<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN JAPAN EQUITY FUND
July 23, 1998
Dear Shareholder:
Unfortunately, the semi-annual report for this fund is not as cheerful as those
of our domestic or European equity funds. As economic conditions in Japan
worsened, the first six months of 1998 proved to be a difficult time for Japan's
equity market. As a result, your fund posted a return of -3.32% for the period.
The fund's net asset value declined from $5.42 per share on December 31, 1997 to
$5.24 per share on June 30, 1998, the end of the reporting period. The net
assets of the fund totaled approximately $1.2 million on June 30, 1998. The net
assets of The Japan Equity Portfolio, in which the fund invests totaled
approximately $2.5 million at the end of the reporting period.
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>
<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
One way to look at performance is to review a fund's average annual total
return. This figure takes the fund's actual (or cumulative) return and shows
what would have happened if the fund had achieved that return by performing at a
constant rate each year. Average annual total returns represent the average
yearly change of a fund's value over various time periods, typically one, five,
or ten years (or since inception). Total returns for periods of less than one
year are not annualized and provide a picture of how a fund has performed over
the short term.
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
---------------- ----------------------------
THREE SIX ONE SINCE
AS OF JUNE 30, 1998 MONTHS MONTHS YEAR INCEPTION*
- --------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
J.P. Morgan Japan Equity Fund -3.14% -3.32% -37.40% -21.13%
TOPIX** -5.37% -1.52% -34.22% -19.26%
Lipper Japanese Fund Average -1.18% 1.26% -24.98% -10.47%
</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 NO 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
[PHOTO]
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 BA and MA degree from Oxford University, England, in Engineering Science and
Economics. This interview was conducted on July 15, 1998 and reflects Masato's
views on that date.
FIRST, ON EVERYONE'S MIND, WILL THE RESIGNATION OF PRIME MINISTER HASHIMOTO HELP
OR HINDER JAPAN'S ECONOMIC RECOVERY?
MD: Both investors and voters alike were surprised by the defeat of Liberal
Democratic Party (LDP) - the ruling party in Japan for a number of years - which
was the catalyst for Hashimoto tendering his resignation. What is not
surprising, however, is that Japan's populace is upset with the state of its
economy, and has sent a clear message that they blame their existing government
for its plight. With seven previous economic packages having failed to
resuscitate Japan's weak economy, one can't blame the voters for losing their
patience and for assessing that their government just couldn't get it right.
What is not clear, however, is what good this change in administration will do.
To date, there continues to be a lack of leadership and strategy as to how
Japan's economy will be turned around, and what agenda will be followed in the
future. Japan's problems are complex and severe - we're not so sure a new
administration is the easy solution.
Having said that, however, our conclusion is that we must wait and see. We
believe that the new leadership will likely move slowly and cautiously, not
wanting to take any action that could result in a drastic mistake. Our attitude,
therefore, is that the change in administration will neither help nor hinder
Japan's recovery; that the new leadership will likely muddle through as
Hashimoto's house did - at least in the near term. Our view is that it will take
a very serious event - a crisis, so to speak - to get the government, old or
new, to react drastically or immediately.
3
<PAGE>
OVER THE SIX-MONTH REPORTING PERIOD, ECONOMIC CONDITIONS IN JAPAN SEEMED TO GO
FROM BAD TO WORSE. CAN YOU GIVE US SOME BACKGROUND AS TO WHY?
MD: There are three major factors we can identify as contributing to Japan's
deterioration: deeper-than-expected banking sector problems, weak consumer
demand, and a premature increase in the country's value-added tax (VAT).
Furthermore, while each are seemingly separate influences, they are to some
extent interrelated, and have thus compounded the severity of Japan's situation.
Let me explain.
Japan's severe banking-sector problems come in the form of bad, or defaulting
loans. Most Japanese banks were not in the habit of conducting adequate credit
checks, and therefore lent a lot of money to companies that ended up having
trouble paying their debt. The banks, then, obviously suffered. With their
balance sheets in such bad shape - no solvency, no profits - the banks have been
unable to provide the necessary capital for businesses, both public and
entrepreneurs, to grow. Japan's future, from everyone's perspective, then looked
dismal, which brings us to consumer demand.
With Japan's future looking so bleak, the Japanese consumer did not feel safe to
spend. As a result, consumers put more money in savings, eliminating the demand
that would have been an obvious catalyst to spur manufacturing and GDP growth.
