<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN JAPAN EQUITY FUND
February 19, 1998
Dear Shareholder:
Your Fund has changed its name. The JPM Pierpont Japan Equity Fund is now the
J.P. Morgan Japan Equity Fund. When J.P. Morgan began advising mutual funds over
15 years ago, regulatory restrictions prevented us from using our name in the
title of any mutual fund, which led to the JPM acronym and the use of the name
Pierpont, the middle name of J.P. Morgan, our founder. With the evolution of
today's financial marketplace, we are now able to proudly include the full J.P.
Morgan name in the title of your Fund.
Unfortunately, the annual report for this Fund is not as cheerful as those of
our domestic equity funds. While Japan's economy seemed to be turning a corner
in the first half of the year, the remainder of 1997 proved to be a difficult
time for the economy and the financial markets. As a result, your Fund posted a
return of -30.53% for the year. The Fund's net asset value declined from $7.83
per share to $5.42 for the period under review. In December, an income dividend
of $0.02 per share was paid.
The report that follows includes an interview with Masato Degawa, a member of
our portfolio management team. This interview is designed to answer commonly
asked questions about the Fund, elaborate on what happened during the reporting
period, and provide an outlook for the months ahead.
As chairman and president of Asset Management Services, we appreciate your
investment in the Fund. If you have any comments or questions, please call your
Morgan representative or J.P. Morgan Funds Services at (800) 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 OF CONTENTS
LETTER TO THE SHAREHOLDERS....1
FUND PERFORMANCE..............2
PORTFOLIO MANAGER Q&A.........3
FUND FACTS AND HIGHLIGHTS.....5
SPECIAL FUND-BASED SERVICES...6
FINANCIAL STATEMENTS..........8
1
<PAGE>
Fund performance
EXAMINING PERFORMANCE
One way to evaluate a mutual fund's historical performance is to look at the
growth of a hypothetical investment of $10,000. The chart at the right shows
that $10,000 invested in the Fund on February 29, 1996* would have been worth
$5,951 on December 31, 1997.
Another way to look at performance is to review a fund's average annual total
return. This figure takes the fund's actual (or cumulative) return and shows you
what would have happened if the fund had achieved that return by performing at a
constant rate each year. Average annual total returns represent the average
yearly change of a fund's value over various time periods, typically 1, 5, or 10
years (or since inception). Total returns for periods of less than one year are
not annualized and provide a picture of how a fund has performed over the short
term.
GROWTH OF $10,000 SINCE INCEPTION*
February 29, 1996 - December 31, 1997
[GRAPH]
<TABLE>
<CAPTION>
J.P. Morgan Japan Equity Fund TOPIX Lipper Japanese Fund Average
<S> <C> <C> <C>
2/96 10,000 10,000 10,000
6/96 10,577 10,542 10,713
12/96 8,566 8,583 9,073
6/97 9,190 9,228 10,181
12/97 5,951 6,164 7,595
</TABLE>
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
-------------------------- -------------------------------
THREE SIX ONE SINCE
AS OF DECEMBER 31, 1997 MONTHS MONTHS YEAR INCEPTION*
- -------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C>
J.P. Morgan Japan Equity Fund -20.71% -35.25% -30.53% -24.66%
TOPIX** -21.26% -33.21% -28.19% -23.20%
Lipper Japanese Fund Average -15.44% -24.05% -14.07% -12.70%
</TABLE>
* THE J.P. MORGAN JAPAN EQUITY FUND'S RETURNS INCLUDE HISTORICAL RETURNS OF THE
J.P. MORGAN INSTITUTIONAL JAPAN EQUITY FUND, WHICH HAD A LOWER EXPENSE RATIO,
FROM FEBRUARY 29, 1996 (THE INCEPTION DATE OF THE J.P. MORGAN INSTITUTIONAL
JAPAN EQUITY FUND) THROUGH MAY 6, 1996 (THE INCEPTION DATE OF THE J.P. MORGAN
JAPAN EQUITY FUND).
** THE TOKYO STOCK PRICE INDEX (TOPIX) IS AN UNMANAGED, MARKET
CAPITALIZATION-WEIGHTED INDEX COMPRISING ALL STOCKS IN THE FIRST SECTION OF THE
TOKYO STOCK EXCHANGE. THE INDEX DOES NOT INCLUDE FEES OR OPERATING EXPENSES AND
IS NOT AVAILABLE FOR ACTUAL INVESTMENT.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. RETURNS ARE NET OF FEES,
ASSUME THE REINVESTMENT OF DISTRIBUTIONS, AND REFLECT THE REIMBURSEMENT OF FUND
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
[PICTURE]
Following is an interview with MASATO DEGAWA, who is a member of the portfolio
management team for The Japan Equity Portfolio in which the Fund invests. Masato
joined Morgan's International Investment Group in 1993 as a Japanese equity
portfolio manager. Prior to joining Morgan, he was a senior analyst with Morgan
Stanley in Tokyo covering Japanese utilities and special situations. He has both
a B.A. and M.A. degree from Oxford University, England, in Engineering Science
and Economics. This interview was conducted on February 18, 1998 and reflects
Masato's views on that date.
CAN YOU GIVE US SOME BACKGROUND ON THIS YEAR'S EVENTS IN JAPAN?
MD: The economy posted a very high growth rate during the first quarter. Much
of that was due to a rush of consumer buying in advance of the consumption tax
hike from 3% to 5%, which took effect on April 1. Obviously, if you're going to
buy a big ticket item, you would try to do it before such a hike. As a result,
first quarter GDP was really high, and foreign investors took it as a sign that
the economy was finally starting to take off. There was a tremendous flow of
capital into the market. In retrospect, the tax hike was very ill-timed because
it had a contracting effect on the economy.
Another negative in terms of fiscal thrust was the increase of the social
security cost to people. Together this amounted to about nine trillion Japanese
yen or more than two percentage points of GDP, which completely crushed the
fragile recovery that began last year.
Additionally, many Japanese companies started running out of so-called
unrealized gain on securities, which used to act like a cushion for profit. In
the past, Japanese corporations used the unrealized gain on securities to make
up for profit shortfalls. They would sell shares of companies whose book value
is well below market value and thereby raise their profit figures. However,
they've been doing this since the economic bubble collapsed in 1989 and they're
running out of these types of holdings. They are left with securities that have
very high book values -- higher than the market price. When those securities get
sold, losses are created. In other words: no more cushion.
IS THIS PRACTICE UNIQUE TO JAPAN?
