<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN INTERNATIONAL EQUITY FUND
December 1, 1998
Dear Shareholder:
In a period plagued by increased volatility in equity markets, the J.P.
Morgan International Equity Fund recorded a positive gain of 4.87% for the
fiscal year ended October 31, 1998. While successful country-allocation
decisions helped protect the fund from turmoil in Japan, the portfolio's
exposure to Europe negatively impacted performance when Russia's crisis hit
global markets in mid-August. As a result, the fund underperformed the 9.65%
return of its benchmark (the MSCI EAFE Index) for the year. The fund did
however outperform the 4.07% 12-month return of the Lipper International
Funds Average (a universe of our competitors).
The fund's net asset value decreased from $10.97 per share to $10.56 at October
31, 1998 after making distributions of approximately $0.42 per share from
ordinary income, approximately $0.45 from short-term capital gains, and
approximately $0.02 from long-term capital gains. The fund's net assets stood at
$76.5 million as of October 31, 1998. The net assets of The International
Equity Portfolio, in which the fund invests, totaled approximately $443.5
million at October 31, 1998.
The following report includes an interview with Nigel F. Emmett, a member of the
portfolio management team responsible for the portfolio. This interview is
designed to answer commonly asked questions about the fund, elaborate on what
happened during the reporting period, and provide an outlook for the months
ahead.
As chairman and president of Asset Management Services, we appreciate your
investment in the fund. If you have any comments or questions, please call your
Morgan representative or J.P. Morgan Funds Services at (800) 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 . . . . 5
FUND PERFORMANCE . . . . . . . . . . . 2 FINANCIAL STATEMENTS. . . . . . . 8
PORTFOLIO MANAGER Q&A. . . . . . . . . 3
- -------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
FUND PERFORMANCE
EXAMINING PERFORMANCE
There are several ways to evaluate a mutual fund's historical performance
record. One approach is to look at the growth of a hypothetical investment of
$10,000. The chart at the right shows that $10,000 invested on May 31, 1990,*
would have grown to $14,445 on October 31, 1998.
Another way to look at performance is to review a fund's average annual
total return. This figure takes the fund's actual (or cumulative) return and
shows what would have happened if the fund had achieved that return by
performing at a constant rate each year. Average annual total returns represent
the average yearly change of a fund's value over various time periods, typically
one, five, or ten years (or since inception). Total returns for periods of less
than one year are not annualized and provide a picture of how a fund has
performed over the short term.
GROWTH OF $10,000 SINCE FUND INCEPTION*
MAY 31, 1990 - OCTOBER 31, 1998
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
J.P. Morgan International MSCI EAFE Index Lipper International
Equity Fund Funds Average
------------------------- --------------- --------------------
<S> <C> <C> <C>
Jun-90 $10,000 $10,000 $10,000
Oct-90 $9,330 $9,027 $9,113
Oct-91 $9,879 $9,655 $9,910
Oct-92 $8,785 $8,379 $9,419
Oct-93 $11,524 $11,518 $12,395
Oct-94 $12,185 $12,680 $13,724
Oct-95 $11,854 $13,626 $13,603
Oct-96 $13,313 $13,956 $15,193
Oct-97 $13,773 $14,602 $16,781
Oct-98 $14,445 $16,010 $17,452
</TABLE>
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
----------------- ------------------------------------------
THREE SIX ONE THREE FIVE SINCE
AS OF OCTOBER 31, 1998 MONTHS MONTHS YEAR YEARS YEARS INCEPTION*
- -------------------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J.P. Morgan International Equity Fund -9.90% -8.97% 4.87% 6.81% 4.62% 4.47%
MSCI EAFE Index** -6.22% -5.02% 9.65% 8.22% 6.81% 5.75%
Lipper International Funds Average -11.20% -10.44% 4.07% 8.09% 7.02% 7.17%
<CAPTION>
AS OF SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------------------------------
J.P. Morgan International Equity Fund -18.05% -16.19% -11.77% 2.64% 3.05% 3.30%
MSCI EAFE Index** -14.21% -13.30% -8.34% 3.75% 5.35% 4.56%
Lipper International Funds Average -16.17% -15.54% -10.65% 4.79% 6.41% 6.34%
</TABLE>
*6/1/90 -- COMMENCEMENT OF OPERATIONS.