Lastly, the Japanese government, very prematurely, we think, raised its VAT, or
consumption tax, thus further stifling consumer demand. While the increase
actually came in 1997, the effects of it were felt into 1998. So, as you
correctly surmised, Japan's situation went from bad to worse. And it is these
problems that the new administration will have to figure out how to correct.
The one positive in this scenario, however, is that the Japanese people have a
lot of money in the bank and are not suffering from the hardships of poverty or
severe unemployment, as is often the case when economies go into recession.
This, however, is another reason why the government has not felt the urgency to
react and make immediate changes. So even some positives are really negatives in
the long run.
GIVEN SUCH A DISMAL BACKDROP, HOW DOES ONE INVEST IN SUCH AN ECONOMY? ARE THERE
INDUSTRIES OR COMPANIES THAT WILL STILL DO WELL REGARDLESS OF JAPAN'S UNDERLYING
WEAKNESS?
MD: Yes. There are still investments that can be made in Japan. While there is
essentially a two-tier market right now - companies differentiated by either
doing business locally or internationally - we have been able to find value
among those that export outside Japan and the Asian region. Companies like Sony,
for example, have been doing extraordinarily well, as they conduct a lot of
business outside Asia; in the U.S. and Europe, for instance. So there are
companies which have managed to remain competitive. And it is also true that
Japan still enjoys a huge current-account surplus, reflecting that the exports
from Japan remain extraordinarily competitive. While that is partly due to the
weakened yen, Japanese manufacturers have been improving sales. So it is the
defensive sectors, or the exporters, that have done well.
4
<PAGE>
SPECIFICALLY, HOW DID THE FUND PERFORM OVER THE SIX-MONTH PERIOD?
MD: There was a clear difference in how the fund performed relative to the
benchmark in the first three months of the period, which was poor, compared to
its turnaround in the second half of the period, which was relatively impressive
versus the index. Unfortunately, however, for the six-month period taken as a
whole, the fund was unable to beat its benchmark (TOPIX).
CAN YOU TELL US WHAT WENT WRONG IN THE FIRST QUARTER AND, CONVERSELY, WHAT WENT
RIGHT IN THE SECOND QUARTER?
MD: During the first two months of the year, speculation in the market was
massive. Value-oriented investors, as we are, therefore had extreme difficulty.
To make a very long story short, what basically happened is that bad quality
stocks performed very well, which were not the stocks in which the portfolio was
invested.
However, starting around the end of March, investors began realizing that
Japan's economic and banking-sector problems were much more serious than
initially suspected. Everybody started waking up to the reality. Speculators
started getting very, very scared and began selling the lower-quality stocks
in which they had invested heavily during the first quarter. Investors
starting taking a more careful look at the balance sheets and fundamentals of
companies - which is something that we always do - and, as a result, began
putting their money in the higher-quality stocks in which the portfolio was
already invested.
As a result, the fund's second-half performance was much better than its
benchmark. However, the gains were not large enough to offset its
underperformance of the first half of the reporting period.
WHAT IS YOUR OUTLOOK FOR THE REMAINDER OF 1998?
MD: At the moment, we are cautious on Japan, believing that things may likely
get a little worse before they get better. As we discussed, the banks are very
concerned about bad-loan problems and, therefore, are certainly not lending
enough - which is likely to create more bankruptcies.
So we are expecting more negative news to come out in the second half of this
year, which we think could trigger another downward trend in the market.
GIVEN THIS OUTLOOK, HOW ARE YOU INVESTING THE PORTFOLIO?
MD: Basically, the best we can do is keep the portfolio invested in
high-quality names. We already pay a lot of attention to the quality of
balance sheets and a company's credit. While the road may seem rocky in the
short run, we believe, however, that by sticking to our "value" philosophy,
the time will come when Japan will be recognized as too oversold, and more
investors will begin recognizing the value that we are currently seeing. So,
for now, the success from investing in Japan will be more a long-term, rather
than short-term, reward.
