<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN U.S. EQUITY FUND
June 24, 1998
Dear Shareholder:
The 12 months ended May 31, 1998, saw extreme volatility in the world's equity
markets, with two distinct periods of crisis -- October of 1997 and May of 1998.
For the period, the J.P. Morgan U.S. Equity Fund posted a strong return of
28.35%, surpassing its peers, as measured by the Lipper Growth & Income Fund
Average, which returned 25.47%. The fund was unable to beat its benchmark
S&P 500 Index, which returned 30.68% for the period.
The fund's net asset value increased from $24.63 per share at May 31, 1997, to
$25.66 per share on May 31, 1998. The fund made distributions during the year of
approximately $0.23 per share from ordinary income, approximately $1.69 per
share from short-term capital gains, and approximately $3.15 per share from
long-term capital gains, of which $1.36 per share represents distributions of
20% rate gains. In addition, the fund's net assets advanced from approximately
$362.6 million on May 31, 1997, to approximately $448.1 million at the end of
the period under review. The net assets of The U.S. Equity Portfolio, in which
the fund invests, totaled approximately $827.3 million on May 31, 1998.
The report that follows includes an interview with Henry D. Cavanna, a member of
the portfolio management team for The U.S. Equity Portfolio. This interview is
designed to answer commonly asked questions about the fund, elaborate on what
happened during the reporting period, and reiterate the fund's investment
strategy.
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) 521-5411.
Sincerely yours,
/s/ Ramon de Oliveira /s/ Keith M. Schappert
Ramon de Oliveira Keith M. Schappert
Chairman of Asset Management Services President of Asset Management Services
J.P. Morgan & Co. Incorporated J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<S> <C> <C> <C>
LETTER TO THE SHAREHOLDERS. . . . . 1 FUND FACTS AND HIGHLIGHTS . . . . . . 6
FUND PERFORMANCE. . . . . . . . . . 2 SPECIAL FUND-BASED SERVICES . . . . . 7
PORTFOLIO MANAGER Q&A . . . . . . . 3 FINANCIAL STATEMENTS. . . . . . . . .10
- --------------------------------------------------------------------------------
</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
$10,000. The chart at right shows that $10,000 invested on May 31, 1988, would
have grown to $53,950 on May 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.
PERFORMANCE
<TABLE>
<CAPTION>
TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
------------------------ -----------------------------------------------------
THREE SIX ONE THREE FIVE TEN
AS OF MAY 31, 1998 MONTHS MONTHS YEAR YEARS YEARS YEARS
- --------------------------------------------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J.P. Morgan U.S. Equity Fund 5.50% 15.75% 28.35% 26.15% 20.19% 18.36%
S&P 500 Index 4.35% 15.06% 30.68% 29.51% 22.17% 18.62%
Lipper Growth & Income Fund Average 2.98% 11.91% 25.47% 24.90% 18.61% 15.95%
AS OF MARCH 31, 1998
- --------------------------------------------------------------- -----------------------------------------------------
J.P.Morgan U.S. Equity Fund 12.73% 12.43% 41.16% 28.11% 19.99% 18.39%
S&P 500 Index 13.95% 17.22% 48.00% 32.81% 22.40% 18.94%
Lipper Growth & Income Fund Average 11.62% 12.49% 40.15% 27.89% 19.08% 16.21%
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET OF FEES
AND ASSUME THE REINVESTMENT OF DISTRIBUTIONS. LIPPER ANALYTICAL SERVICES, INC.
IS A LEADING SOURCE FOR MUTUAL FUND DATA.
GROWTH OF $10,000 OVER 10 YEARS
MAY 31, 1988 - MAY 31, 1998
<TABLE>
<CAPTION>
J.P. Morgan S&P 500 Lipper Growth &
U.S. Equity Fund Index Income Fund Average
---------------- ------- -------------------
<S> <C> <C> <C>
5/88 10,000 10,000 10,000
12,512 12,680 11,665
5/90 14,857 14,787 13,000
17,057 16,530 13,811
5/92 19,547 18,159 15,694
21,507 20,267 18,012
5/94 23,344 21,130 18,434
26,871 25,396 22,115
5/96 33,638 32,618 27,241
42,033 42,213 34,944
5/98 53,950 55,165 42,251
</TABLE>
LIPPER PERFORMANCE AVERAGES ARE CALCULATED BY TAKING AN ARITHMETIC AVERAGE OF
THE RETURNS OF THE FUNDS IN THE GROUP. THE AVERAGE ANNUALIZED RETURNS WHICH
RESULT FROM THIS METHODOLOGY WILL DIFFER FROM ANNUALIZING THE GROWTH OF THE
MINIMUM INITIAL INVESTMENT.
2
<PAGE>
PORTFOLIO MANAGER Q&A
[PHOTO]
The following is an interview with HENRY D. CAVANNA, a member of the portfolio
management team for The U.S. Equity Portfolio. Henry joined Morgan in 1971. He
is a senior U.S. equity portfolio manager in the U.S. Equity and Balanced
Accounts Group. Prior to joining Morgan, Henry was with Harris Upham & Co. He
received his BA from Boston College and his LLB from the University of
Pennsylvania. This interview took place on June 9, 1998, and reflects Henry's
views on that date.
HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT DURING THE 12 MONTHS ENDED MAY 31,
1998?
HDC: Although the S&P 500 Index gained 30.68%, it was a rocky year from a
macroeconomic standpoint. The crisis in Asia reared its head -- and continues to
unfold as we speak. The U.S. economy picked up steam, with earnings growth for
large-cap stocks better than expected. Interest rates remained low, as did
inflation. However, profit growth is slowing. This means that companies have
less pricing power, or less ability to pass their costs on to their customers.
While we believe this is a normal cyclical slowdown from a robust level, it
bears watching.