MD: As far as the developed markets go, yes. You have to remember that much of
the management of Japan, Inc. is still old fashioned. They are more concerned
with their employees than their shareholders. While that may be a commendable
viewpoint, it hinders their competitiveness in today's world.
3
<PAGE>
WHICH COMPANIES ARE FARING THE WORST?
MD: Generally, the banking, insurance, and construction sectors are in the
worst shape. Nissan Life, which had been poorly managed, went under in April.
That was big news. Shortly after that, three construction companies went
bankrupt. Then in November, four major financial institutions failed. This
caused people to become concerned about their future employment, which was
unheard of until recently, and led to further cutbacks in consumer spending.
With domestic consumption making up two thirds of GDP, this had an additional
cooling effect on the economy.
WHERE ARE THE BRIGHT SPOTS IN THE JAPANESE ECONOMY?
MD: Companies that generate much of their revenue from exporting are having
banner years. These companies were forced to become lean and mean back in 1995
when the yen was at record strength. Now that the yen has weakened from 80 to
125 to the dollar, these restructured companies are very efficient and
competitive.
THE FUND UNDERPERFORMED THE TOPIX AND THE LIPPER AVERAGE IN 1997. WHY?
MD: Investors have continued to flock to the "Nifty Fifteen." These are Japan's
largest stocks and to many investors they represent stability of earnings in
uncertain times. Demand for these stocks has driven their prices up. To us,
however, these stocks are expensive. We prefer issues that offer better value
because, in the long run, we believe they will provide superior performance.
Another aspect of this Portfolio is its sector-neutral structure, which reduces
the risk of being in the wrong sector at the wrong time. While we stand by the
sector-neutral structure as a long-term proposition, the Portfolio's exposure to
the financial and construction sectors has hindered performance this year. Of
course, should we see a rebound in these sectors, the Portfolio will participate
in this rebound from the onset.
WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND THE FINANCIAL MARKETS IN JAPAN?
MD: We don't think the economy is likely to grow quickly because of a lack of
consumer confidence and continuing bankruptcy concerns. We are expecting zero
GDP growth for 1998 and perhaps 1.5% growth the following year. As for the stock
market, there is support around the 15,000 level on the Nikkei Index. If the
Nikkei were to fall below that, the Japanese market as well as the financial
system would be in trouble. On the flip side, we think the Nikkei will have
trouble rising above 18,000 because at that level the selling of cross holdings
will likely resume.
On a more positive note, the government has never been so supportive of the
stock market. Both the government and businesses are backing the reform measures
needed to make the market healthy again, which should help.
4
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
The J.P. Morgan Japan Equity Fund seeks to provide a high total return from a
portfolio of equity securities of Japanese companies. It is designed for
investors who want an actively managed portfolio of Japanese equity securities
that seeks to outperform the Tokyo Stock Price Index, a composite
market-capitalization weighted index of all common stocks listed on the First
Section of the Tokyo Stock Exchange. As an international investment, the Fund is
subject to foreign political and currency risk, in addition to market risk.
- --------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS
5/6/96
- --------------------------------------------------------------------------------
NET ASSETS AS OF 12/31/97
$790,093
- --------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/18/98
- --------------------------------------------------------------------------------
EXPENSE RATIO
The Fund's current annualized expense ratio of 1.42% covers shareholders'
expenses for custody, tax reporting, investment advisory and shareholder
services after reimbursement. The Fund is no-load and does not charge any sales,
redemption, or exchange fees. There are no additional charges for buying,
selling, or safekeeping Fund shares, or for wiring redemption proceeds from the
Fund.
FUND HIGHLIGHTS
ALL DATA AS OF DECEMBER 31, 1997
PORTFOLIO ALLOCATION
(AS A PERCENTAGE OF TOTAL INVESTMENTS)
[PIE CHART]
CONSUMER GOODS 21.0%
FINANCE 20.9%
TECHNOLOGY 19.6%
INDUSTRIAL PRODUCTS
& SERVICES 14.5%
BASIC INDUSTRIES 12.9%
TRANSPORTATION 7.1%
HEALTH CARE 2.0%
UTILITIES 1.5%
SHORT-TERM HOLDINGS 0.5%
<TABLE>
<CAPTION>
LARGEST HOLDINGS % OF TOTAL INVESTMENTS
- -------------------------------------------------------------------------
<S> <C>
TOYOTA MOTOR CORP., 1.2% DUE 1/28/98 4.6%
SONY CORP., 1.4% DUE 3/31/05 3.9%
BRIDGESTONE CORP. (JAPAN) 3.8%
BOT CAYMAN FINANCE LTD.,
4.25% DUE 3/29/49 3.2%
TAKEDA CHEMICAL INDUSTRIES LTD. 2.8%
FUJI PHOTO FILM CO. LTD. 2.7%
WEST JAPAN RAILWAY CO. 2.7%
NOMURA SECURITIES CO. LTD. 2.6%
FUJITSU LTD. 2.4%
MITSUI TRUST & BANKING CO. LTD. 2.4%
</TABLE>
5
<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 at
meeting 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.
KEOGH
Keoghs provide another excellent vehicle to help individuals who are
self-employed or are employees of unincorporated businesses to accumulate
retirement savings. A Keogh is a tax-deferred pension plan that can allow you to
contribute the lesser of $30,000 or 25% of your annual earned gross
compensation. The J.P. Morgan Funds can help you build a comprehensive
investment program designed to maximize the retirement dollars in your Keogh
account.
6
<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.
The Fund invests through a master portfolio (another fund with the same
objective). The Portfolio invests in foreign securities which are subject to
special risks including currency fluctuation and political uncertainty. Opinions
expressed herein are based on current market conditions and are subject to
change without notice.
MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING MANAGEMENT FEES AND OTHER
EXPENSES, IS PROVIDED IN THE PROSPECTUS, WHICH SHOULD BE READ CAREFULLY BEFORE
INVESTING. YOU MAY OBTAIN ADDITIONAL COPIES OF THE PROSPECTUS BY CALLING J.P.
MORGAN FUNDS SERVICES AT (800) 521-5411.