5
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
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
- --------------------------------------------------------------------------------
FUND NET ASSETS AS OF 6/30/98
$1,202,593
- --------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 6/30/98
$2,544,434
- --------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/18/98
EXPENSE RATIO
The fund's current annualized expense ratio of 1.36% 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 JUNE 30, 1998
PORTFOLIO ALLOCATION
(AS A PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
<TABLE>
<CAPTION>
<S> <C>
TECHNOLOGY 23.9%
CONSUMER GOODS & SERVICES 19.6%
FINANCE 16.8%
BASIC INDUSTRIES 16.3%
INDUSTRIAL PRODUCTS & SERVICES 14.4%
TRANSPORTATION 5.6%
HEALTH CARE 2.6%
SHORT-TERM AND OTHER INVESTMENTS 0.8%
</TABLE>
<TABLE>
<CAPTION>
LARGEST HOLDINGS % OF TOTAL INVESTMENTS
- --------------------------------------------------------------------------------
<S> <C>
TOYOTA MOTOR CORP. LTD. (CONSUMER GOODS
& SERVICES) 5.4%
TAKEDA CHEMICAL INDUSTRIES LTD. (BASIC INDUSTRIES) 4.4%
SONY CORP., 1.4%, DUE 3/31/05 (TECHNOLOGY) 4.2%
PIONEER ELECTRONICS CORP. (TECHNOLOGY) 4.0%
ITO-YOKADO CO. LTD. (CONSUMER GOODS & SERVICES) 3.9%
TOSTEM CORP. (INDUSTRIAL PRODUCTS & SERVICES) 3.7%
FUJITSU LTD. (TECHNOLOGY) 3.5%
WEST JAPAN RAILWAY CO. (TRANSPORTATION) 3.3%
SONY MUSIC ENTERTAINMENT INC. 3.0%
(CONSUMER GOODS & SERVICES)
HONDA MOTOR CO. LTD. (CONSUMER GOODS & SERVICES) 3.0%
</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 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.
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 securities. Opinions expressed herein are
based on current market conditions and are subject to change without notice.The
fund invests in foreign securities which are subject to special risks including
economic and political uncertainty and currency fluctuations; prospective
investors should refer to the fund's prospectus for a discussion of these risks.
The fund invests through 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>
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The Japan Equity Portfolio
("Portfolio"), at value $1,210,413
Receivable for Expense Reimbursements 9,056
Receivable for Shares of Beneficial Interest Sold 487
----------
Total Assets 1,219,956
----------
LIABILITIES
Shareholder Servicing Fee Payable 209
Administration Fee Payable 25
Administrative Services Fee Payable 24
Accrued Trustees' Fees and Expenses 5
Accrued Expenses 17,100
----------
Total Liabilities 17,363
----------
NET ASSETS
Applicable to 229,628 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $1,202,593
----------
----------
Net Asset Value, Offering and Redemption Price
Per Share $5.24
----
----
ANALYSIS OF NET ASSETS
Paid-in Capital $1,618,871
Distributions in Excess of Net Investment Income (4,741)
Accumulated Net Realized Loss on Investment (532,031)
Net Unrealized Appreciation of Investment 120,494
----------
Net Assets $1,202,593
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Dividend Income (Net of Foreign
Withholding Tax of $994) $ 4,055
Allocated Interest Income (Net of Foreign
Withholding Tax of $49) 1,729
Allocated Portfolio Expenses (Net of
Reimbursement of $6,230) (5,349)
---------
Net Investment Income Allocated from
Portfolio 435
FUND EXPENSES
Transfer Agent Fees and Expenses $ 9,246
Registration Fees 5,530
Printing Expenses 4,689
Professional Fees 3,428
Shareholder Servicing Fee 1,186
Administrative Services Fee 140
Line of Credit Expense 14
Administration Fee 10
Trustees' Fees and Expenses 10
Fund Services Fee 10
Miscellaneous 1,821
--------
Total Fund Expenses 26,084
Less: Reimbursement of Expenses (24,968)
--------
NET FUND EXPENSES 1,116
---------
NET INVESTMENT LOSS (681)
NET REALIZED LOSS ON INVESTMENT ALLOCATED FROM
PORTFOLIO (344,605)
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT ALLOCATED FROM PORTFOLIO 319,247
---------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ (26,039)
---------
---------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE FISCAL
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Loss $ (681) $ (4,091)
Net Realized Loss on Investment Allocated from
Portfolio (344,605) (161,900)
Net Change in Unrealized Appreciation
(Depreciation) of Investment Allocated from
Portfolio 319,247 (127,293)
------------- -----------------
Net Decrease in Net Assets Resulting from
Operations (26,039) (293,284)
------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS
In Excess of Net Investment Income -- (2,855)
------------- -----------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest
Sold 1,060,573 1,285,706
Reinvestment of Dividends -- 2,772
Cost of Shares of Beneficial Interest Redeemed (622,034) (820,842)
------------- -----------------
Net Increase from Transactions in Shares
of Beneficial Interest 438,539 467,636
------------- -----------------
Total Increase in Net Assets 412,500 171,497
NET ASSETS
Beginning of Period 790,093 618,596
------------- -----------------
End of Period (including distributions in
excess of net investment income of $4,741
and 4,060, respectively) $1,202,593 $ 790,093
------------- -----------------
------------- -----------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
12
<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 FOR THE PERIOD
SIX MONTHS FOR THE FISCAL MAY 6, 1996
ENDED YEAR ENDED (COMMENCEMENT OF
JUNE 30, 1998 DECEMBER 31, OPERATIONS) THROUGH
