<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND
February 1, 2000
Dear Shareholder:
We are pleased to report that the J.P. Morgan Institutional Diversified Fund
earned a solid 6.96% for the six months ended December 31, 1999. The fund
outperformed its peers, as measured by the Lipper Balanced Fund Average,
which returned 3.00%, as well as its benchmark*, which returned 6.73%.
The fund's net asset value per share increased from $14.69 on June 30, 1999
to $15.01 on December 31, 1999. The fund made distributions during the year
of approximately $0.20 per share from ordinary income, approximately $0.17
per share from short-term capital gains, and approximately $0.31 per share
from long-term capital gains. The fund's net assets stood at approximately
$669.2 million at the end of December, while the net assets of the master
portfolio, in which the fund invests, totaled approximately $1.0 billion.
The report that follows includes an interview with John M. Devlin, Jr., the
portfolio manager primarily responsible for the master portfolio. In this
interview, John discusses events in the financial markets, portfolio
performance, and what he sees on the horizon.
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 President of Asset Management Services
J.P. Morgan & Co. Incorporated J.P. Morgan & Co. Incorporated
*Comprised of 52% S&P 500 Index, 35% Salomon Brothers Broad Investment Grade
Bond Index, 10% MSCI EAFE Index, and 3% Russell 2000 Index.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS PORTFOLIO MANAGER Q&A ............. 3
LETTER TO THE SHAREHOLDERS ....... 1 FUND FACTS AND HIGHLIGHTS ......... 5
FUND PERFORMANCE .................. 2 FINANCIAL STATEMENTS .............. 8
- --------------------------------------------------------------------------------
1
<PAGE>
Fund Performance
EXAMINING PERFORMANCE
One way to look at performance is to review a fund's average annual total
return. This figure takes 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.
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
---------------- ----------------------------------
THREE SIX ONE THREE FIVE SINCE
AS OF DECEMBER 31, 1999 MONTHS MONTHS YEAR YEARS YEARS INCEPTION*
- -------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
J.P. Morgan Institutional Diversified Fund 9.65% 6.96% 14.23% 17.22% 18.35% 14.92%
Diversified Benchmark** 9.79% 6.73% 13.71% 18.34% 19.29% 15.50%
S&P 500 Index 14.88% 7.70% 21.04% 27.56% 28.55% 22.96%
Salomon Brothers Broad
Investment Grade Bond Index -0.16% 0.56% -0.83% 5.73% 7.74% 5.66%
MSCI EAFE Index 16.99% 22.12% 26.96% 15.74% 12.83% 11.62%
Russell 2000 Index 18.44% 10.96% 21.26% 13.08% 16.69% 13.28%
Lipper Balanced Fund Average 7.59% 3.00% 8.73% 13.78% 16.24% 12.69%
</TABLE>
*ALTHOUGH THE FUND'S INCEPTION WAS JULY 8, 1993, IT HAD NO PUBLIC
SHAREHOLDERS UNTIL SEPTEMBER 10, 1993 (COMMENCEMENT OF INVESTMENT
OPERATIONS). FOR PURPOSES OF COMPARISON, THE "SINCE INCEPTION" RETURNS IN THE
TABLE ABOVE ARE CALCULATED FROM SEPTEMBER 30, 1993, THE FIRST DATE WHEN DATA
FOR THE FUND, ITS BENCHMARK AND ITS LIPPER CATEGORY AVERAGE WERE ALL
AVAILABLE. THE FUND'S AVERAGE ANNUAL TOTAL RETURN SINCE ITS COMMENCEMENT OF
INVESTMENT OPERATIONS ON SEPTEMBER 10, 1993, IS 14.61%.
**COMPRISED OF 52% S&P 500 INDEX, 35% SALOMON BROTHERS BROAD INVESTMENT GRADE
BOND INDEX, 10% MSCI EAFE INDEX, AND 3% RUSSELL 2000 INDEX. THE INDICES ARE
UNMANAGED PORTFOLIOS THAT MEASURE MARKET PERFORMANCE. THEY DO NOT INCLUDE
FEES OR OPERATING EXPENSES, AND ARE NOT AVAILABLE FOR ACTUAL INVESTMENT.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET OF
FEES, ASSUME THE REINVESTMENT OF FUND DISTRIBUTIONS, AND REFLECT
REIMBURSEMENT OF CERTAIN FUND AND PORTFOLIO EXPENSES AS DESCRIBED IN THE
PROSPECTUS. HAD EXPENSES NOT BEEN SUBSIDIZED, RETURNS WOULD HAVE BEEN LOWER.