7
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The Japan Equity Portfolio
("Portfolio"), at value $ 840,690
Receivable for Expense Reimbursements 13,009
Prepaid Expenses 6
----------
Total Assets 853,705
----------
LIABILITIES
Payable for Shares of Beneficial Interest
Redeemed 46,085
Shareholder Servicing Fee Payable 192
Administrative Services Fee Payable 23
Administration Fee Payable 21
Fund Services Fee Payable 1
Accrued Expenses 17,290
----------
Total Liabilities 63,612
----------
NET ASSETS
Applicable to 145,839 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $ 790,093
----------
----------
Net Asset Value, Offering and Redemption Price
Per Share $5.42
----
----
ANALYSIS OF NET ASSETS
Paid-in Capital $1,180,332
Distributions in Excess of Net Investment Income (4,060)
Accumulated Net Realized Loss on Investment and
Foreign Currency Transactions (187,426)
Net Unrealized Depreciation of Investment and
Foreign Currency Translations (198,753)
----------
Net Assets $ 790,093
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
8
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Dividend Income (Net of Foreign
Withholding Tax of $1,480) $ 5,920
Allocated Interest Income (Net of Foreign
Withholding Tax of $42) 2,829
Allocated Portfolio Expenses (7,844)
---------
Net Investment Income Allocated from
Portfolio 905
FUND EXPENSES
Registration Fees $ 22,167
Transfer Agent Fees 20,461
Printing Expenses 15,892
Professional Fees 11,303
Amortization of Organization Expenses 3,298
Shareholder Servicing Fee 2,260
Administrative Services Fee 279
Fund Services Fee 31
Administration Fee 27
Trustees' Fees and Expenses 15
Miscellaneous 3,554
--------
Total Fund Expenses 79,287
Less: Reimbursement of Expenses (74,291)
--------
NET FUND EXPENSES 4,996
---------
NET INVESTMENT LOSS (4,091)
NET REALIZED LOSS ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS ALLOCATED FROM PORTFOLIO (161,900)
NET CHANGE IN UNREALIZED DEPRECIATION OF
INVESTMENT AND FOREIGN CURRENCY TRANSLATIONS
ALLOCATED FROM PORTFOLIO (127,293)
---------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $(293,284)
---------
---------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 6, 1996
(COMMENCEMENT OF
FOR THE FISCAL OPERATIONS) TO
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 1996
----------------- ----------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Loss $ (4,091) $ (2,087)
Net Realized Loss on Investment and Foreign
Currency Transactions Allocated from Portfolio (161,900) (26,307)
Net Change in Unrealized Depreciation of
Investment and Foreign Currency Translations
Allocated from Portfolio (127,293) (71,460)
----------------- ----------------
Net Decrease in Net Assets Resulting from
Operations (293,284) (99,854)
----------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS
In Excess of Net Investment Income (2,855) --
----------------- ----------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 1,285,706 1,502,463
Reinvestment of Dividends 2,772 --
Cost of Shares of Beneficial Interest Redeemed (820,842) (784,013)
----------------- ----------------
Net Increase from Transactions in Shares of
Beneficial Interest 467,636 718,450
----------------- ----------------
Total Increase in Net Assets 171,497 618,596
NET ASSETS
Beginning of Period 618,596 --
----------------- ----------------
End of Period (including Distributions in Excess
of Net Investment Income of $4,060 and
Accumulated Net Investment loss of $899,
respectively) $ 790,093 $ 618,596
----------------- ----------------
----------------- ----------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 6, 1996
(COMMENCEMENT OF
FOR THE FISCAL OPERATIONS) TO
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 1996
----------------- ----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.83 $ 10.00
----------------- ----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.02) (0.03)
Net Realized and Unrealized Loss on Investment
and Foreign Currency (2.37) (2.14)
----------------- ----------------
Total from Investment Operations (2.39) (2.17)
----------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS
In Excess of Net Investment Income (0.02) --
----------------- ----------------
NET ASSET VALUE, END OF PERIOD $ 5.42 $ 7.83
----------------- ----------------
----------------- ----------------
RATIOS AND SUPPLEMENTAL DATA
Total Return (30.53)% (21.70)%(a)
Net Assets, End of Period (in thousands) $ 790 $ 619
Ratios to Average Net Assets
Expenses 1.42% 1.42%(b)
Net Investment Loss (0.45)% (0.93)%(b)
Decrease Reflected in Expense Ratio due to
Expense Reimbursement 8.22% 1.08%(c)
</TABLE>
- ------------------------
(a) Not Annualized.
(b) Annualized.
(c) After consideration of certain state limitations.
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The J.P. Morgan Japan Equity Fund (the "Fund") is a separate series of the J.P.
Morgan Funds, a Massachusetts business trust (the "Trust") which was organized
on November 4, 1992. The Trust is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Fund
commenced operations on May 6, 1996. Prior to January 1, 1998, the Trust's and
the Fund's names were The JPM Pierpont Funds and The JPM Pierpont Japan Equity
Fund, respectively.
The Fund invests all of its investable assets in The Japan Equity Portfolio (the
"Portfolio"), a non-diversified, open-end management investment company having
the same investment objective as the Fund. The value of such investment included
in the Statement of Assets and Liabilities reflects the Fund's proportionate
interest in the net assets of the Portfolio (less than 1% at December 31, 1997).
The performance of the Fund is directly affected by the performance of the
Portfolio. The financial statements of the Portfolio, including the Schedule of
Investments, are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the Fund:
a) Valuation of securities by the Portfolio is discussed in Note 1 of the
Portfolio's Notes to Financial Statements which are included elsewhere in
this report.
b) The Fund records its share of net investment income, realized and
unrealized gain and loss and adjusts its investment in the Portfolio each
day. All the net investment income and realized and unrealized gain and
loss of the Portfolio is allocated pro rata among the Fund and other
investors in the Portfolio at the time of such determination.
c) Distributions to shareholders of net investment income and net realized
capital gains, if any, are declared and paid annually.
d) The Fund incurred organization expenses of $5,500. Morgan Guaranty Trust
Company of New York ("Morgan") has agreed to pay the organization expenses
of the Fund. The Fund has agreed to reimburse Morgan for these costs which
are being deferred and amortized on a straight-line basis over a period
not to exceed five-years beginning with the commencement of operations of
the Fund.
e) The Fund is treated as a separate entity for federal income tax purposes
and intends to comply with the provisions of the Internal Revenue Code of
1986, as amended, applicable to regulated investment companies and to
distribute 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 ) 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.
12
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
g) 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 for the year ended December 31, 1997 was to decrease
Distributions in Excess of Net Investment Income by $3,785 and increase
Accumulated Net Realized Loss on Investment and Foreign Currency
Transactions by $2,577 and decrease Paid-in Capital by $1,208. The
adjustments are primarily attributable to foreign currency gains. Net
investment loss, net realized losses and net assets were not affected by
this change.
h) For United States Federal income tax purposes, the Fund had a capital loss
carryforward at December 31, 1997 of $49,245, of which $17,233 will expire
in the year 2004 and $32,012 which will expire in the year 2005. No
capital gains distribution is expected to be paid to shareholders until
future net gains have been realized in excess of such carryforward.