The stock market continues to do well, but is more narrow than it's been at any
time since the early 1970s. The largest of the large-cap stocks have been
outpacing all others for four years now. This trend appeared to be reversing
during the third quarter of 1997, until Asia's troubles caused investors to seek
security in large caps once more. The longer a bull market goes on, the less
stable the markets become, and the more investors view large-cap stocks as a
haven. The spread in returns between large- and small-cap stocks continues to
widen. In fact, for the first five months of 1998, the S&P 500 returned 13.12%,
while the Russell 2000 Index gained only 4.71%.
HOW DID THE FUND PERFORM RELATIVE TO THE MARKET?
HDC: For the 12 months ended May 31, 1998, the fund returned 28.35%, versus
30.68% for the S&P 500. However, we are ahead of the market for the year to
date, with a return of 13.98% versus 13.12% for the Index. I am pleased to
report that we are outpacing our peers for both periods. The Lipper Growth &
Income Fund Average returned 25.47% for the 12 months, and 10.17% for the
year to date.
Our stock picking style appears to be coming back into favor, which is crucial
to our success. We construct a portfolio of large-cap stocks that is
well-diversified and well-balanced by sector, or industry group. We seek to
insulate the portfolio from major macroeconomic or market timing bets. Rather,
we employ a stock-picking process that is driven by our own in-house research
and analysis. The insights of our 26 equity analysts contribute significantly to
the decisions of our portfolio management team.
3
<PAGE>
In picking stocks for the portfolio, we focus on companies that look undervalued
on a long-term basis, and we sell companies that look fully valued. These days,
many of the largest companies appear fully valued to us. However, there are
still plenty of large-cap stocks that we believe represent good value and that
we hold. These include Procter & Gamble, IBM, Exxon, Bristol-Myers Squibb, and
Warner-Lambert. We want to own large-cap stocks, but we want to own them at a
fair price.
GIVEN THE STRONG PERFORMANCE OF THE S&P 500 INDEX, MANY INVESTORS ARE EXPRESSING
INTEREST IN INDEX FUNDS. HOW WOULD YOU COUNSEL THEM?
HDC: Active money managers -- those who pick stocks rather than mimicking an
index -- normally underperform the indexes in a narrow market. That is, when the
market's performance comes largely from a small group of stocks, active managers
are at a disadvantage. Investors have to ask themselves if they expect the era
of the index to continue indefinitely. Markets are cyclical. Periods of
outperformance by an asset class are very often followed by periods of
underperformance -- and vice versa.
If a baseball player who normally hits .300 experiences a period when he's
hitting only .250, few managers would take him out of the lineup. They know the
odds are that someone who hits .300 on average will hit .300 again. Today's
market environment is challenging for active managers, but these periods don't
go on forever. It's also important to note that, on an absolute basis, most
active managers are performing well above the historical norms for large-cap
stocks. Few if any investors are losing money these days.
The outperformance of the S&P 500 is really due to the 50 largest stocks in that
index. Ten percent of the stocks in the Index account for 50% of the index's
market capitalization, or size. They are the stocks with the highest returns,
and the market is paying a premium for them. That's why our research views these
stocks as fully valued. We also believe that, because the "Nifty Fifty"
companies are more global in nature, foreign earnings are more important to
them. Therefore, they are more exposed to the troubles in Asia, as well as to a
strengthening U.S. dollar. The additional vulnerability that could affect these
large stocks suggests to us that now is not the time to pay a premium for them.
While we aren't abandoning the Nifty Fifty, we aren't embracing them, either. We
think it makes sense to own a diversified portfolio that includes these stocks
- -- and others as well.
WHICH STOCKS CONTRIBUTED TO THE PORTFOLIO'S PERFORMANCE?
HDC: EMC Corp., a technology company, is the leading vendor of mainframe
storage systems and is quickly achieving the same position in the open systems
market. Demand is rising rapidly for data storage, as people increase their use
of the Internet and computers. We believe that EMC represents good value. The
company appears well-positioned to capitalize on the growth of demand for
storage.
WorldCom, Inc. is a well-positioned global telecommunications company. It is
a fully integrated firm, offering local, long-distance, and Internet access
services. WorldCom has been moving ahead with plans to acquire MCI
Communications Corp., a move which will transform the combined company into
the second-
4
<PAGE>
largest U.S. long-distance carrier, with good prospects for long-term earnings
growth.
Warner-Lambert Co. is benefiting from the recent introductions of two exciting
new drugs: Lipitor, a cholesterol-reducing drug, and Rezulin, a diabetes drug.
The launch of Lipitor was the largest and most successful new drug launch in
U.S. history. (That is, until Viagra.) Warner-Lambert's earnings grew rapidly,
and the stock did very well during the period.
WHICH STOCKS HINDERED THE PORTFOLIO'S PERFORMANCE?
HDC: Starwood Hotels & Resorts is a real estate investment trust, and REITs
have not done well in this market. However, our research indicates that Starwood
represents good value. The company recently acquired ITT Sheraton, and is trying
to create synergies and improve management at several hotel properties. Right
now, the stock is suffering due to some controversial tax issues that remain to
be resolved. The government is considering removing some tax advantages that
have benefited Starwood. We believe these issues will be resolved, and we
continue to hold the stock due to our positive outlook for Starwood's underlying
businesses.
Circuit City Stores is an electronics retailer that is suffering from depressed
earnings and slow sales. We hold the stock because we believe that stronger
retail demand will help improve sales, as it has already started to do. In
addition, Circuit City is a well-run business with a strong management team. We
believe the stock will do well over time and that the market is not looking far
enough into the future.
WHAT IS YOUR OUTLOOK FOR THE COMING MONTHS?