LIPPER ANALYTICAL SERVICES, INC. IS A LEADING SOURCE FOR MUTUAL FUND DATA.
2
<PAGE>
PORTFOLIO MANAGER Q&A
[PHOTO]
The following is an interview with JOHN M. DEVLIN, JR., vice president and
member of the portfolio management team for the master portfolio. John joined
J.P. Morgan in 1986. At Morgan, he was on special assignment in the Frankfurt
office and, prior to that, spent six years on the fixed-income trading desk
as a mortgage and corporate specialist. Before joining Morgan, John was a
pension fund manager and Treasury manager during his 12 years with U.S.
Steel. He has his B.S. in Finance from Georgetown and his M.B.A. from Pace
University. He was an adjunct professor of Finance at Pace University for 10
years. This interview took place on January 25, 2000, and reflects John's
views on that date.
HOW DID THE MARKETS IN WHICH THE PORTFOLIO INVESTS PERFORM OVER THE SIX-MONTH
PERIOD ENDED DECEMBER 31, 1999?
JD: Large-cap U.S. stocks were extremely volatile during the second half of
1999, coming under heavy pressure in the third quarter, yet rebounding during
the last three months of the year. The S&P 500 was up 14.88% for the fourth
quarter, bringing the six-month return to 7.70%. Small-cap stocks, as
measured by the Russell 2000, followed a similar path, struggling during the
third quarter, but returning 18.44% in the fourth quarter, settling in at a
robust 10.96% for the six-month period. A rebound in global growth was
evident in foreign markets as well, with the MSCI EAFE returning 22.12% (in
U.S. dollar terms) for the second half of the year.
Fixed income markets continued to have a difficult time as the Federal
Reserve began raising short-term rates in June and corporate issuers flooded
the market, adding liquidity to their respective balance sheets well ahead of
Y2K. The bond market, as measured by the Salomon Brothers Broad Investment
Grade (BIG) Bond Index, returned only 0.56% for the six months, reflecting
the significant rise in interest rates across the yield curve.
IN LIGHT OF THE MARKET ENVIRONMENT, HOW DID THE FUND PERFORM?
JD: I am pleased to report that the fund continued to surpass its peer group
for the six-month period. The fund posted a net return of 6.96% for the
period versus the Lipper Balanced Fund Average's return of 3.00%. In
addition, the consistency of returns places the fund in the top 20% among its
223 peers for the past five years*. The fund also outperformed its benchmark
(comprised of 52% S&P 500, 35% Salomon BIG, 10% MSCI EAFE, and 3% Russell
2000), which posted a 6.73% return for the past six months.
Once again, this significant achievement is a direct result of bringing together
all of the excellent work we do at J.P. Morgan. The fund's performance is driven
by fundamental research of our worldwide network of equity and fixed income
analysts. Our portfolio construction methodology (i.e., picking the right
securities)
*THE FUND RANKED IN THE 18TH PERCENTILE OUT OF 448 FUNDS FOR THE ONE-YEAR
PERIOD ENDED 12/31/99.
3
<PAGE>
bolstered this performance. Add to this the fund's flexibility to diversify
into small caps, fixed income, and international equities, and the results
are an overall strategy that reduces risk - critically important in these
volatile times - and leads to consistently positive returns. As a matter of
fact, the annualized return for the fund for the five years ended December
31, 1999 was 18.35% compared to the 16.24% for the Lipper Balanced Fund
Average. We are very proud of our capabilities to produce this strong
performance for our clients.
WHICH SECURITY SELECTION AND ASSET ALLOCATION DECISIONS CONTRIBUTED THE MOST TO
THE PORTFOLIO'S PERFORMANCE FOR THE SIX MONTHS?
JD: Within the S&P 500, the technology sector returned over 42% for the
period, and has subsequently risen to comprise almost 30% of the market
capitalization of the index. Our portfolio construction discipline and
research has us owning Sun Microsystems and Cisco Systems, both of which were
up significantly over the six months and added to performance. Holdings in
Forest Labs, Citigroup, Procter & Gamble, Warner Lambert, and Microsoft all
contributed positively as well, and were some of our biggest holdings. An
overweight allocation to small caps and international equities also added
significantly to returns. Likewise, an underweight position in fixed income
coupled with shorter-than-the-index duration contributed positively to
returns.