The Fund incurred approximately $4,000 of foreign currency losses and
$137,000 of realized capital losses in the period November 1, 1997 to
December 31, 1997. These losses were deferred for tax purposes until
January 1, 1998.
2. TRANSACTIONS WITH AFFILIATES
a) The Trust, on behalf of the Fund, has retained Funds Distributor, Inc.
("FDI") a registered broker-dealer, to serve as co-administrator and
distributor for the Fund. Under a Co-Administration Agreement between FDI
and the Trust on behalf of the Fund, FDI provides administrative services
necessary for the operations of the Fund, furnishes office space and
facilities required for conducting the business of the Fund and pays the
compensation of the Fund's officers affiliated with FDI. The Fund has
agreed to pay FDI fees equal to its allocable share of a complex-wide
charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable
to the Fund is based on the ratio of the Fund's net assets to the
aggregate net assets of the Trust and certain other investment companies
subject to similar agreements with FDI. For the fiscal year ended December
31, 1997, the fee for these services amounted to $27.
b) The Trust, on behalf of the Fund, has an Administrative Services Agreement
(the "Services Agreement") with Morgan under which Morgan is responsible
for overseeing certain aspects of the administration and operation of the
Fund. Under the Services Agreement, the Fund had 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 December
31, 1997, the fee for these services amounted to $279.
13
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
In addition, Morgan has agreed to reimburse the Fund to the extent
necessary to maintain the total operating expenses of the Fund, including
the expenses allocated to the Fund from the Portfolio, at no more than
1.42% of the average daily net assets of the Fund. For the fiscal year
ended December 31, 1997, Morgan has agreed to reimburse the Fund $74,291
for expenses under this agreement.
c) The Trust, on behalf of the Fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal and account
maintenance services to Fund shareholders. The agreement provides for the
Fund to pay Morgan a fee for these services which is computed daily and
paid monthly at an annual rate of 0.25% of the average daily net assets of
the Fund. For the fiscal year ended December 31, 1997, the fee for these
services amounted to $2,260.
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.
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
$31 for the fiscal year ended December 31, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving as
a Trustee of the Trust, the J.P. Morgan Institutional Funds, the Master
Portfolios and J.P. Morgan Series Trust. The Trustees' Fees and Expenses
shown in the financial statements represent the Fund's allocated portion
of these total fees and expenses. Prior to April 1, 1997, the aggregate
annual Trustee fee was $65,000. The Trust's Chairman and Chief Executive
Officer also serves as Chairman of Group and receives compensation and
employee benefits from Group in his role as Group's Chairman. The
allocated portion of such compensation and benefits included in the Fund
Services Fee shown in the financial statements was $6.
14
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
3. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest of one or more series.
Transactions in shares of beneficial interest of the Fund were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 6, 1996
(COMMENCEMENT OF
FOR THE FISCAL OPERATIONS) TO
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 1996
----------------- ----------------
<S> <C> <C>
Shares sold...................................... 195,738 169,499
Reinvestment of dividends and distributions...... 533 0
Shares redeemed.................................. (129,453) (90,478)
----------------- ----------------
Net Increase..................................... 66,818 79,021
----------------- ----------------
----------------- ----------------
</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 28, 1997, with unaffiliated lenders. Additionally, since all
of the investable assets of the Fund are in the Portfolio, the Portfolio is
party to certain covenants of the Agreement. The maximum borrowing under the
Agreement is $100,000,000. Prior to January 26, 1998, the maximum borrowing
under the Agreement was $150,000,000. The Agreement expires on May 27, 1998,
however, the Fund and the unaffiliated lenders as parties to the Agreement will
have the ability to extend the Agreement and continue their participation
therein for an additional 364 days. The purpose of the Agreement is to provide
another alternative for settling large fund shareholder redemptions. Interest on
any such 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 as of December 31, 1997.
5. SUBSEQUENT EVENT
The Fund invests in Portfolio along with another registered management
investment company and a non-U.S. fund both managed by Morgan. The non-U.S. fund
withdrew its interest in the Portfolio through an in-kind withdrawal in January
1998. 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 to
approximately $2,785,000.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan Japan Equity Fund
(formerly The JPM Pierpont Japan 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 Japan Equity Fund (one of the series constituting part of J.P.
Morgan Funds (formerly The JPM Pierpont Funds), hereafter referred to as the
"Fund") at December 31, 1997, the results of its operations for the year then
ended, and the changes in its net assets and the financial highlights for the
year then ended and for the period May 6, 1996 (commencement of operations) to