(UNAUDITED) 1997 DECEMBER 31, 1996
--------------- -------------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 5.42 $ 7.83 $10.00
--------------- -------------- -------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.00)(d) (0.02) (0.03)
Net Realized and Unrealized Loss on Investment (0.18) (2.37) (2.14)
--------------- -------------- -------------------
Total from Investment Operations (0.18) (2.39) (2.17)
--------------- -------------- -------------------
LESS DISTRIBUTIONS TO SHAREHOLDERS
In Excess of Net Investment Income -- (0.02) --
--------------- -------------- -------------------
NET ASSET VALUE, END OF PERIOD $ 5.24 $ 5.42 $ 7.83
--------------- -------------- -------------------
--------------- -------------- -------------------
RATIOS AND SUPPLEMENTAL DATA
Total Return (3.32)%(a) (30.53)% (21.70)%(a)
Net Assets, End of Period (in thousands) $1,203 $ 790 $ 619
Ratios to Average Net Assets
Expenses 1.36%(b) 1.42% 1.42%(b)
Net Investment Income (Loss) (0.14)%(b) (0.45)% (0.93)%(b)
Expenses without Reimbursement 7.94%(b) 9.64% 2.50%(c)
</TABLE>
- ------------------------
(a) Not Annualized.
(b) Annualized.
(c) After consideration of certain state limitations.
(d) Less than $(0.01).
The Accompanying Notes are an Integral Part of the Financial Statements.
13
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
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. See Note 6 for termination of operations of the fund
subsequent to June 30, 1998.
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 (approximately 48% at June 30,
1998). The performance of the fund is directly affected by the performance of
the portfolio. The financial statements of the portfolio, including the Schedule
of Investments, are included elsewhere in this report and should be read in
conjunction with the fund's financial statements.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the fund:
a) Valuation of securities by the portfolio is discussed in Note 1a of the
portfolio's Notes to Financial Statements which are included elsewhere in
this report.
b) The fund records its share of net investment income, realized and
unrealized gain and loss and adjusts its investment in the portfolio each
day. All the net investment income and realized and unrealized gain and
loss of the portfolio is allocated pro rata among the fund and other
investors in the portfolio at the time of such determination.
c) Distributions to shareholders of net investment income and net realized
capital gains, if any, are declared and paid annually.
d) 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.
e) Expenses incurred by the trust with respect to any two or more funds in
the trust are allocated in proportion to the net assets of each fund in
the trust, except where allocations of direct expenses to each fund can
otherwise be made fairly. Expenses directly attributable to a fund are
charged to that fund.
14
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 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 six months ended June 30,
1998, the fee for these services amounted to $10.
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 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 six months ended June 30, 1998, the fee for
these services amounted to $140.
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 through April 30, 1999.
For the six months ended June 30, 1998, Morgan has agreed to reimburse the
fund $24,968 for expenses under this agreement.
c) The trust, on behalf of the fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal account
maintenance service to fund shareholders.The agreement provides for the
fund to pay Morgan a fee for these services which is computed daily and
paid monthly at an annual rate of 0.25% of the average daily net assets of
the fund. For the six months ended June 30, 1998, the fee for these
services amounted to $1,186.
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
15
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
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
$10 for the six months ended June 30, 1998.
e) An aggregate annual fee of $75,000 is paid to each trustee for serving as
a trustee of the trust, the J.P.Morgan 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. 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 $2.
3. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the trustees to issue an unlimited number of
full and fractional shares of beneficial interest of one or more series.
Transactions in shares of beneficial interest of the fund were as follows:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, FOR THE FISCAL
1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
------------ -----------------
<S> <C> <C>
Shares sold...................................... 198,252 195,738
Reinvestment of dividends and distributions...... -- 533
Shares redeemed.................................. (114,463) (129,453)
------------ -----------------
Net Increase..................................... 83,789 66,818
------------ -----------------
------------ -----------------
</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. 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 will
continue 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 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.
16
<PAGE>
J.P. MORGAN JAPAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
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 June 30, 1998.