** MSCI EAFE INDEX IS AN UNMANAGED INDEX USED TO TRACK THE AVERAGE
PERFORMANCE OF OVER 900 SECURITIES LISTED ON THE STOCK EXCHANGES OF COUNTRIES
IN EUROPE, AUSTRALASIA, AND THE FAR EAST. THE INDEX DOES NOT INCLUDE FEES OR
EXPENSES AND IS NOT AVAILABLE FOR ACTUAL INVESTMENT.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET OF
FEES, ASSUME THE REINVESTMENT OF DISTRIBUTIONS AND REFLECT THE REIMBURSEMENT OF
CERTAIN FUND AND PORTFOLIO EXPENSES AS DESCRIBED IN THE PROSPECTUS. HAD EXPENSES
NOT BEEN SUBSIDIZED, RETURNS WOULD HAVE BEEN LOWER. LIPPER ANALYTICAL SERVICES,
INC. IS A LEADING SOURCE FOR MUTUAL FUND DATA.
2
<PAGE>
PORTFOLIO MANAGER Q&A
[PHOTO]
Following is an interview with NIGEL F. EMMETT, vice president, a portfolio
manager with the International Equity Group. Nigel joined J.P. Morgan in 1997.
Prior to J.P. Morgan, he was employed by Brown Brothers Harriman & Co. in New
York and Gartmore Investment Management in London. Nigel earned a BA degree in
Economics from Manchester University, is an Associate Member of the Institute of
Investment Management and Research (AMIIR), and is a Chartered Financial
Analyst. This interview was conducted November 16, and reflects Nigel's views on
that date.
THE VOLATILITY IN INTERNATIONAL EQUITY MARKETS OVER THE ANNUAL REPORTING PERIOD
HIT RECORD LEVELS. NO DOUBT, IT WAS A VERY DIFFICULT TIME IN WHICH TO INVEST.
HOW DID THE PORTFOLIO'S MANAGEMENT TEAM NAVIGATE THROUGH THE PAST YEAR?
NE: All the extremes in volatility really started in 1997, beginning with the
Asian crisis. While Asia's currency crisis actually started in the summer of
1997, it wasn't really until the fourth quarter of 1997 when its impact was felt
globally. With that being the first quarter of the portfolio's annual reporting
period, performance suffered a blow right from the start as equity markets
everywhere came under siege.
During the first quarter of 1998, however, we saw some recovery in the markets
as some of the panic of the fourth quarter calmed and stability returned. The
quarter was notable, from a performance perspective, for the strong results
turned in by Europe. In terms of what drove performance for the first few months
of 1998, I think it's important to focus on Europe.
WHAT WAS BEHIND EUROPE'S SUCCESS?
NE: First, at the economic level, domestic demand in Europe continued to
improve at a faster rate than almost anyone would have expected. While European
economic growth is now slowing to moderate levels, it still has the potential
for stronger growth relative to the U.S., for example. Secondly, the benefits of
restructuring, both past and current, have positively impacted many European
corporations.
So through the first half of the reporting period, fund performance had been
moving steadily along, driven by the strong returns of Europe.
THEN WE MOVED INTO THE SUMMER OF 1998, AND MORE TURMOIL.
NE: That's right. The next distinctive period within the year occurred in
mid-August when we saw another financial crisis, this time in Russia. A renewed
wave of risk aversion once again flooded the markets and extremes in volatility
returned. Even the previously strong European markets were badly hurt during
this period, as they were negatively impacted by the default of many Russian
banks.
3
<PAGE>
Also, by then it had become painfully obvious that problems in Japan were not
going away and were, in fact, worse than anyone expected. The Japanese banking
crisis unrolled into an ugly mess, with non-performing loans and bankruptcies
increasing. While the Japanese government has since proposed a new stimulus
package to help Japan muddle through to recovery, the international equity index
(MSCI EAFE Index) was burdened by the weak performance of Japan. Also, due in
large part to Japan's economic malaise and very low growth, many investors
flocked to the U.S. equity market on concerns of a global recession. This, too,
had a negative impact on international equity performance, as well as on the
performance of the fund.
HOW DID THE FUND PERFORM DURING ITS ANNUAL REPORTING PERIOD?
NE: Despite a challenging environment for international equities, the fund was
able to outperform its peers of international equity funds (as measured by
Lipper Analytical Services). The portfolio benefited from an underweight
position in Japan throughout most of the reporting period, as well as its
avoidance of Malaysia which was actually initiated in April of 1997. Malaysia
has since been removed from the MSCI EAFE Index (due to capital controls enacted
by its government).
Unfortunately, however, the fund underperformed its benchmark, the MSCI EAFE
Index. The extremes in sentiment and indiscriminate selling that occurred
throughout most of the period often brought the values of otherwise sound
investments down with the bad. Performance was also hurt by the portfolio's
overweight position in Europe which, as I mentioned, suffered on the back of
Russia's crisis.