WHICH HOLDINGS AND ALLOCATION DECISIONS DETRACTED FROM THE PORTFOLIO'S
PERFORMANCE?
JD: Not owning several very strong stocks - namely Qualcomm and Nortel
Networks - negatively impacted performance. In addition, large-cap stocks
continued to perform at record levels and we maintained a modest underweight
to this asset class. This underweight, however, was more than offset by the
performance of small caps and international equities during the period.
WHAT IS YOUR OUTLOOK FOR THE COMING MONTHS? HOW WILL YOU POSITION THE PORTFOLIO
AS A RESULT?
JD: Six months ago we discussed the possible disruptions to the market as
investors focused on Y2K-related problems. The equity markets successfully
weathered these concerns as global growth continued to push valuations
higher. Global economic growth is continuing to recover, providing a good
backdrop for stocks, translating into higher volume growth and better
earnings. Consumer confidence remains at historically high levels and should
continue to underpin growth. Inflation around the world has remained very
subdued in recent years due to excess capacity in Europe, Japan, and the
emerging markets. As growth progressively erodes this excess capacity,
inflation will pose an increased risk, especially in the United States. We
expect that central banks will correctly anticipate this and raise rates
accordingly, driving bond yields higher in the process. We expect stocks to
outperform bonds, although equity valuations remain high and will require
strong earnings to validate them.
4
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
J.P. Morgan Institutional Diversified Fund seeks to provide a high total
return from a diversified portfolio of equity and fixed-income securities. It
is designed for investors who wish to invest for long-term objectives, such
as retirement, and who seek over time to attain real appreciation in their
investments, but with somewhat less price fluctuation than a portfolio
consisting solely of equity securities.
- ------------------------------------------------------------------------------
COMMENCEMENT OF INVESTMENT OPERATIONS
9/10/93
- ------------------------------------------------------------------------------
FUND NET ASSETS AS OF 12/31/99
$669,207,763
- ------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 12/31/99
$1,007,685,639
- ------------------------------------------------------------------------------
DIVIDEND PAYABLE DATES
QUARTERLY
- ------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/20/00
EXPENSE RATIO
The fund's current annualized 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 DECEMBER 31, 1999
DIVERSIFIED STRATEGY
[CHART]
U.S. LARGE-CAP EQUITIES 52.0%
FIXED INCOME 35.0%
INTERNATIONAL EQUITIES 10.0%
U.S. SMALL-CAP EQUITIES 3.0%
ASSET ALLOCATION AS OF 12/31/99*
(PERCENTAGE OF TOTAL INVESTMENTS)
U.S. LARGE-CAP EQUITIES 47.1%
FIXED INCOME 28.8%
INTERNATIONAL EQUITIES 14.1%
U.S. SMALL-CAP EQUITIES 5.5%
SHORT-TERM & OTHER INVESTMENTS 4.5%
TOP 10 HOLDINGS
(EXCLUDING SHORT-TERM INVESTMENTS) % OF TOTAL INVESTMENTS
- ----------------------------------------------------------------
MICROSOFT CORP. 2.6%
FNMA TBA JANUARY, 7.5% DUE 1/1/30 2.1%
FNMA TBA JANUARY, 6.5% DUE 9/1/28 2.0%
FNMA TBA JANUARY, 6.0% DUE 9/1/28 1.9%
FNMA TBA JANUARY, 7.0% DUE 1/1/30 1.8%
GENERAL ELECTRIC CO. 1.8%
CISCO SYSTEMS, INC. 1.7%
INTEL CORP. 1.4%
EXXON MOBIL CORP. 1.3%
LUCENT TECHNOLOGIES, INC. 1.2%
*ASSET ALLOCATION IS BASED ON A PERCENTAGE OF TOTAL INVESTMENTS WHICH
EXCLUDES CASH COLLATERAL INVESTED IN SHORT-TERM SECURITIES USED FOR PURCHASES
MADE BUT NOT YET SETTLED.
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.