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
New York, New York
February 23, 1998
16
<PAGE>
The Japan Equity Portfolio
Annual Report December 31, 1997
(The following pages should be read in conjunction
with the J.P. Morgan Japan Equity Fund
Annual Financial Statements)
17
<PAGE>
THE JAPAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
COMMON STOCK (81.1%)
BASIC INDUSTRIES (11.9%)
BUSINESS & PUBLIC SERVICES (0.8%)
Dai Nippon Printing Co. Ltd.(s).................. 70,000 $ 1,319,017
-------------
CHEMICALS (7.8%)
Bridgestone Corp.(Japan)(s)...................... 278,000 6,050,865
Ishihara Sangyo Kaisha Ltd.(s)+.................. 583,000 650,164
Mitsui Chemicals, Inc.- New Shares(s)............ 18,600 34,333
Sekisui Chemical Co. Ltd.(s)..................... 389,000 1,983,578
Takeda Chemical Industries Ltd.(s)............... 159,000 4,549,108
-------------
13,268,048
-------------
FOREST PRODUCTS & PAPER (0.6%)
Sumitomo Forestry Co. Ltd.(s).................... 209,000 1,027,149
-------------
METALS & MINING (2.7%)
Godo Steel Ltd.(s)+.............................. 233,000 136,193
Komai Tekko, Inc.(s)............................. 82,000 124,241
Mitsui Mining & Smelting Co. Ltd.(s)............. 344,000 1,386,360
Nippon Steel Corp.(s)............................ 1,296,000 1,923,749
Tokyo Steel Manufacturing Co. Ltd.(s)............ 288,000 976,826
-------------
4,547,369
-------------
TOTAL BASIC INDUSTRIES......................... 20,161,583
-------------
CONSUMER GOODS & SERVICES (15.5%)
AUTOMOTIVE (3.3%)
Nissan Motor Co. Ltd.(s)......................... 404,000 1,677,882
Toyota Motor Corp. Ltd.(s)....................... 135,000 3,883,216
-------------
5,561,098
-------------
AUTOMOTIVE SUPPLIES (0.4%)
Nifco, Inc.(s)................................... 38,000 248,421
Sumitomo Rubber Industries Ltd.(s)............... 89,000 377,162
-------------
625,583
-------------
BROADCASTING & PUBLISHING (1.6%)
Toppan Printing Co. Ltd.(s)...................... 213,000 2,784,933
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
ENTERTAINMENT, LEISURE & MEDIA (0.1%)
Kyodo Printing Co. Ltd.(s)....................... 58,000 $ 227,502
-------------
FOOD, BEVERAGES & TOBACCO (2.1%)
Japan Tobacco, Inc.(s)........................... 346 2,464,185
Nippon Meat Packers, Inc.(s)..................... 86,000 1,177,347
-------------
3,641,532
-------------
MERCHANDISING (0.0%)*
Canon Sales Co., Inc.(s)......................... 7,000 80,218
-------------
MULTI - INDUSTRY (0.5%)
Marubeni Corp.(s)................................ 450,000 792,564
-------------
RETAIL (7.5%)
Aoyama Trading Co. Ltd.(s)....................... 61,000 1,093,130
Ito - Yokado Co. Ltd.(s)......................... 75,000 3,835,916
Izumi Co. Ltd.(s)................................ 184,000 856,169
Izumiya Co. Ltd.(s).............................. 306,000 2,002,798
Mizuno Corp.(s).................................. 92,000 279,493
Nintendo Co. Ltd.(s)............................. 20,000 1,968,911
Seven - Eleven Japan Co. Ltd.(s)................. 33,000 2,345,158
Shimachu Co. Ltd.(s)............................. 300 4,730
Xebio Co. Ltd.(s)................................ 53,300 426,331
York - Benimaru Co. Ltd.(s)...................... 400 4,830
-------------
12,817,466
-------------
TOTAL CONSUMER GOODS & SERVICES................ 26,530,896
-------------
FINANCE (16.8%)
BANKING (10.5%)
Bank of Iwate Ltd.(s)............................ 18,600 829,712
Fukui Bank Ltd.(s)............................... 400,000 753,724
Fukushima Bank Ltd.(s)........................... 216,000 480,107
Hyakugo Bank Ltd.(s)............................. 337,000 1,451,457
Keiyo Bank Ltd.(s)............................... 250,000 519,147
Kita-Nippon Bank Ltd.(s)......................... 11,700 503,918
Mitsui Trust & Banking Co. Ltd.(s)............... 2,001,000 3,893,622
Shinwa Bank Ltd.(s).............................. 139,000 534,529
Sumitomo Trust & Banking Co. Ltd.(s)............. 433,000 2,257,895
The Bank of Tokyo - Mitsubishi Ltd.(s)........... 208,400 2,885,070
The Kagawa Bank Ltd.(s).......................... 263,000 1,294,559
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
THE JAPAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
BANKING (CONTINUED)
Tokai Bank Ltd.(s)+.............................. 182,000 $ 851,062
Toyo Trust & Banking Co. Ltd.(s)................. 264,000 1,563,439
-------------
17,818,241
-------------
COMMERCIAL SERVICES (0.7%)
Asatsu, Inc.(s).................................. 78,000 1,127,817
-------------
FINANCIAL SERVICES (2.5%)
Nomura Securities Co. Ltd.(s).................... 313,000 4,188,705
-------------
INSURANCE (1.3%)
Tokio Marine & Fire Insurance Co. Ltd.(s)........ 199,000 2,265,171
-------------
REAL ESTATE (1.8%)
Daiwa Danchi Co. Ltd.(s)+........................ 110,000 162,435
Mitsubishi Estate Co. Ltd.(s).................... 271,000 2,959,674
-------------
3,122,109
-------------
TOTAL FINANCE.................................. 28,522,043
-------------
HEALTHCARE (1.2%)
PHARMACEUTICALS (1.2%)
Yamanouchi Pharmaceutical Co. Ltd.(s)............ 98,000 2,110,427
-------------
INDUSTRIAL PRODUCTS & SERVICES (13.8%)
CONSTRUCTION & HOUSING (2.1%)
Matsui Construction Co. Ltd.(s).................. 193,000 354,765
Nishimatsu Construction Co. Ltd.(s).............. 400,000 1,261,334
Toda Construction Co.(s)......................... 261,000 712,615
Tostem Corp.(s).................................. 109,800 1,182,270
-------------
3,510,984
-------------
ELECTRICAL EQUIPMENT (5.5%)
Hitachi Ltd.(s).................................. 321,000 2,296,012
Nissei Sangyo Co. Ltd.(s)........................ 81,000 666,584
Ricoh Co. Ltd.(s)................................ 208,000 2,591,580
Rohm Co. Ltd.(s)................................. 32,000 3,273,315