Additionally, much of the panic investing that occurred during the period
resulted in investors flocking to very large, recognizable names which were
often already overpriced. With the market rewarding what we considered
overvalued investments, this hurt the fund's performance as well. However, we
felt, and still feel, it is important to stick to our style and ride out
volatility. We are confident our extensive research has the portfolio focused in
high-quality, undervalued opportunities that will eventually be recognized and
rewarded by the market.
WHAT IS YOUR OUTLOOK FOR THE NEXT THREE MONTHS? HOW IS THE PORTFOLIO BEING
POSITIONED?
NE: Overall, we are optimistic about the future prospects for international
equities compared to the U.S., for example, which is toward the end of its
expansion phase. Specifically, we remain positive on Europe. While economic
growth is slowing and earnings estimates are being revised downward, we think it
still provides some of the best opportunities in the international equity
universe. European Monetary Union (EMU) also provides a strong incentive for
European companies to continue to restructure and reduce their costs.
We continue to underweight Japan. While some progress has been made, the road to
recovery will be long and bumpy. Within the Asian region, however, Hong Kong
provides some attractive opportunities. We also expect to maintain the
portfolio's overweight in Australia and New Zealand, as those domestic economies
are doing well.
We also believe J.P. Morgan's robust research capabilities are key in focusing
the portfolio in those under-researched, undervalued securities likely to reward
investors in the future.
4
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
J.P. Morgan International Equity Fund seeks to provide a high total return
from a portfolio of equity securities of foreign companies. It is designed
for investors with a long-term investment horizon who want to diversify their
portfolios by investing in an actively managed portfolio of non-U.S.
securities that seeks to outperform the MSCI EAFE Index. As an international
investment, the fund is subject to foreign market, political, and currency
risks.
- --------------------------------------------------------------------------------
COMMENCEMENT OF INVESTMENT OPERATIONS
6/1/90
- --------------------------------------------------------------------------------
FUND NET ASSETS AS OF 10/31/98
$76,472,444
- --------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 10/31/98
$443,474,618
- --------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/18/98
EXPENSE RATIO
The fund's current expense ratio of 1.17% covers shareholders' expenses for
custody, tax reporting, investment advisory and shareholder services. The fund
is no-load and does not charge any sales, redemption, or exchange fees. There
are no additional charges for buying, selling, or safekeeping fund shares, or
for wiring redemption proceeds from the fund.
FUND HIGHLIGHTS
ALL DATA AS OF OCTOBER 31, 1998
PORTFOLIO ALLOCATION
(AS A PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
<TABLE>
<CAPTION>
<S> <C>
UNITED KINGDOM 23.2%
JAPAN 16.2%
GERMANY 11.7%
FRANCE 10.0%
SWITZERLAND 9.5%
NETHERLANDS 6.4%
ITALY 5.3%
SWEDEN 4.1%
AUSTRALIA 4.0%
OTHER 9.6%
</TABLE>
<TABLE>
<CAPTION>
LARGEST COMMON
STOCK HOLDINGS % OF TOTAL INVESTMENTS
- --------------------------------------------------------------------------------
<S> <C>
NESTLE SA (SWITZERLAND) 2.6%
MUENCHENER RUECKVERSICHERUNGS-
GESELLSCHAFT AG (GERMANY) 2.2%
TELECOM ITALIA SPA-RNC (ITALY) 2.0%
LLOYDS TSB GROUP PLC (UNITED KINGDOM) 2.0%
GLAXO WELLCOME PLC (UNITED KINGDOM) 1.9%
VIVENDI (FRANCE) 1.9%
ROCHE HOLDING AG (SWITZERLAND) 1.8%
VEBA AG (GERMANY) 1.3%
ZURICH ALLIED AG (SWITZERLAND) 1.3%
AUTOLIV, INC. (SDR) (SWEDEN) 1.3%
</TABLE>
5
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. J.P. MORGAN INVESTMENT MANAGEMENT INC.
SERVES AS INVESTMENT ADVISOR. SHARES OF THE FUND ARE NOT BANK DEPOSITS AND ARE
NOT GUARANTEED BY ANY BANK, GOVERNMENT ENTITY, OR THE FDIC. RETURN AND SHARE
PRICE WILL FLUCTUATE AND REDEMPTION VALUE MAY BE MORE OR LESS THAN ORIGINAL
COST.
Opinions expressed herein are based on current market conditions and are subject
to change without notice. The fund invests through a master portfolio (another
fund with the same objective). The fund invests in foreign securities which are
subject to special risks; prospective investors should refer to the funds
prospectus for a discussion of these risks.