5. OTHER MATTERS
Prior to January 16, 1998, the fund invested in the portfolio along with a U.S.
and a non-U.S. fund managed by Morgan. On January 16, 1998, the non-U.S. fund
withdrew its interest in the portfolio through an in-kind withdrawal amounting
to $167,623,751. The withdrawal did not create a taxable event to the fund or
reduce the net assets of the fund, but it did reduce the net assets of the
portfolio.
6. TERMINATION OF FUND
The trustees on July 8, 1998 approved a resolution to terminate the fund. The
liabilities incurred in connection with the termination and any liabilities
which arise after the termination date will be paid by Morgan. The fund will be
liquidated and all shareholders accounts will be redeemed on or about August 14,
1998.
17
<PAGE>
THE JAPAN EQUITY PORTFOLIO
SEMI-ANNUAL REPORT JUNE 30, 1998
(UNAUDITED)
(The following pages should be read in conjunction
with J.P. Morgan Japan Equity Fund
Semi-Annual Financial Statements)
18
<PAGE>
THE JAPAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -----------
<S> <C> <C>
COMMON STOCK (85.5%)
BASIC INDUSTRIES (15.3%)
CHEMICALS (11.4%)
Bridgestone Corp.(s)............................. 3,000 $ 70,901
Dai Nippon Ink & Chemicals Inc.(s)............... 17,000 52,059
Ishihara Sangyo Kaisha Ltd.+(s).................. 10,000 13,834
Sekisui Chemical Co. Ltd.(s)..................... 9,000 46,042
Takeda Chemical Industries Ltd.(s)............... 4,000 106,352
-----------
289,188
-----------
METALS & MINING (3.9%)
Kawasaki Steel Corp.(s).......................... 21,000 37,828
Nippon Steel Corp.(s)............................ 21,000 36,920
Tokyo Steel Manufacturing Co. Ltd.(s)............ 5,000 25,723
-----------
100,471
-----------
TOTAL BASIC INDUSTRIES......................... 389,659
-----------
CONSUMER GOODS & SERVICES (18.4%)
AUTOMOTIVE (7.9%)
Honda Motor Co. Ltd.(s).......................... 2,000 71,189
Toyota Motor Corp. Ltd.(s)....................... 5,000 129,337
-----------
200,526
-----------
BROADCASTING & PUBLISHING (0.8%)
Toppan Printing Co. Ltd.(s)...................... 2,000 21,386
-----------
MERCHANDISING (3.4%)
Canon Sales Co., Inc.(s)......................... 1,000 13,589
Sony Music Entertainment Inc.(s)................. 1,700 72,148
-----------
85,737
-----------
RETAIL (6.3%)
Aoyama Trading Co. Ltd.(s)....................... 1,000 24,642
Ito - Yokado Co. Ltd.(s)......................... 2,000 94,102
Izumiya Co. Ltd.(s).............................. 5,000 32,100
Xebio Co. Ltd.(s)................................ 700 10,466
-----------
161,310
-----------
TOTAL CONSUMER GOODS & SERVICES................ 468,959
-----------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -----------
<S> <C> <C>
FINANCE (12.7%)
BANKING (5.0%)
Asahi Bank Ltd.(s)............................... 12,000 $ 52,743
Sumitomo Trust & Banking Co. Ltd.(s)............. 9,000 40,206
The Bank of Tokyo - Mitsubishi Ltd.(s)........... 400 4,234
The Sakura Bank Ltd.(s).......................... 4,000 10,376
Toyo Trust & Banking Co. Ltd.(s)................. 4,000 19,800
-----------
127,359
-----------
FINANCIAL SERVICES (3.3%)
Nomura Securities Co. Ltd.(s).................... 4,000 46,547
Takefuji Corp.(s)................................ 800 36,892
-----------
83,439
-----------
INSURANCE (1.6%)
Mitsui Marine & Fire Insurance Co. Ltd.(s)....... 2,000 10,044
Tokio Marine & Fire Insurance Co. Ltd.(s)........ 3,000 30,825
-----------
40,869
-----------
REAL ESTATE (2.8%)
Mitsubishi Estate Co. Ltd.(s).................... 8,000 70,325
-----------
TOTAL FINANCE.................................. 321,992
-----------
HEALTHCARE (2.5%)
PHARMACEUTICALS (2.5%)
Yamanouchi Pharmaceutical Co. Ltd.(s)............ 3,000 62,471
-----------
INDUSTRIAL PRODUCTS & SERVICES (13.5%)
CONSTRUCTION & HOUSING (6.3%)
Nishimatsu Construction Co. Ltd.(s).............. 7,000 34,298
Sekisui House Ltd.(s)............................ 3,000 23,237
Toda Construction Co.(s)......................... 4,000 15,996
Tostem Corp.(s).................................. 6,800 88,096