References to specific securities and their issuers are for illustrative
purposes only and are not intended to be, and should not be interpreted as,
recommendations to purchase or sell such securities. Opinions expressed
herein are based on current market conditions and are subject to change
without notice. The fund invests in a master portfolio (another fund with the
same objective). The portfolio invests in foreign securities, which are
subject to special risks. Prospective investors should refer to the
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 DIVERSIFIED FUND
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The Diversified Portfolio
("Portfolio"), at value $669,142,998
Receivable for Shares of Beneficial Interest Sold 158,385
Receivable for Expense Reimbursements 133,585
Prepaid Trustees' Fees 2,601
Prepaid Expenses and Other Assets 1,840
------------
Total Assets 669,439,409
------------
LIABILITIES
Payable for Shares of Beneficial Interest
Redeemed 101,517
Shareholder Servicing Fee Payable 54,331
Dividends Payable to Shareholders 19,769
Administrative Services Fee Payable 13,724
Administration Fee Payable 666
Fund Services Fee Payable 580
Accrued Expenses 41,059
------------
Total Liabilities 231,646
------------
NET ASSETS
Applicable to 44,598,135 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $669,207,763
============
Net Asset Value, Offering and Redemption Price
Per Share $15.01
-----
-----
ANALYSIS OF NET ASSETS
Paid-in Capital $554,603,436
Distribution in Excess of Net Investment Income (611,256)
Accumulated Net Realized Gain on Investment 9,870,469
Net Unrealized Appreciation of Investment 105,345,114
------------
Net Assets $669,207,763
============
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
8
<PAGE>
J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Interest Income $ 7,010,893
Allocated Dividend Income (Net of Foreign
Withholding Tax of $71,797) 2,531,030
Allocated Portfolio Expenses (Net of
Reimbursement of $29,550) (2,000,373)
-----------
Net Investment Income Allocated from
Portfolio 7,541,550
FUND EXPENSES
Shareholder Servicing Fee $310,252
Administrative Services Fee 78,428
Registration Fees 17,279
Transfer Agent Fees 8,869
Printing Expenses 7,675
Professional Fees 7,649
Fund Services Fee 5,214
Administration Fee 4,299
Trustees' Fees and Expenses 2,114
Miscellaneous 10,645
--------
Total Fund Expenses 452,424
Less: Reimbursement of Expenses (430,594)
--------
NET FUND EXPENSES 21,830
-----------
NET INVESTMENT INCOME 7,519,720
NET REALIZED GAIN ON INVESTMENT ALLOCATED FROM
PORTFOLIO 14,660,500
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT ALLOCATED FROM PORTFOLIO 21,050,173
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $43,230,393
===========
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE FISCAL
DECEMBER 31, 1999 YEAR ENDED
(UNAUDITED) JUNE 30, 1999
----------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 7,519,720 $ 11,588,537
Net Realized Gain on Investment Allocated from
Portfolio 14,660,500 25,176,414
Net Change in Unrealized Appreciation of
Investment Allocated from Portfolio 21,050,173 23,300,271
---------------- -------------
Net Increase in Net Assets Resulting from
Operations 43,230,393 60,065,222
---------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (8,625,181) (11,954,859)
Net Realized Gain (20,388,906) (21,636,221)
---------------- -------------
Total Distributions to Shareholders (29,014,087) (33,591,080)
---------------- -------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 43,506,597 295,826,699
Reinvestment of Dividends and Distributions 27,296,116 30,810,306
Cost of Shares of Beneficial Interest Redeemed (24,469,158) (76,399,603)
---------------- -------------
Net Increase from Shareholder Transactions 46,333,555 250,237,402
---------------- -------------
Total Increase in Net Assets 60,549,861 276,711,544
NET ASSETS
Beginning of Period 608,657,902 331,946,358
---------------- -------------
End of Period (including undistributed net
investment income of $0 and $494,205,
respectively) $ 669,207,763 $ 608,657,902
================ =============
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED
DECEMBER 31, FOR THE FISCAL YEAR ENDED JUNE 30,
1999 ------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
--------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.69 $ 14.18 $ 13.39 $ 12.02 $ 11.26 $ 9.90
-------------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.18 0.38 0.39 0.37 0.40 0.31
Net Realized and Unrealized Gain on Investment 0.82 1.44 1.89 1.96 1.42 1.37
-------------- -------- -------- -------- -------- --------
Total from Investment Operations 1.00 1.82 2.28 2.33 1.82 1.68
-------------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.20) (0.39) (0.59) (0.36) (0.42) (0.26)
Net Realized Gain (0.48) (0.92) (0.90) (0.60) (0.64) (0.06)
-------------- -------- -------- -------- -------- --------
Total Distributions to Shareholders (0.68) (1.31) (1.49) (0.96) (1.06) (0.32)
-------------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 15.01 $ 14.69 $ 14.18 $ 13.39 $ 12.02 $ 11.26
============== ======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Total Return 6.96%(a) 13.77% 18.42% 20.72% 16.91% 17.36%
Net Assets, End of Period (in thousands) $ 669,208 $608,658 $331,946 $237,449 $193,219 $164,855
Net Expenses 0.65%(b) 0.65% 0.65% 0.65% 0.65% 0.65%
Net Investment Income 2.42%(b) 2.55% 3.12% 3.34% 3.34% 3.70%
Expenses Without Reimbursement 0.80%(b) 0.84% 0.88% 0.98% 0.98% 1.18%
</TABLE>
- ------------------------
(a) Not Annualized.