HDC: We do not believe that the current pace of the U.S. economy is
sustainable. We are looking for the economy to slow as the impact of Asia
continues to be felt. Computer companies and banks with loans in Asia, in
particular, should be affected. We expect corporate profit growth in the low
single digits due in part to a lack of corporate pricing power. In this
environment, we believe active stock selection will have more of an impact on
returns.
In spite of these challenging macroeconomic conditions, however, we still see
low inflation and do not expect a recession. The U.S. continues to manage its
business well, and it appears to be a good time to be invested in North America.
5
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
J.P. Morgan U.S. Equity Fund seeks to provide a high total return from a
portfolio of selected equity securities. It is designed for investors who want
an actively managed portfolio of selected equity securities that seeks to
outperform the S&P 500 Index.
- --------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS
6/27/85
- --------------------------------------------------------------------------------
FUND NET ASSETS AS OF 5/31/98
$448,143,832
- --------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 5/31/98
$827,303,724
- --------------------------------------------------------------------------------
DIVIDEND PAYABLE DATES
6/26/98, 8/14/98, 12/18/98
- --------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/18/98
EXPENSE RATIO
The fund's current annualized expense ratio of 0.78% covers shareholders'
expenses for custody, tax reporting, investment advisory and shareholder
services. The fund is no-load and does not charge any sales, redemption, or
exchange fees. There are no additional charges for buying, selling, or
safekeeping fund shares, or for wiring redemption proceeds from the fund.
FUND HIGHLIGHTS
ALL DATA AS OF MAY 31, 1998
PORTFOLIO ALLOCATION
(AS A PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
<TABLE>
<CAPTION>
<S> <C>
CONSUMER GOODS & SERVICES 21.3%
FINANCE 15.8%
TECHNOLOGY 13.5%
HEALTH CARE 13.1%
ENERGY 9.0%
UTILITIES 8.0%
BASIC INDUSTRIES 6.5%
INDUSTRIAL PRODUCTS & SERVICES 6.2%
TRANSPORTATION 2.8%
SHORT-TERM AND OTHER INVESTMENTS 3.8%
</TABLE>
<TABLE>
<CAPTION>
LARGEST EQUITY HOLDINGS % OF TOTAL INVESTMENTS
- ----------------------------------------------------------------------
<S> <C>
BRISTOL-MYERS SQUIBB CO. (HEALTH CARE) 2.6%
AMERICAN HOME PRODUCTS (HEALTH CARE) 2.1%
WORLDCOM, INC. (UTILITIES) 2.1%
PHILIP MORRIS COMPANIES, INC. 2.1%
(CONSUMER GOODS & SERVICES)
E.I. DU PONT DE NEMOURS & CO. 2.1%
(BASIC INDUSTRIES)
TOSCO CORP. (ENERGY) 2.0%
WARNER-LAMBER CO. (HEALTH CARE) 2.0%
FEDERAL NATIONAL MORTGAGE ASSOCIATION 2.0%
(FINANCE)
EMC CORP. (TECHNOLOGY) 2.0%
STARWOOD HOTELS & RESORTS (FINANCE) 1.9%
</TABLE>
6
<PAGE>
SPECIAL FUND-BASED SERVICES
PIERPONT ASSET ALLOCATION SERVICE (PAAS)
For many investors, a diversified portfolio -- including short-term instruments,
bonds, and stocks -- can offer an excellent opportunity to achieve one's
investment objectives. PAAS provides investors with a comprehensive management
program for their portfolios. Through this service, investors can:
- - Create and maintain an asset allocation that is specifically targeted to
meet their most critical investment objectives.
- - Make ongoing tactical adjustments in the actual asset mix of their
portfolios to capitalize on shifting market trends.
- - Make investments through the J.P. Morgan Funds, a family of diversified
mutual funds.
PAAS is available to clients who invest a minimum of $500,000 in the J.P. Morgan
Funds.
IRA MANAGEMENT SERVICE
As one of the few remaining investments that can help your assets grow
tax-deferred until retirement, the IRA enables more of your dollars to work for
you longer. Morgan offers an IRA Rollover plan that helps you to build well-
balanced long-term investment portfolios, diversified across a wide array of
mutual funds. From money markets to emerging markets, the J.P. Morgan Funds
provide an excellent way to help you accumulate long-term wealth for retirement.
7
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. MORGAN GUARANTY TRUST COMPANY OF NEW
YORK SERVES AS AN INVESTMENT ADVISOR AND MAKES THE FUND AVAILABLE SOLELY IN ITS
CAPACITY AS SHAREHOLDER SERVICING AGENT. SHARES OF THE FUND ARE NOT BANK
DEPOSITS AND ARE NOT GUARANTEED BY ANY BANK, GOVERNMENT ENTITY, OR THE FDIC.
RETURN AND SHARE PRICE WILL FLUCTUATE AND REDEMPTION VALUE MAY BE MORE OR LESS
THAN ORIGINAL COST.
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).