-----------
161,627
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE JAPAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -----------
<S> <C> <C>
ELECTRICAL EQUIPMENT (2.8%)
Hitachi Ltd.(s).................................. 6,000 $ 39,125
Ricoh Co. Ltd.(s)................................ 3,000 31,581
-----------
70,706
-----------
MACHINERY (3.6%)
Ebara Corp.(s)................................... 4,000 35,566
Fanuc Ltd.(s).................................... 1,000 34,586
Kubota Corp.(s).................................. 1,000 2,306
Sanden Corp.(s).................................. 3,000 20,298
-----------
92,756
-----------
MANUFACTURING (0.8%)
Tsubakimoto Chain Co.(s)......................... 6,000 20,103
-----------
TOTAL INDUSTRIAL PRODUCTS & SERVICES........... 345,192
-----------
TECHNOLOGY (17.8%)
COMPUTER SYSTEMS (3.3%)
Fujitsu Ltd.(s).................................. 8,000 84,159
-----------
ELECTRONICS (8.1%)
Canon, Inc.(s)................................... 1,000 22,697
Fuji Photo Film Co. Ltd.(s)...................... 2,000 69,604
Pioneer Electronic Corp.(s)...................... 5,000 95,471
Sony Corp.(s).................................... 200 17,221
-----------
204,993
-----------
SEMICONDUCTORS (4.6%)
Tokyo Electron Ltd.(s)........................... 2,000 61,246
Tokyo Ohka Kogyo Co. Ltd.(s)..................... 2,000 56,778
-----------
118,024
-----------
TELECOMMUNICATIONS (1.8%)
DDI Corp.(s)..................................... 13 45,243
-----------
TOTAL TECHNOLOGY............................... 452,419
-----------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ----------- -----------
<S> <C> <C>
TRANSPORTATION (5.3%)
RAILROADS (3.1%)
West Japan Railway Co.(s)........................ 22 $ 79,735
-----------
WHOLESALE & INTERNATIONAL TRADE (2.2%)
Mitsubishi Corp.(s).............................. 9,000 55,770
-----------
TOTAL TRANSPORTATION........................... 135,505
-----------
TOTAL COMMON STOCK (COST $2,779,566)........... 2,176,197
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(IN JPY)
-----------
<S> <C> <C>
FIXED INCOME SECURITIES (3.9%)
TECHNOLOGY (3.9%)
ELECTRONICS (3.9%)
Sony Corp., 1.4% due 03/31/05
(COST $103,600)................................ 9,000,000 99,542
-----------
CONVERTIBLE BONDS (4.0%)
FINANCE (3.1%)
FINANCIAL SERVICES (3.1%)
AB International Cayman Trust, 0.05% due
7/31/07(s)..................................... 2,000,000 13,366
Sanwa International Finance Trust, 1.25% due
07/31/05(s).................................... 9,000,000 66,308
-----------
TOTAL FINANCE.................................. 79,674
-----------
TECHNOLOGY (0.9%)
COMPUTER SYSTEMS (0.9%)
Ricoh Co. Ltd., 1.5% due 03/29/02................ 2,000,000 22,048
-----------
TOTAL CONVERTIBLE BONDS (COST $108,632)........ 101,722
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE JAPAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
SECURITY DESCRIPTION (IN USD) VALUE
- ------------------------------------------------- ----------- -----------
<S> <C> <C>
SHORT-TERM INVESTMENTS (0.8%)
U.S. TREASURY OBLIGATIONS (0.8%)
United States Treasury Bills, 5.03% due 08/20/98
(COST $19,863)(s).............................. $ 20,000 $ 19,863
-----------
TOTAL INVESTMENTS (COST $3,011,661) (94.2%)...................
2,397,324
OTHER ASSETS IN EXCESS OF LIABILITIES (5.8%)..................
147,110
-----------
NET ASSETS (100.0%)........................................... $ 2,544,434
-----------
-----------
</TABLE>
- ------------------------------
Note: The cost of investments for federal income tax purposes at June 30, 1998
was $3,013,214; the aggregate gross unrealized appreciation and depreciation was
$44,330 and $660,219, respectively, resulting in net unrealized depreciation of
$615,889.
+ Non-income producing security.
(s) Security is fully or partially segregated with custodian as collateral for
futures contracts or with broker as initial margin for futures contracts
$869,857 of the market value has been segregated.