(b) Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan Institutional Diversified 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 a diversified, open-end
management investment company. The fund commenced operations on September 10,
1993.
The fund invests all of its investable assets in The Diversified 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 (66% at December 31,
1999). 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 funds 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 and paid quarterly. Distributions to shareholders of net
realized capital gains, if any, are declared and paid annually.
d) Expenses incurred by the trust with respect to any two or more funds 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.
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
12
<PAGE>
J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
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 six
months ended December 31, 1999, the fee for these services amounted to
$4,299.
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 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 six months ended December 31, 1999, the fee for
these services amounted to $78,428.
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 October 31,
2000. For the six months ended December 31, 1999, J.P. Morgan has agreed
to reimburse the fund $460,144 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 services to fund shareholders. The agreement provides for the
fund to pay Morgan a fee for these services which is computed daily and
paid monthly at an annual rate of 0.10% of the average daily net assets of
the fund. For the six months ended December 31, 1999, the fee for these
services amounted to $310,252.
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
$5,214 for the six months ended December 31, 1999.
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
13
<PAGE>
J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
compensation and employee benefits from Group in his role as Group's
Chairman. The allocated portion of such compensation and benefits included
in the Fund Services Fee shown in the financial statements was $1,000.
3. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the trustees to issue an unlimited number of
full and fractional shares of beneficial interest of one or more series.
Transactions in shares of beneficial interest of the fund were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE FISCAL
MONTHS ENDED YEAR ENDED
DECEMBER 31, 1999 JUNE 30, 1999
----------------- --------------
<S> <C> <C>
Shares sold...................................... 2,967,999 21,154,981
Reinvestment of dividends and distributions...... 1,863,542 2,259,472
Shares redeemed.................................. (1,664,428) (5,384,899)
---------------- -------------
Net Increase..................................... 3,167,113 18,029,554
================ =============
</TABLE>
From time to time, the fund may have a concentration of several shareholders
holding a significant percentage of shares outstanding. Investment activities of
these shareholders could have a material impact on the fund and portfolio.
4. CREDIT AGREEMENT
The trust, on behalf of the fund, together with other affiliated investment
companies (the "funds"), entered into a revolving line of credit agreement (the
"Agreement") on May 27, 1998, 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 Agreement expired on May 26,
1999, however, the fund as party to the Agreement has renewed the Agreement and
will continue its participation therein for an additional 364 days until
May 23, 2000. 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
0.085% (0.065% prior to May 26, 1999) on the unused portion of the committed
amount. This is allocated to the funds in accordance with procedures established
by their respective trustees. There were no outstanding borrowings pursuant to
the Agreement at December 31, 1999.
14
<PAGE>
The Diversified Portfolio
Semi-annual Report December 31, 1999
(unaudited)
(The following pages should be read in conjunction
with J.P. Morgan Institutional Diversified Fund
Semi-annual Financial Statements)
15
<PAGE>
J.P. MORGAN INSTITUTIONAL FUNDS
PRIME MONEY MARKET FUND
TREASURY MONEY MARKET FUND
FEDERAL MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
TAX AWARE ENHANCED INCOME FUND: INSTITUTIONAL SHARES
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
SMARTINDEX-TM- FUND: INSTITUTIONAL SHARES
MARKET NEUTRAL FUND: INSTITUTIONAL SHARES
FOR MORE INFORMATION ON THE J.P. MORGAN INSTITUTIONAL FUNDS, CALL J.P. MORGAN
FUNDS SERVICES AT (800)766-7722.
IMSAR387
J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND
SEMIANNUAL REPORT
DECEMBER 31, 1999