CALL J.P. MORGAN FUNDS SERVICES AT (800) 521-5411 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>
J.P. MORGAN U.S. EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The U.S. Equity Portfolio
("Portfolio"), at value $448,300,982
Receivable for Shares of Beneficial Interest Sold 202,038
Prepaid Trustees' Fees 3,807
Prepaid Expenses and Other Assets 37,257
------------
Total Assets 448,544,084
------------
LIABILITIES
Payable for Shares of Beneficial Interest
Redeemed 254,017
Shareholder Servicing Fee Payable 96,867
Administrative Services Fee Payable 11,242
Administration Fee Payable 2,277
Fund Services Fee Payable 416
Accrued Expenses 35,433
------------
Total Liabilities 400,252
------------
NET ASSETS
Applicable to 17,467,491 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $448,143,832
------------
------------
Net Asset Value, Offering and Redemption Price
Per Share $25.66
-----
-----
ANALYSIS OF NET ASSETS
Paid-in Capital $328,959,252
Undistributed Net Investment Income 579,087
Accumulated Net Realized Gain on Investment 48,996,747
Net Unrealized Appreciation of Investment 69,608,746
------------
Net Assets $448,143,832
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Dividend Income (Net of Foreign
Withholding Tax of $43,643) $ 5,701,842
Allocated Interest Income 460,481
Allocated Portfolio Expenses (1,922,676)
------------
Net Investment Income Allocated from
Portfolio 4,239,647
FUND EXPENSES
Shareholder Servicing Fee $1,030,062
Administrative Services Fee 123,735
Transfer Agent Fees 67,660
Registration Fees 17,000
Professional Fees 14,727
Fund Services Fee 14,143
Administration Fee 10,661
Printing Expenses 9,231
Line of Credit Expense 5,278
Trustees' Fees and Expenses 4,053
Insurance Expense 1,535
Miscellaneous 11,180
----------
Total Fund Expenses 1,309,265
------------
NET INVESTMENT INCOME 2,930,382
NET REALIZED GAIN ON INVESTMENT ALLOCATED FROM
PORTFOLIO 99,516,717
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT ALLOCATED FROM PORTFOLIO (1,088,270)
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $101,358,829
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997
-------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 2,930,382 $ 3,812,324
Net Realized Gain on Investment Allocated from
Portfolio 99,516,717 50,364,233
Net Change in Unrealized Appreciation of
Investment Allocated from Portfolio (1,088,270) 22,399,004
-------------- --------------
Net Increase in Net Assets Resulting from
Operations 101,358,829 76,575,561
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (3,619,210) (5,464,295)
Net Realized Gain (75,349,843) (31,902,751)
-------------- --------------
Total Distributions to Shareholders (78,969,053) (37,367,046)
-------------- --------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 79,192,975 59,295,449
Reinvestment of Dividends and Distributions 73,302,482 34,833,436
Cost of Shares of Beneficial Interest Redeemed (89,344,257) (100,748,222)
-------------- --------------
Net Increase (Decrease) from Transactions in
Shares of Beneficial Interest 63,151,200 (6,619,337)
-------------- --------------
Total Increase in Net Assets 85,540,976 32,589,178
NET ASSETS
Beginning of Fiscal Year 362,602,856 330,013,678
-------------- --------------
End of Fiscal Year (including undistributed net
investment income of $579,087 and $1,268,990,
respectively) $ 448,143,832 $ 362,602,856
-------------- --------------
-------------- --------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
12
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each year are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MAY 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 24.63 $ 22.15 $ 19.42 $ 19.38 $ 19.30
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.18 0.25 0.38 0.32 0.27
Net Realized and Unrealized Gain on Investment 5.92 4.72 4.23 2.17 1.32
-------- -------- -------- -------- --------
Total from Investment Operations 6.10 4.97 4.61 2.49 1.59
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.23) (0.36) (0.29) (0.28) (0.29)
Net Realized Gain (4.84) (2.13) (1.59) (2.17) (1.22)
-------- -------- -------- -------- --------
Total Distributions to Shareholders (5.07) (2.49) (1.88) (2.45) (1.51)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR $ 25.66 $ 24.63 $ 22.15 $ 19.42 $ 19.38
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Total Return 28.35% 25.00% 25.18% 15.11% 8.54%
Net Assets, End of Year (in thousands) $448,144 $362,603 $330,014 $259,338 $231,306
Ratios to Average Net Assets
Expenses 0.78% 0.80% 0.81% 0.90% 0.90%
Net Investment Income 0.71% 1.13% 1.87% 1.74% 1.43%
Expenses Without Reimbursement -- -- -- 0.91% 0.93%
Portfolio Turnover -- -- -- -- 10.00%(a)
</TABLE>
- ------------------------
(a) 1994 Portfolio Turnover reflects the period from June 1, 1993 to July 18,
1993. After July 18, 1993, all of the Fund's investable assets were invested in
The U.S. Equity Portfolio.
The Accompanying Notes are an Integral Part of the Financial Statements.
13
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The J.P. Morgan U.S. Equity Fund (the "fund") is a separate series of the J.P.
Morgan Funds, a Massachusetts business trust (the "trust"). The trust is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The fund, prior to its tax-free reorganization on
July 18, 1993, to a series of the trust, operated as a stand-alone mutual fund.
Costs related to the reorganization were borne by Morgan Guaranty Trust Company
of New York ("Morgan"). This report includes a period which preceded the fund's
reorganization and reflects the operations of the predecessor entity. Prior to
January 1, 1998, the trust's and the fund's names were The JPM Pierpont Funds
and The JPM Pierpont U.S. Equity Fund, respectively.
The fund invests all of its investable assets in The U.S. Equity Portfolio (the
"portfolio"), a diversified open-end management investment company having the
same investment objective as the fund. The value of such investment included in
the Statement of Assets and Liabilities reflects the fund's proportionate
interest in the net assets of the portfolio (54% at May 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) Distributions to shareholders of net investment income are declared and
paid as dividends 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 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 Investment Companies." The effect of applying
this statement as of May 31, 1998, was to decrease undistributed net
investment income by $1,075, decrease accumulated net realized gain on
investment by $12,966,149 and increase paid-in-capital by
14
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
$12,967,224. The adjustments are primarily attributable to the net
realized gain on transfer of securities as discussed in Note 5 of the
portfolio's Notes to Financial Statements which are included elsewhere in
this report. Net investment income, net realized gains and net assets were
not affected by this change.
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 May 31, 1998, the fee for these services amounted to
$10,661.
b) The trust, on behalf of the fund, has an Administrative Services Agreement
(the "Services Agreement") with Morgan, under which Morgan is responsible
for certain aspects of the administration and operation of the fund. Under
the Services Agreement, the fund has agreed to pay Morgan a fee equal to
its 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
Institutional Funds (formerly The JPM Institutional 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 May 31, 1998, the fee for
these services amounted to $123,735.