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE JAPAN EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $3,011,661 ) $2,397,324
Cash 177,994
Foreign Currency at Value (Cost $36,391 ) 36,455
Receivable for Investments Sold 13,519
Variation Margin Receivable 5,990
Prepaid Trustees' Fees 779
Interest Receivable 488
Dividends Receivable 343
Prepaid Expenses and Other Assets 90
----------
Total Assets 2,632,982
----------
LIABILITIES
Payable to Advisor 51,770
Custody Fee Payable 8,400
Administrative Services Fee Payable 11,149
Advisory Fee Payable 2,227
Fund Services Fee Payable 2
Accrued Expenses 15,000
----------
Total Liabilities 88,548
----------
NET ASSETS
Applicable to Investors' Beneficial Interests $2,544,434
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE JAPAN EQUITY PORTFOLIO
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income (Net of Foreign Withholding Tax
of $1,003) $ 22,897
Dividend Income (Net of Foreign Withholding Tax
of $2,425) 9,898
------------
Investment Income 32,795
EXPENSES
Advisory Fee $ 66,322
Custodian Fees and Expenses 15,346
Professional Fees and Expenses 7,750
Printing Expenses 5,000
Administrative Services Fee 3,066
Fund Services Fee 478
Trustees' Fees and Expenses 256
Administration Fee 215
Insurance Expense 66
Amortization of Organization Expenses 351
Miscellaneous 1,500
------------
Total Expenses 100,350
Less: Reimbursement of Expenses (17,068)
------------
NET EXPENSES 83,282
------------
NET INVESTMENT LOSS (50,487)
NET REALIZED LOSS ON
Investment Transactions (50,178,052)
Futures Contracts (121,035)
Foreign Currency Contracts and Transactions (214,723)
------------
Net Realized Loss (50,513,810)
NET CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION OF
Investments 54,402,031
Futures Contracts (15,048)
Foreign Currency Contracts and Translations 176,379
------------
Net Change in Unrealized Appreciation 54,563,362
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 3,999,065
------------
------------
</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 SIX
MONTHS ENDED FOR THE FISCAL
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
DECREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income (Loss) $ (50,487) $ 548,681
Net Realized Loss on Investments, Futures and
Foreign Currency Contracts and Transactions (50,513,810) (96,176,243)
Net Change in Unrealized Appreciation of
Investments, Futures and Foreign Currency
Contracts and Transactions 54,563,362 4,789,345
------------- -----------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 3,999,065 (90,838,217)
------------- -----------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 1,274,331 198,329,912
Withdrawals (173,281,187) (317,285,028)
------------- -----------------
Net Decrease from Investors' Transactions (172,006,856) (118,955,116)
------------- -----------------
Total Decrease in Net Assets (168,007,791) (209,793,333)
NET ASSETS
Beginning of Period 170,552,225 380,345,558
------------- -----------------
End of Period $ 2,544,434 $ 170,552,225
------------- -----------------
------------- -----------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS FOR THE FISCAL MARCH 28, 1995
ENDED YEAR ENDED (COMMENCEMENT OF
JUNE 30, DECEMBER 31, OPERATIONS)
1998 --------------- THROUGH
(UNAUDITED) 1997 1996 DECEMBER 31, 1995
----------- ------ ------ -----------------
<S> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.82%(a) 0.83% 0.81% 0.87%(a)
Net Investment Income (Loss) (0.49)%(a) 0.18% (0.03)% 0.12%(a)
Expense without Reimbursement 0.98%(a) -- -- --
Portfolio Turnover 5%(b) 93% 86% 60%(b)
</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 (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Japan Equity Portfolio (the "portfolio"), is one of seven subtrusts
(portfolios) comprising The Series Portfolio (the "series portfolio"). The
series portfolio is registered under the Investment Company Act of 1940, as
amended, 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. See Note 6 for
termination of operations of the portfolio subsequent to June 30, 1998.
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; and general market conditions. All
short-term portfolio securities with a remaining maturity of less than 60
days are valued by the amortized cost method.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of the domestic market and
may also take place on days on which the domestic market is closed. If
events materially affecting the value of foreign securities occur between
the time when the exchange on which they are traded closes and the time
when the portfolio's net assets are calculated, such securities will be
valued at fair value in accordance with procedures established by and
under the general supervision of the portfolio's trustees.
b) The books and records of the portfolio are maintained in U.S. dollars. The
market value of investment securities, other assets and liabilities and
foreign currency contracts are translated at the prevailing exchange rates
at the end of the period. Purchases, sales, income and expense are
translated at the exchange rate prevailing on the respective dates of such
transactions. Translation gains and losses
25
<PAGE>
THE JAPAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
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 become 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) Expenses incurred by the series portfolio with respect to any two or more
portfolios in the series portfolio are allocated in proportion to the net
assets of each portfolio in the series portfolio, except where allocations
of direct expenses to each portfolio can otherwise be made fairly.