Sanki Engineering Co. Ltd.(s).................... 87,000 618,269
-------------
9,445,760
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
INDUSTRIAL PRODUCTS & SERVICES (0.2%)
Okamura Corp.(s)................................. 123,000 $ 303,666
-------------
MACHINERY (4.9%)
Aichi Corp.(s)................................... 179,000 516,262
Ebara Corp.(s)................................... 247,000 2,621,575
Fanuc Ltd.(s).................................... 77,000 2,925,525
Mitsubishi Heavy Industries Ltd.(s).............. 298,000 1,246,813
Sansei Yusoki Co. Ltd.(s)........................ 89,000 195,768
Toshiba Tungaloy Co. Ltd.(s)..................... 380,000 789,103
-------------
8,295,046
-------------
MANUFACTURING (1.1%)
Topy Industries Ltd.(s).......................... 300,000 456,849
Tsubakimoto Chain Co.(s)......................... 377,000 1,362,779
-------------
1,819,628
-------------
TOTAL INDUSTRIAL PRODUCTS & SERVICES........... 23,375,084
-------------
TECHNOLOGY (13.9%)
COMPUTER SYSTEMS (2.3%)
Fujitsu Ltd.(s).................................. 365,000 3,930,132
-------------
ELECTRONICS (8.3%)
Canon, Inc.(s)................................... 75,000 1,753,562
Fuji Photo Film Co. Ltd.(s)...................... 112,000 4,306,994
Pioneer Electronic Corp.(s)...................... 147,000 2,272,477
Secom Co. Ltd.(s)................................ 40,000 2,565,738
TDK Corp.(s)..................................... 44,000 3,329,921
-------------
14,228,692
-------------
SEMICONDUCTORS (0.9%)
Tokyo Ohka Kogyo Co. Ltd.(s)..................... 62,500 1,586,281
-------------
TELECOMMUNICATIONS (2.4%)
DDI Corp.(s)..................................... 865 2,295,205
Nippon Telegraph & Telephone Corp.(s)............ 216 1,860,621
-------------
4,155,826
-------------
TOTAL TECHNOLOGY............................... 23,900,931
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE JAPAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
TRANSPORTATION (6.6%)
RAILROADS (3.8%)
East Japan Railway Co.(s)........................ 500 $ 2,265,017
West Japan Railway Co.(s)........................ 1,338 4,280,906
-------------
6,545,923
-------------
TRANSPORT & SERVICES (0.7%)
Nippon Express Co. Ltd.(s)....................... 246,000 1,229,800
-------------
WHOLESALE & INTERNATIONAL TRADE (2.1%)
Kamei Corp.(s)................................... 50,000 346,098
Mitsubishi Corp.(s).............................. 386,000 3,057,812
Nagase & Co. Ltd.(s)............................. 74,000 216,273
-------------
3,620,183
-------------
TOTAL TRANSPORTATION........................... 11,395,906
-------------
UTILITIES (1.4%)
ELECTRIC (1.1%)
Shikoku Electric Power Co., Inc.(s).............. 80 1,144
Tokyo Electric Power Co., Inc.(s)................ 103,600 1,896,369
-------------
1,897,513
-------------
NATURAL GAS (0.3%)
Hokuriku Gas Co. Ltd.(s)......................... 204,000 439,313
-------------
TOTAL UTILITIES................................ 2,336,826
-------------
TOTAL COMMON STOCK (COST $193,157,170)......... 138,333,696
-------------
</TABLE>
<TABLE>
<S> <C> <C>
WARRANTS (0.5%)
BASIC INDUSTRIES (0.4%)
CHEMICALS (0.4%)
Shin-Etsu Chemical Co. Ltd., Expiring
08/01/00+...................................... 488 658,800
-------------
INDUSTRIAL PRODUCTS & SERVICES (0.0%)*
MACHINERY (0.0%)*
Ebara Corp., Expiring 10/08/99+.................. 318 18,314
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
TECHNOLOGY (0.1%)
COMPUTER SYSTEMS (0.1%)
Fujitsu Ltd., Expiring 06/12/98+................. 868 $ 168,417
-------------
TOTAL WARRANTS (COST $973,419)................. 845,531
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(IN JPY)
-------------
<S> <C> <C>
FIXED INCOME SECURITIES (3.7%)
TECHNOLOGY (3.7%)
ELECTRONICS (3.7%)
Sony Corp., 1.4% due 03/31/05 (COST
$6,285,077).................................... 546,000,000 6,235,988
-------------
</TABLE>
<TABLE>
<S> <C> <C>
CONVERTIBLE BONDS (8.7%)
CONSUMER GOODS & SERVICES (4.3%)
AUTOMOTIVE (4.3%)
Toyota Motor Corp., 1.2% due 01/28/98............ 500,000,000 7,344,962
-------------
FINANCE (3.1%)
FINANCIAL SERVICES (3.1%)
BOT Cayman Finance Ltd., 4.25% due 03/29/49...... 620,000,000 5,197,618
-------------
HEALTH CARE (0.6%)
PHARMACEUTICALS (0.6%)
Yamanouchi Pharmaceutical Co. Ltd., 1.25% due
03/31/14....................................... 100,000,000 1,084,440
-------------
TECHNOLOGY (0.7%)
COMPUTER SYSTEMS (0.7%)
Ricoh Co. Ltd., 1.5% due 03/29/02................ 100,000,000 1,253,643
-------------
TOTAL CONVERTIBLE BONDS (COST $14,896,958)..... 14,880,663
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE JAPAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
SECURITY DESCRIPTION (IN USD) VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (0.4%)
U.S. TREASURY OBLIGATIONS (0.4%)
United States Treasury Bills, 5.31% due 04/09/98
(cost $768,330)(s)............................. $ 780,000 $ 768,708
-------------
TOTAL INVESTMENTS (COST
$216,080,954) (94.4%)......................................... 161,064,586
OTHER ASSETS IN EXCESS OF
LIABILITIES (5.6%)............................................ 9,487,639
-------------
NET ASSETS (100.0%)............................................. $ 170,552,225
-------------
-------------
</TABLE>
- ------------------------------
+ Non-income producing security.
(s) Security is fully or partially segregated as collateral for futures
contracts.
* Less than 0.1%.
Note: Based on the cost of investments of $216,680,521 for Federal Income Tax
purposes at December 31, 1997, the aggregate gross unrealized appreciation was
$5,692,939, and the aggregate gross unrealized depreciation was $61,308,874,
resulting in net unrealized depreciation of investments of $55,615,935.