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 0.25% of the average daily net assets of
the fund. For the fiscal year ended May 31, 1998, the fee for these
services amounted to $1,030,062.
Morgan, Charles Schwab & Co. ("Schwab") and the trust are parties to
separate services and operating agreements (the "Schwab Agreements")
whereby Schwab makes fund shares available to customers of investment
advisors and other financial intermediaries who are Schwab's clients. The
fund is not responsible for payments to Schwab under the Schwab
Agreements; however, in the event the services agreement with Schwab is
terminated for reasons other than a breach by Schwab and the relationship
between the trust and Morgan is terminated, the fund would be responsible
for the ongoing payments to Schwab with respect to pre-termination shares.
15
<PAGE>
J.P. MORGAN U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 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
$14,143 for the fiscal year ended May 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 Institutional 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 $3,000.
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 FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997
-------------- --------------
<S> <C> <C>
Shares of beneficial interest sold............... 3,184,514 2,669,035
Reinvestment of dividends and distributions...... 3,183,230 1,683,473
Shares of beneficial interest redeemed........... (3,622,182) (4,528,123)
-------------- --------------
Net Increase (Decrease).......................... 2,745,562 (175,615)
-------------- --------------
-------------- --------------
</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. 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.
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
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 allocated to the
funds in accordance with procedures established by their respective trustees or
directors. The fund has not borrowed pursuant to the Agreement at May 31, 1998.
5. OTHER MATTERS
On January 25, 1998, one of the investors in the portfolio, a non-U.S. fund,
withdrew its interest in the portfolio through an in-kind withdrawal amounting
to $132,735,628. The withdrawal did not create a taxable event to the fund or
reduce the net assets of the fund, but did reduce the net assets of the
portfolio.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan U.S. Equity Fund
(Formerly The JPM Pierpont U.S. Equity Fund)
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
J.P. Morgan U.S. Equity Fund (one of the series constituting part of the J.P.
Morgan Funds), hereafter referred to as the "Fund", at May 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
July 17, 1998
17
<PAGE>
The U.S. Equity Portfolio
Annual Report May 31, 1998
(The following pages should be read in conjunction
with the J.P. Morgan U.S. Equity Fund
Annual Financial Statements)
18
<PAGE>
THE U.S. EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -------------
<S> <C> <C>
COMMON STOCKS (94.6%)
BASIC INDUSTRIES (6.4%)
AGRICULTURE (0.0%)
Agribrands International, Inc.+.................. 8,020 $ 274,685
-------------
CHEMICALS (3.9%)
Dow Chemical Co.................................. 22,100 2,140,937
E.I. du Pont de Nemours & Co.(s)................. 219,100 16,870,700
Rohm & Haas Co................................... 117,600 12,921,300
-------------
31,932,937
-------------
FOREST PRODUCTS & PAPER (1.2%)
Temple-Inland, Inc............................... 173,500 10,193,125
-------------
METALS & MINING (1.3%)
Allegheny Teledyne, Inc.......................... 444,572 10,336,299
-------------
TOTAL BASIC INDUSTRIES......................... 52,737,046
-------------
CONSUMER GOODS & SERVICES (21.1%)
AUTOMOTIVE (0.5%)
Chrysler Corp.................................... 81,100 4,511,187
-------------
BROADCASTING & PUBLISHING (1.9%)
Comcast Corp., Class A........................... 214,500 7,353,328
Tele-Communications TCI Ventures Group+.......... 470,242 8,185,150
-------------
15,538,478
-------------
ENTERTAINMENT, LEISURE & MEDIA (3.2%)
Hasbro, Inc...................................... 153,400 5,867,550
International Game Technology.................... 270,300 6,673,031
Seagram Company Ltd.............................. 322,300 14,161,056
-------------
26,701,637
-------------
FOOD, BEVERAGES & TOBACCO (7.7%)
Anheuser Busch Companies, Inc.................... 296,900 13,638,844
General Mills, Inc............................... 102,500 6,995,625
PepsiCo, Inc..................................... 285,400 11,647,887
Philip Morris Companies, Inc..................... 455,200 17,013,100
Ralston-Ralston Purina Group..................... 79,900 8,893,869
Unilever NV (ADR)................................ 70,000 5,525,625
-------------
63,714,950
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -------------
<S> <C> <C>
HOUSEHOLD PRODUCTS (1.7%)
Procter & Gamble Co.............................. 162,260 $ 13,619,699
-------------
RETAIL (6.1%)
Circuit City Stores, Inc......................... 302,100 12,801,487
Federated Department Stores, Inc.+............... 157,000 8,134,562
Gap, Inc......................................... 173,000 9,342,000
Kmart Corp.+..................................... 455,400 8,823,375
Toys 'R' Us, Inc.+............................... 249,100 6,601,150
Wal-Mart Stores, Inc............................. 90,200 4,977,912
-------------
50,680,486
-------------
TOTAL CONSUMER GOODS & SERVICES................ 174,766,437
-------------
ENERGY (8.9%)
OIL-PRODUCTION (8.3%)
Atlantic Richfield Co............................ 106,100 8,368,637
British Petroleum Co. (ADR)...................... 91,697 8,126,647
Exxon Corp....................................... 218,200 15,383,100
Mobil Corp....................................... 144,400 11,263,200
Phillips Petroleum Co............................ 168,400 8,430,525
Tosco Corp....................................... 526,400 16,713,200
-------------
68,285,309
-------------
OIL-SERVICES (0.6%)
Cooper Cameron Corp.+............................ 81,500 4,849,250
-------------
TOTAL ENERGY................................... 73,134,559
-------------
FINANCE (15.8%)
BANKING (4.7%)
Astoria Financial Corp........................... 70,600 3,885,206
First Union Corp................................. 251,700 13,922,156