Expenses directly attributable to a portfolio are charged to that
portfolio.
e) The portfolio may enter into forward and spot foreign currency contracts
to protect securities and related receivables and payables against
fluctuations in future foreign currency rates. A forward contract is an
agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. Risks associated with such contracts
include the movement in the value of the foreign currency relative to the
U.S. Dollar and the ability of the counterparty to perform.
The market value of the contract will fluctuate with changes in currency
exchange rates. Contracts are valued daily at the current foreign exchange
rates, and the change in the market value is recorded by the portfolio as
unrealized appreciation or depreciation of forward foreign currency
contract translations. At June 30,1998, the portfolio had no open forward
foreign currency contracts.
f) 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 (UNAUDITED) (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
correlation in movements in the price of futures contracts, interest
rates, and the underlying hedged assets, and the possible inability of
counterparties to meet the terms of their contracts. At June 30, 1998, the
portfolio had open future contracts as follows:
<TABLE>
<CAPTION>
NET UNREALIZED PRINCIPAL AMOUNT
CONTRACTS LONG APPRECIATION OF CONTRACTS
-------------- -------------- ----------------
<S> <C> <C> <C>
Topix Index, expiring September 1998............. 2 $ 4,600 $ 176,460
-------------- -------------- ----------------
-------------- -------------- ----------------
</TABLE>
g) The portfolio intends to be treated as a partnership for federal income
tax purposes. As such, each investor in the portfolio will be taxed on its
share of the portfolio's ordinary income and capital gains. It is intended
that the portfolio's assets will be managed in such a way that an investor
in the portfolio will be able to satisfy the requirements of Subchapter M
of the Internal Revenue Code. The portfolio earns foreign income which may
be subject to foreign withholding taxes at various rates.
2. TRANSACTIONS WITH AFFILIATES
a) The portfolio has an Investment Advisory Agreement with 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 six months
ended June 30, 1998, such fees amounted to $66,322.
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 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 six months ended June 30, 1998, the fee for
these services amounted to $215.
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 an
investment advisor (the "master portfolios") and J.P.Morgan Series Trust
in accordance with the following annual schedule: 0.09% on the first $7
billion of their aggregate average daily net assets and 0.04% of their
aggregate average daily net assets in excess of $7 billion less the
complex-wide fees payable to FDI. The portion of this charge payable by
the portfolio is determined by the proportionate share 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 six months ended June 30, 1998, the fee
for these services amounted to $3,066.
27
<PAGE>
THE JAPAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
In addition, Morgan has agreed to reimburse the portfolio to the extent
necessary to maintain the total operating expenses of the portfolio at no more
than 1.00% of the average daily net assets of the portfolio through April 30,
1999. For the six months ended June 30, 1998, Morgan has agreed to reimburse the
portfolio $17,068 for expenses under this agreement.
d) The portfolio has a Fund Services Agreement with Pierpont Group, Inc.
("Group") to assist the trustees in exercising their overall supervisory
responsibilities for the portfolio's affairs. The trustees of the
portfolio represent all the existing shareholders of Group. The
portfolio's allocated portion of Group's costs in performing its services
amounted to $478 for the six months ended June 30, 1998.
e) An aggregate annual fee of $75,000 is paid to each trustee for serving as
a trustee of the trust, the J.P.Morgan Funds, the 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. 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 $100.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the six months
ended June 30, 1998 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
----------- ----------
<S> <C>
$ 1,364,063 2,888,210
</TABLE>
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 16, 1998 the portfolio received a withdrawal request in the amount of
$167,623,751 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 loss on
transfer of the securities in the amount of $48,613,992, which is included in
the Net Realized Loss on Investment Transactions and Foreign Currency Contracts
and Transactions in the Statement of Operations.
6. TERMINATION OF PORTFOLIO
The trustees on July 8, 1998 approved a resolution to terminate the portfolio.
The liabilities incurred in connection with the termination and any liabilities
which arise after the termination date will be paid by Morgan. The portfolio
will be liquidated on or about August 14, 1998.
28
<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
JAPAN EQUITY FUND
SEMI-ANNUAL REPORT
JUNE 30, 1998