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE JAPAN EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $216,080,954) $161,064,586
Foreign Currency at Value (Cost $8,269,917) 8,101,644
Receivable for Investments Sold 1,516,567
Variation Margin Receivable 493,808
Interest Receivable 88,540
Dividends Receivable 26,977
Deferred Organization Expenses 11,265
Prepaid Trustees' Fees 22
Prepaid Expenses and Other Assets 95
------------
Total Assets 171,303,504
------------
LIABILITIES
Payable for Investments Purchased 325,308
Payable to Custodian 221,893
Advisory Fee Payable 108,434
Custody Fee Payable 67,606
Administrative Services Fee Payable 16,087
Administration Fee Payable 308
Fund Services Fee Payable 276
Accrued Expenses 11,367
------------
Total Liabilities 751,279
------------
NET ASSETS
Applicable to Investors' Beneficial Interests $170,552,225
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE JAPAN EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividend Income (Net of Foreign Withholding Tax
of $543,762) $ 2,175,048
Interest Income (Net of Foreign Withholding Tax
of $11,257) 957,927
------------
Investment Income 3,132,975
EXPENSES
Advisory Fee $ 2,031,363
Custodian Fees and Expenses 349,102
Administrative Services Fee 96,448
Professional Fees and Expenses 58,565
Fund Services Fee 11,246
Printing Expenses 8,850
Administration Fee 7,389
Amortization of Organization Expenses 6,591
Trustees' Fees and Expenses 6,126
Insurance Expense 2,230
Miscellaneous 6,384
------------
Total Expenses 2,584,294
------------
NET INVESTMENT INCOME 548,681
NET REALIZED LOSS ON
Investment Transactions (including $1,972,884
net realized loss from futures contracts) (94,220,201)
Foreign Currency Transactions (1,956,042)
------------
Net Realized Loss (96,176,243)
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF
Investments (including $19,648 net unrealized
gain on futures contracts) 4,823,799
Foreign Currency Contracts and Translations (34,454)
------------
Net Change in Unrealized Appreciation 4,789,345
------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $(90,838,217)
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE JAPAN EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
DECREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income (Loss) $ 548,681 $ (163,669)
Net Realized Loss on Investment and Foreign
Currency Transactions (96,176,243) (2,268,850)
Net Change in Unrealized Appreciation
(Depreciation) of Investment and Foreign
Currency Translations 4,789,345 (67,037,516)
----------------- -----------------
Net Decrease in Net Assets Resulting from
Operations (90,838,217) (69,470,035)
----------------- -----------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 198,329,912 290,426,062
Withdrawals (317,285,028) (253,101,673)
----------------- -----------------
Net Increase (Decrease) from Investors'
Transactions (118,955,116) 37,324,389
----------------- -----------------
Total Decrease in Net Assets (209,793,333) (32,145,646)
NET ASSETS
Beginning of Fiscal Year 380,345,558 412,491,204
----------------- -----------------
End of Fiscal Year $ 170,552,225 $ 380,345,558
----------------- -----------------
----------------- -----------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL MARCH 28, 1995
YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, OPERATIONS) TO
----------------- DECEMBER 31,
1997 1996 1995
------- ------- ----------------
<S> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.83% 0.81% 0.87%(a)
Net Investment Income (Loss) 0.18% (0.03)% 0.12%(a)
Portfolio Turnover 93% 86% 60%(b)
Average Broker Commissions $0.0006 $0.0005 --
</TABLE>
- ------------------------
(a) Annualized.
(b) Not Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE JAPAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Japan Equity Portfolio (the "Portfolio"), is one of eight subtrusts
(portfolios) comprising The Series Portfolio (the "Series Portfolio"). The
Series Portfolio is registered under the Investment Company Act of 1940, as
amended (the "Act"), as a no-load, open-end management investment company which
was organized as a trust under the laws of the State of New York on June 24,
1994. The Portfolio's investment objective is to provide a high total return
from a portfolio of equity securities of issuers that have their principal
activities in Japan or are organized under Japanese law. The Declaration of
Trust permits the Trustees to issue an unlimited number of beneficial interests
in the Portfolio. The Portfolio commenced operations on March 28, 1995.
Investments in Japanese markets may involve certain considerations and risks not
typically associated with investments in the United States. Future economic and
political developments in Japan could adversely affect the liquidity or value,
or both, of such securities in which the Portfolio is invested. The ability of
the issuers of the debt securities held by the Portfolio to meet their
obligations may be affected by economic and political developments in a specific
industry or region.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the Portfolio:
a) The value of each security for which readily available market quotations
exist is based on a decision as to the broadest and most representative
market for such security. The value of such security will be based either
on the last sale price on a national securities exchange, or, in the
absence of recorded sales, at the average of readily available closing bid
and asked prices on such exchanges. Securities listed on a foreign
exchange are valued at the last quoted sale price available before the
time when net assets are valued. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Securities or other assets for which market quotations are not readily
available are valued at fair value in accordance with procedures
established by the Portfolio's Trustees. Such procedures include the use
of independent pricing services, which use prices based upon yields or
prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; operating data and general market
conditions. All portfolio securities with a remaining maturity of less
than 60 days are valued by the amortized cost method.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of the domestic market and
may also take place on days on which the domestic market is closed. If
events materially affecting the value of foreign securities occur between
the time when the exchange on which they are traded closes and the time
when the Portfolio's net assets are calculated, such securities will be
valued at fair value in accordance with procedures established by and
under the general supervision of the Portfolio's Trustees.
b) The books and records of the Portfolio are maintained in U.S. dollars. The
market value of investment securities, other assets and liabilities and
foreign currency contracts are translated at the prevailing exchange rates
at the end of the period. Purchases, sales, income and expense are
translated at the
25
<PAGE>
THE JAPAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
exchange rate prevailing on the respective dates of such transactions.
Translation gains and losses resulting from changes in exchange rates
during the reporting period and gains and losses realized upon settlement
of foreign currency transactions are reported in the Statement of
Operations.
Although the net assets of the Portfolio are presented at the exchange
rates and market values prevailing at the end of the period, the Portfolio
does not isolate the portion of the results of operations arising as a
result of changes in foreign exchange rates from the fluctuations arising
from changes in the market prices of securities during the period.
c) Securities transactions are recorded on a trade date basis. Dividend
income is recorded on the ex-dividend date or at the time that the
relevant ex-dividend date and amount becomes known. Interest income, which
includes the amortization of premiums and discounts, if any, is recorded
on an accrual basis. For financial and tax reporting purposes, realized
gains and losses are determined on the basis of specific lot
identification.
d) The Portfolio may enter into forward and spot foreign currency contracts
to protect securities and related receivables and payables against
fluctuations in future foreign currency rates. A forward contract is an
agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. Risks associated with such contracts
include the movement in the value of the foreign currency relative to the
U.S. Dollar and the ability of the counterparty to perform.
The market value of the contract will fluctuate with changes in currency
exchange rates. Contracts are valued daily based on procedures established
by and under the general supervision of the Portfolio's Trustees and the
change in the market value is recorded by the Portfolio as unrealized
appreciation or depreciation of foreign currency translations. At December
31, 1997, the Portfolio had no open forward foreign currency contracts.