Long Island Bancorp, Inc......................... 55,300 3,416,503
NationsBank Corp................................. 168,400 12,756,300
Washington Mutual, Inc........................... 73,100 5,169,541
-------------
39,149,706
-------------
FINANCIAL SERVICES (5.8%)
Associates First Capital Corp., Class A.......... 112,300 8,401,444
Citicorp(s)...................................... 57,200 8,529,950
Federal National Mortgage Association............ 270,400 16,190,200
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE U.S. EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -------------
<S> <C> <C>
FINANCIAL SERVICES (CONTINUED)
Providian Financial Corp......................... 92,000 $ 5,853,500
Travelers Group, Inc............................. 142,018 8,663,098
-------------
47,638,192
-------------
INSURANCE (3.3%)
Ambac Financial Group, Inc....................... 152,700 8,350,781
American International Group, Inc.(s)............ 26,200 3,243,887
Marsh & McLennan Companies, Inc.................. 92,000 8,055,750
UNUM Corp........................................ 141,100 7,839,869
-------------
27,490,287
-------------
REAL ESTATE INVESTMENT TRUSTS (2.0%)
Equity Office Properties Trust................... 27,200 747,987
Starwood Hotels & Resorts........................ 337,000 15,902,187
-------------
16,650,174
-------------
TOTAL FINANCE.................................. 130,928,359
-------------
HEALTHCARE (13.0%)
HEALTH SERVICES (4.3%)
Humana, Inc.+.................................... 306,400 9,517,550
Perkin-Elmer Corp................................ 160,900 11,021,650
United Healthcare Corp........................... 230,000 14,720,000
-------------
35,259,200
-------------
MEDICAL SUPPLIES (0.6%)
Bausch & Lomb, Inc............................... 101,000 5,031,062
-------------
PHARMACEUTICALS (8.1%)
Alza Corp.+...................................... 240,300 11,624,513
American Home Products Corp...................... 360,000 17,392,500
Bristol-Myers Squibb Co.......................... 199,700 21,467,750
Crescendo Pharmaceuticals Corp.+................. 11,895 150,174
Warner-Lambert Co................................ 259,800 16,578,488
-------------
67,213,425
-------------
TOTAL HEALTHCARE............................... 107,503,687
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -------------
<S> <C> <C>
INDUSTRIAL PRODUCTS & SERVICES (6.2%)
DIVERSIFIED MANUFACTURING (4.4%)
AlliedSignal, Inc................................ 276,600 $ 11,824,650
Cooper Industries, Inc........................... 171,100 11,014,563
Tyco International Ltd........................... 243,046 13,458,672
-------------
36,297,885
-------------
POLLUTION CONTROL (1.8%)
Waste Management, Inc............................ 452,900 14,719,250
-------------
TOTAL INDUSTRIAL PRODUCTS & SERVICES........... 51,017,135
-------------
TECHNOLOGY (13.3%)
AEROSPACE (2.3%)
Boeing Co........................................ 275,900 13,139,738
Coltec Industries, Inc.+......................... 264,025 5,891,058
-------------
19,030,796
-------------
COMPUTER PERIPHERALS (1.9%)
EMC Corp.+....................................... 388,500 16,098,469
-------------
COMPUTER SOFTWARE (2.3%)
Autodesk, Inc.................................... 109,000 4,639,313
Computer Associates International, Inc........... 140,400 7,371,000
Oracle Corp.+.................................... 289,700 6,835,109
-------------
18,845,422
-------------
COMPUTER SYSTEMS (3.3%)
International Business Machines Corp............. 120,000 14,085,000
Sun Microsystems, Inc.+.......................... 336,800 13,482,525
-------------
27,567,525
-------------
ELECTRONICS (2.8%)
Bay Networks, Inc.+.............................. 432,400 11,972,075
Cabletron Systems, Inc.+......................... 68,600 883,225
Cisco Systems, Inc.+............................. 71,000 5,362,719
Sensormatic Electronics Corp..................... 407,800 5,224,938
-------------
23,442,957
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE U.S. EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -------------
<S> <C> <C>
SEMICONDUCTORS (0.4%)
General Semiconductor, Inc.+..................... 127,000 $ 1,714,500
Texas Instruments, Inc........................... 35,000 1,798,125
-------------
3,512,625
-------------
TELECOMMUNICATIONS-EQUIPMENT (0.3%)
Commscope, Inc.+................................. 171,633 2,660,312
-------------
TOTAL TECHNOLOGY............................... 111,158,106
-------------
TRANSPORTATION (1.9%)
RAILROADS (1.9%)
Union Pacific Corp............................... 319,900 15,475,163
-------------
UTILITIES (8.0%)
ELECTRIC (2.1%)
Central & South West Corp........................ 321,600 8,502,300
Northern States Power Co......................... 81,700 4,646,688
Texas Utilities Co............................... 103,500 4,088,250
-------------
17,237,238
-------------
GAS-PIPELINES (0.6%)
Columbia Energy Group(s)......................... 57,900 4,885,313
-------------
TELEPHONE (5.3%)
GTE Corp......................................... 272,500 15,890,156
SBC Communications, Inc.......................... 266,000 10,340,750
WorldCom, Inc.+.................................. 381,700 17,379,278
-------------
43,610,184
-------------
TOTAL UTILITIES................................ 65,732,735
-------------
TOTAL COMMON STOCKS (COST $628,795,186)........ 782,453,227
-------------
</TABLE>
<TABLE>
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (1.0%)
TRANSPORTATION (1.0%)
RAILROADS (1.0%)
Union Pacific Capital Trust, 6.25% due 04/01/28
(144A)
(cost $8,000,000)+............................. 160,000 7,960,000
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (3.8%)
REPURCHASE AGREEMENT (3.7%)
Goldman Sachs Repurchase Agreement 5.50% dated
05/29/98, due 06/01/98, proceeds $30,597,017
(collateralized by $30,687,386 various mortgage
notes, 5.24% - 7.36% due 11/10/98 - 11/21/16,
valued at $31,194,883). (cost $30,583,000)..... $ 30,583,000 $ 30,583,000
-------------
U.S. TREASURY OBLIGATIONS (0.1%)
U.S. Treasury Bill 4.85% due 07/09/98 (cost
$989,959)(s)................................... 995,000 989,959
-------------
TOTAL SHORT-TERM INVESTMENTS (COST
$31,572,959).................................. 31,572,959
-------------
TOTAL INVESTMENTS (COST $668,368,145) (99.4%)..................