CALL J.P. MORGAN FUNDS SERVICES AT (800) 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.
6
<PAGE>
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
<PAGE>
J.P. MORGAN INTERNATIONAL EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The International Equity Portfolio
("Portfolio"), at value $76,528,454
Receivable for Shares of Beneficial Interest Sold 11,778
Prepaid Trustees' Fees 283
Prepaid Expenses and Other Assets 794
-----------
Total Assets 76,541,309
-----------
LIABILITIES
Payable for Shares of Beneficial Interest
Redeemed 17,000
Shareholder Servicing Fee Payable 15,401
Administrative Services Fee Payable 1,736
Administration Fee Payable 829
Fund Services Fee Payable 61
Accrued Expenses 33,838
-----------
Total Liabilities 68,865
-----------
NET ASSETS
Applicable to 7,241,260 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $76,472,444
-----------
-----------
Net Asset Value, Offering and Redemption Price
Per Share $10.56
-----
-----
ANALYSIS OF NET ASSETS
Paid-in Capital $64,046,297
Undistributed Net Investment Income 1,491,229
Accumulated Net Realized Gain on Investment and
Foreign Currency Contracts and Transactions 1,524,653
Net Unrealized Appreciation of Investment and
Foreign Currency Contracts and Translations 9,410,265
-----------
Net Assets $76,472,444
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
8
<PAGE>
J.P. MORGAN INTERNATIONAL EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Dividend Income (Net of withholding tax
of $258,845) $1,895,404
Allocated Interest Income (Net of withholding tax
of $394) 161,987
Allocated Portfolio Expenses (864,572)
----------
Net Investment Income Allocated from
Portfolio 1,192,819
FUND EXPENSES
Shareholder Servicing Fee $271,861
Administrative Services Fee 31,866
Transfer Agent Fees 31,167
Professional Fees 14,987
Interest Expense 9,067
Fund Services Fee 3,379
Administration Fee 2,482
Trustees' Fees and Expenses 2,261
Miscellaneous 36,618
--------
Total Fund Expenses 403,688
----------
NET INVESTMENT INCOME 789,131
NET REALIZED GAIN ON INVESTMENT AND FOREIGN
CURRENCY CONTRACTS AND TRANSACTIONS ALLOCATED
FROM PORTFOLIO 2,944,881
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT AND FOREIGN CURRENCY CONTRACTS AND
TRANSLATIONS ALLOCATED FROM PORTFOLIO 2,675,678
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $6,409,690
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
J.P. MORGAN INTERNATIONAL EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
DECREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 789,131 $ 2,016,366
Net Realized Gain on Investment and Foreign
Currency Contracts and Transactions Allocated
from Portfolio 2,944,881 6,943,599
Net Change in Unrealized Appreciation
(Depreciation) of Investment and Foreign
Currency Contracts and Translations Allocated
from Portfolio 2,675,678 (1,416,556)
---------------- ----------------
Net Increase in Net Assets Resulting from
Operations 6,409,690 7,543,409
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (4,506,440) (4,418,970)
Net Realized Gain (5,060,475) (9,301,667)
---------------- ----------------
Total Distributions to Shareholders (9,566,915) (13,720,637)
---------------- ----------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 27,414,430 34,549,327
Reinvestment of Dividends and Distributions 6,667,184 9,300,971
Cost of Shares of Beneficial Interest Redeemed (101,111,026) (91,733,829)
---------------- ----------------
Net Decrease from Transactions in Shares of
Beneficial Interest (67,029,412) (47,883,531)
---------------- ----------------
Total Decrease in Net Assets (70,186,637) (54,060,759)
NET ASSETS
Beginning of Fiscal Year 146,659,081 200,719,840
---------------- ----------------
End of Fiscal Year (including undistributed net
investment income of $1,491,229 and $3,832,921,
respectively) $ 76,472,444 $ 146,659,081
---------------- ----------------
---------------- ----------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each year are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 10.97 $ 11.38 $ 10.68 $ 11.50 $ 11.15
------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.34 0.15 0.12 0.09 0.05
Net Realized and Unrealized Gain (Loss) on
Investment and Foreign Currency Transactions
and Translations 0.14 0.23 1.16 (0.42) 0.57
------- -------- -------- -------- --------
Total from Investment Operations 0.48 0.38 1.28 (0.33) 0.62
------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.42) (0.25) (0.24) -- (0.04)
Net Realized Gain (0.47) (0.54) (0.34) (0.49) (0.23)
------- -------- -------- -------- --------
Total Distributions to Shareholders (0.89) (0.79) (0.58) (0.49) (0.27)
------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR $ 10.56 $ 10.97 $ 11.38 $ 10.68 $ 11.50
------- -------- -------- -------- --------
------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Total Return 4.87% 3.46% 12.31% (2.71%) 5.73%
Net Assets, End of Year (in thousands) $76,472 $146,659 $200,720 $185,541 $210,435
Ratios to Average Net Assets
Expenses 1.17% 1.12% 1.14% 1.28% 1.38%
Net Investment Income 0.73% 1.11% 1.00% 0.80% 0.46%
Expenses without Reimbursement and including
Interest Expense 1.17% 1.12% 1.14% 1.28% 1.45%
Interest Expense 0.01% -- -- -- --
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN INTERNATIONAL EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan International Equity Fund (the "fund") is a separate series of 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, prior
to its tax-free reorganization on October 3, 1993 to a series of the trust,
operated as a stand-alone mutual fund. Costs related to the reorganization were
borne by Morgan Guaranty Trust Company of New York ("Morgan"), a wholly owned
subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan"). Prior to January
1, 1998, the trust's and the fund's names were The JPM Pierpont Funds and The
JPM Pierpont International Equity Fund, respectively.