e) Futures -- A futures contract is an agreement to purchase/sell a specified
quantity of an underlying instrument at a specified future date or to
make/receive a cash payment based on the value of a securities index. The
price at which the purchase and sale will take place is fixed when the
Portfolio enters into the contract. Upon entering into such a contract the
Portfolio is required to pledge to the broker an amount of cash and/or
liquid securities equal to the minimum "initial margin" requirements of
the exchange. Pursuant to the contract, the Portfolio agrees to receive
from, or pay to, the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments are
known as "variation margin" and are recorded by the Portfolio as
unrealized gains or losses. When the contract is closed, the Portfolio
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time when
it was closed. The Portfolio invests in futures contracts for the purpose
of hedging its existing portfolio securities, or securities the Portfolio
intends to purchase, against fluctuations in value caused by changes in
prevailing market interest rates or securities movements. The use of
futures transactions involves the risk of imperfect
26
<PAGE>
THE JAPAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
correlation of movements in the price of futures contracts, interest rates
and the underlying hedged assets, and the possible inability of
counterparties to meet the terms of their contracts. Futures transactions
during the fiscal year ended December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL AMOUNT
CONTRACTS OF CONTRACTS
--------- ----------------
<S> <C> <C>
Contracts open at beginning of year.............. 0 $ 0
Contracts opened................................. 1,540 157,400,898
Contracts closed................................. (1,459) (149,999,945)
--------- ----------------
Contracts open at end of year.................... 81 $ 7,400,953
--------- ----------------
--------- ----------------
</TABLE>
SUMMARY OF OPEN CONTRACTS AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION/
CONTRACTS LONG (DEPRECIATION)
-------------- --------------
<S> <C> <C>
Topix Index, expiring March 1998................. 81 $ 19,648
-------------- --------------
Totals........................................... 81 $ 19,648
-------------- --------------
-------------- --------------
</TABLE>
f The Portfolio intends to be treated as a partnership for federal income
tax purposes. As such, each investor in the Portfolio will be subject to
taxation on its share of the Portfolio's ordinary income and capital
gains. It is intended that the Portfolio's assets will be managed in such
a way that an investor in the Portfolio will be able to satisfy the
requirements of Subchapter M of the Internal Revenue Code. The Portfolio
earns foreign income which may be subject to foreign withholding taxes at
various rates.
g) The Portfolio incurred organization expenses in the amount of $33,000.
These costs are being deferred and amortized on a straight-line basis over
a period not to exceed five years beginning with the commencement of
operations of the Portfolio.
h) Expenses incurred by the Series Portfolio with respect to any two or more
portfolios in the Series Portfolios are allocated in proportion to the net
assets of each portfolio in the Series Portfolio, except where allocations
of direct expenses to eachportfolio can otherwise be made fairly. Expenses
directly attributable to a portfolio are charged to that portfolio.
2. TRANSACTIONS WITH AFFILIATES
a) The Portfolio has an Investment Advisory Agreement with Morgan Guaranty
Trust Company of New York ("Morgan"). Under the terms of the agreement,
the Portfolio pays Morgan at an annual rate of 0.65% of the Portfolio's
average daily net assets. For the fiscal year ended December 31, 1997,
such fees amounted to $2,031,363.
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
27
<PAGE>
THE JAPAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
compensation of the officers affiliated with FDI. The Portfolio has agreed
to pay FDI fees equal to its allocable share of an annual complex-wide
charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable
to the Portfolio is based on the ratio of the Portfolio's net assets to
the aggregate net assets of the Portfolio and certain other investment
companies subject to similar agreements with FDI. For the fiscal year
ended December 31, 1997, the fee for these services amounted to $7,389.
c) The Portfolio has an Administrative Services Agreement (the "Services
Agreement") with Morgan under which Morgan is responsible for overseeing
certain aspects of the administration and operation of the Portfolio.
Under the Services Agreement, the Portfolio had agreed to pay Morgan a fee
equal to its allocable share of an annual complex-wide charge. This charge
is calculated daily based on the aggregate average daily net assets of the
Portfolio and certain other portfolios for which Morgan acts as investment
advisor (the "Master Portfolios") and J.P. Morgan Series Trust in
accordance with the following annual 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 paid by the
Portfolio is determined by the proportionate share that its net assets
bear to the net assets of the Master Portfolios, other investors in the
Master Portfolios for which Morgan provides similar services, and J.P.
Morgan Series Trust. For the fiscal year ended December 31, 1997, the fee
for these services amounted to $96,448.
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 $11,246 for the fiscal year ended December 31, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving as
a Trustee of the J.P. Morgan Funds, the J.P. Morgan Institutional Funds,
the Master Portfolios and J.P. Morgan Series Trust. The Trustees' Fees and
Expenses shown in the financial statements represent the Portfolio's
allocated portion of the total fees and expenses. Prior to April 1, 1997,
the aggregate annual Trustee fee was $65,000. The Portfolio's Chairman and
Chief Executive Officer also serves as Chairman of Group and received
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 $2,300.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the year ended
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
-------------- --------------
<S> <C>
$ 265,590,612 $ 357,048,926
</TABLE>
28
<PAGE>
THE JAPAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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. SUBSEQUENT EVENT
On January 16, 1998, the Portfolio received a withdrawal request as discussed in
Note 5 of the Fund's Notes to Financial Statements which are included elsewhere
in this report. The withdrawal which was made in-kind by transferring certain
assets and liabilities, including securities, directly to a non-U.S. fund
reduced the size of the Portfolio to approximately $2,785,000.
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The Japan 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 Japan Equity Portfolio (one of the
portfolios comprising The Series Portfolio, hereafter referred to as the
"Portfolio") at December 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the supplementary data for each of the two years in the
period then ended and for the period March 28, 1995 (commencement of operations)
to December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements and supplementary data (hereafter
referred to as "financial statements") are the responsibility of the Portfolio's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 23, 1998
30
<PAGE>
J.P. MORGAN FUNDS
FEDERAL MONEY MARKET FUND
PRIME MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
BOND FUND
CALIFORNIA BOND FUND: SELECT SHARES
EMERGING MARKETS DEBT FUND
GLOBAL STRATEGIC INCOME FUND
NEW YORK TOTAL RETURN BOND FUND
SHORT TERM BOND FUND
TAX EXEMPT BOND FUND
DIVERSIFIED FUND
DISCIPLINED EQUITY FUND
TAX AWARE U.S. EQUITY FUND: SELECT SHARES
U.S. EQUITY FUND
U.S. SMALL COMPANY FUND
U.S. SMALL COMPANY OPPORTUNITIES FUND
EMERGING MARKETS EQUITY FUND
EUROPEAN EQUITY FUND
INTERNATIONAL EQUITY FUND
INTERNATIONAL OPPORTUNITIES FUND
JAPAN EQUITY FUND
FOR MORE INFORMATION ON THE J.P. MORGAN FAMILY
OF FUNDS, CALL J.P. MORGAN FUNDS SERVICES AT
(800) 521-5411.
J.P. MORGAN
JAPAN EQUITY
FUND
ANNUAL REPORT
DECEMBER 31, 1997