821,986,186
OTHER ASSETS IN EXCESS OF LIABILITIES (0.6%)...................
5,317,538
-------------
NET ASSETS (100.0%)............................................ $ 827,303,724
-------------
-------------
</TABLE>
- ------------------------------
Note: Based on the cost of securities of $670,450,134 for Federal Income Tax
purposes at May 31, 1998, the aggregate gross unrealized appreciation and
depreciation was $164,833,674 and $13,297,622, respectively, resulting in net
unrealized appreciation of $151,536,052.
+ - Non income producing security.
(s) - Security is fully segregated with custodian as collateral for futures
contracts or with broker as initial margin for futures contracts. Total market
value of securities segregated is $34,519,809.
144A - Securities restricted for resale to Qualified Institutional Buyers.
ADR - American Depositary Receipt.
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE U.S. EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $668,368,145) $821,986,186
Cash 38
Receivable for Investments Sold 8,812,341
Dividends Receivable 1,431,378
Interest Receivable 14,017
Prepaid Trustees' Fees 2,807
Prepaid Expenses and Other Assets 3,849
------------
Total Assets 832,250,616
------------
LIABILITIES
Payable for Investments Purchased 4,445,086
Advisory Fee Payable 285,944
Variation Margin Payable 161,035
Custody Fee Payable 31,136
Administrative Services Fee Payable 20,740
Administration Fee Payable 1,564
Fund Services Fee Payable 769
Accrued Expenses 618
------------
Total Liabilities 4,946,892
------------
NET ASSETS
Applicable to Investors' Beneficial Interests $827,303,724
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE U.S. EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MAY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividend Income (Net of Foreign Withholding Tax
of $85,857 ) $ 12,070,213
Interest Income 1,003,198
------------
Investment Income 13,073,411
EXPENSES
Advisory Fee $3,534,791
Administrative Services Fee 265,956
Custodian Fees and Expenses 181,907
Professional Fees and Expenses 50,177
Fund Services Fee 30,613
Administration Fee 18,971
Printing Expenses 15,438
Trustees' Fees and Expenses 14,756
Insurance Expense 3,413
Miscellaneous 79
----------
Total Expenses 4,116,101
------------
NET INVESTMENT INCOME 8,957,310
NET REALIZED GAIN ON INVESTMENTS
(including $104,591 net realized gain from
futures contracts) 211,793,953
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENTS
(including $403,490 in unrealized
depreciation from futures contracts) (9,192,276)
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $211,558,987
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE U.S. EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 8,957,310 $ 11,014,128
Net Realized Gain on Investments 211,793,953 114,253,160
Net Change in Unrealized Appreciation of
Investments (9,192,276) 54,102,181
-------------- --------------
Net Increase in Net Assets Resulting from
Operations 211,558,987 179,369,469
-------------- --------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 171,037,121 205,179,647
Withdrawals (414,552,601) (244,500,948)
-------------- --------------
Net Decrease from Investors' Transactions (243,515,480) (39,321,301)
-------------- --------------
Total Increase (Decrease) in Net Assets (31,956,493) 140,048,168
NET ASSETS
Beginning of Fiscal Year 859,260,217 719,212,049
-------------- --------------
End of Fiscal Year $ 827,303,724 $ 859,260,217
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL YEAR ENDED MAY JULY 19, 1993
31, (COMMENCEMENT OF
------------------------------- OPERATIONS) THROUGH
1998 1997 1996 1995 MAY 31, 1994
------ ------ ----- ----- -------------------
<S> <C> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.47% 0.47% 0.46% 0.51% 0.53%(a)
Net Investment Income 1.01% 1.44% 2.20% 2.12% 1.79%(a)
Portfolio Turnover 106% 99% 85% 71% 76%+
</TABLE>
- ------------------------
(a) Annualized.
+ Portfolio turnover is for the twelve month period ended May 31, 1994, and
includes the portfolio activity of the Portfolio's predecessor entity, The
Pierpont Equity Fund, for the period June 1, 1993 to June 18, 1993.
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE U.S. EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The U.S. Equity Portfolio (the "portfolio") is registered under the Investment
Company Act of 1940, as amended, as a no-load, 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 July 19, 1993 and received a
contribution of certain assets and liabilities, including securities, with a
value of $209,477,219 on that date from The Pierpont Equity Fund in exchange for
a beneficial interest in the portfolio. At that date, net unrealized
appreciation of $12,039,552 was included in the contributed securities. On
October 31, 1993, the portfolio received a contribution of securities and
certain assets and liabilities, with a market value and cost of $128,337,342
from the JPM North America Fund, Ltd., in exchange for a beneficial interest in
the portfolio. The portfolio's investment objective is to provide a high total
return from a portfolio of selected equity securities. The Declaration of Trust
permits the trustees to issue an unlimited number of beneficial interests in the
portfolio.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the portfolio:
a) The value of each security for which readily available market quotations
exist is based on a decision as to the broadest and most representative
market for such security. The value of such security will be based either
on the last sale price on a national securities exchange or, in the
absence of recorded sales, at the average of readily available closing bid
and asked prices on such exchanges. Securities listed on a foreign
exchange are valued at the last quoted sale price available before the
time when net assets are valued. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Securities or other assets for which market quotations are not readily
available are valued at fair value in accordance with procedures
established by the portfolio's trustees. Such procedures include the use
of independent pricing services, which use prices based upon yields or
prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. All
portfolio securities with a remaining maturity of less than 60 days are
valued by the amortized cost method.
b) The portfolio's custodian (or designated subcustodians, as the case may be
under tri-party repurchase agreements,) takes possession of the collateral
pledged for investments in repurchase agreements on behalf of the
portfolio. It is the policy of the portfolio to value the underlying
collateral daily on a mark-to-market basis to determine that the value,
including accrued interest, is at least equal to the repurchase price plus
accrued interest. In the event of default of the obligation to repurchase,
the portfolio has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances,
in the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral or proceeds may be subject
to legal proceedings.
c) Securities transactions are recorded on a trade date basis. Dividend
income is recorded on the ex-dividend date or as of the time that the
relevant ex-dividend date and amount becomes known. Interest
25
<PAGE>
THE U.S. EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
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) Futures -- A futures contract is an agreement to purchase/sell a specified
quantity of an underlying instrument at a specified future date or to
make/receive a cash payment based on the value of a securities index. The
price at which the purchase and sale will take place is fixed when the
portfolio enters into the contract. Upon entering into such a contract,
the portfolio is required to pledge to the broker an amount of cash and/or
liquid securities equal to the minimum "initial margin" requirements of
the exchange. Pursuant to the contract, the portfolio agrees to receive
from, or pay to, the broker an amount of cash equal to the daily
fluctuation in 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.
SUMMARY OF OPEN CONTRACTS AT MAY 31, 1998
<TABLE>
<CAPTION>
NET UNREALIZED CURRENT MARKET VALUE
CONTRACTS LONG (DEPRECIATION) OF FUTURES
-------------- -------------- --------------------
<S> <C> <C> <C>
S & P 500, expiring June 1998.................... 85 $ (269,088) $ 23,179,500
S & P 500, expiring September 1998............... 17 (134,402) 4,686,475
-------------- -------------- --------------------
Totals........................................... 102 $ (403,490) $ 27,865,975
-------------- -------------- --------------------
-------------- -------------- --------------------
</TABLE>
e) 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.
2. TRANSACTIONS WITH AFFILIATES
a) The portfolio has an Investment Advisory Agreement with Morgan Guaranty
Trust Company of New York ("Morgan"). Under the terms of the agreement,
the portfolio pays Morgan at an annual rate of 0.40% of the portfolio's
average daily net assets. For the fiscal year ended May 31, 1998, such
fees amounted to $3,534,791.
b) The portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as the co-administrator and exclusive placement
agent. Under a Co-Administration Agreement between FDI and the portfolio,
FDI provides administrative services necessary for the operations of the
portfolio, furnishes office space and facilities required for conducting
the business of the portfolio and pays the
26
<PAGE>
THE U.S. EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
compensation of the portfolio's 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 May 31, 1998, the fee for these services
amounted to $18,971.
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 Morgan acts as advisor
(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 portfolio is determined by the proportionate share that its net
assets bear to the net assets of the portfolio, 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 May 31,
1998, the fee for these services amounted to $265,956.
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 $30,613 for the fiscal year ended May 31, 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 (formerly The JPM Pierpont Funds), the
J.P. Morgan Institutional Funds (formerly The JPM 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 $6,400.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended May 31, 1998 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
- ----------------- --------------
<S> <C>
$907,251,208...... $1,031,134,808
</TABLE>
27
<PAGE>
THE U.S. EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1998
- --------------------------------------------------------------------------------
4. CREDIT AGREEMENT
The portfolio is party to a revolving line of credit agreement (the "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 25, 1998, the portfolio received a withdrawal request in the amount
of $132,735,628 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 securities in the amount of $30,736,878, which is included in the
Net Realized Gain on Investments in the Statement of Operations.
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The U.S. Equity Portfolio
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the supplementary data present fairly, in all material
respects, the financial position of The U.S. Equity Portfolio (the "Portfolio")
at May 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 supplementary data for each of the four years in the period then ended and
for the period July 19, 1993 (commencement of operations) through May 31, 1994,
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 May 31,
1998 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
July 17, 1998
29
<PAGE>
J.P. MORGAN FUNDS
PRIME MONEY MARKET FUND
FEDERAL MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
CALIFORNIA MONEY MARKET FUND
SHORT TERM BOND FUND
BOND FUND
GLOBAL STRATEGIC INCOME FUND
EMERGING MARKETS DEBT FUND
TAX EXEMPT BOND FUND
NEW YORK TOTAL RETURN BOND FUND
CALIFORNIA BOND FUND: SELECT SHARES
DIVERSIFIED FUND
DISCIPLINED EQUITY FUND
U.S. EQUITY FUND
U.S. SMALL COMPANY FUND
U.S. SMALL COMPANY OPPORTUNITIES FUND
TAX AWARE U.S. EQUITY FUND: SELECT SHARES
INTERNATIONAL EQUITY FUND
EUROPEAN EQUITY FUND
JAPAN EQUITY FUND
INTERNATIONAL OPPORTUNITIES FUND
EMERGING MARKETS EQUITY FUND
GLOBAL 50 FUND: SELECT SHARES
FOR MORE INFORMATION ON THE J.P. MORGAN FUNDS,
CALL J.P. MORGAN FUNDS SERVICES AT
(800) 521-5411.
J.P. MORGAN
U.S. EQUITY FUND
ANNUAL REPORT
MAY 31, 1998