The fund invests all of its investable assets in The International Equity
Portfolio (the "portfolio"), a diversified open-end management investment
company having the same investment objective as the fund. The value of such
investment included in the Statement of Assets and Liabilities reflects the
fund's proportionate interest in the net assets of the portfolio (17% at October
31, 1998). The performance of the fund is directly affected by the performance
of the portfolio. The financial statements of the portfolio, including the
Schedule of Investments, are included elsewhere in this report and should be
read in conjunction with the fund's financial statements.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the fund:
a) Valuation of securities by the portfolio is discussed in Note 1a of the
portfolio's Notes to Financial Statements which are included elsewhere in
this report.
b) The fund records its share of net investment income, realized and
unrealized gain and loss and adjusts its investment in the portfolio each
day. All the net investment income and realized and unrealized gain and
loss of the portfolio is allocated pro rata among the fund and other
investors in the portfolio at the time of such determination.
c) Distributions to shareholders of net investment income and net realized
capital gains, if any, are declared and paid annually.
d) Expenses incurred by the trust with respect to any two or more funds in
the trust are allocated in proportion to the net assets of each fund in
the trust, except where allocations of direct expenses to each fund can
otherwise be made fairly. Expenses directly attributable to a fund are
charged to that fund.
e) The fund is treated as a separate entity for federal income tax purposes
and intends to comply with the provisions of the Internal Revenue Code of
1986, as amended, applicable to regulated investment companies and to
distribute substantially all of its income, including net realized capital
gains, if any, within the prescribed time periods. Accordingly, no
provision for federal income or excise tax is necessary.
f) The fund accounts for and reports distributions to shareholders in
accordance with Statement of Position 93-2 "Determination, Disclosure, and
Financial Statement Presentation of Income, Capital
12
<PAGE>
J.P. MORGAN INTERNATIONAL EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
Gain, and Return of Capital Distributions by Investment Companies." The
effect of applying this statement was to increase Undistributed Net
Investment Income by $1,375,617, decrease Accumulated Net Realized Gain on
Investment and Foreign Currency Contracts and Transactions by $1,442,057
and increase Paid-in Capital by $66,440. The adjustments are primarily
attributable to foreign currency gains. Net investment income, net
realized gains and net assets were not affected by this change.
2. TRANSACTIONS WITH AFFILIATES
a) The trust, on behalf of the fund, has retained Funds Distributor, Inc.
("FDI"), a registered broker-dealer, to serve as co-administrator and
distributor for the fund. Under a Co-Administration Agreement between FDI
and the trust on behalf of the fund, FDI provides administrative services
necessary for the operations of the fund, furnishes office space and
facilities required for conducting the business of the fund and pays the
compensation of the fund's officers affiliated with FDI. The fund has
agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The
amount allocable to the fund is based on the ratio of the fund's net
assets to the aggregate net assets of the trust and certain other
investment companies subject to similar agreements with FDI. For the
fiscal year ended October 31, 1998, the fee for these services amounted to
$2,482.
b) The trust, on behalf of the fund, has an Administrative Services Agreement
(the "Services Agreement") with Morgan under which Morgan is responsible
for certain aspects of the administration and operation of the fund. Under
the Services Agreement, the fund has agreed to pay Morgan a fee equal to
its allocable share of an annual complex-wide charge. This charge is
calculated based on the aggregate average daily net assets of the
portfolio and 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 October 31, 1998, the fee
for these services amounted to $31,866.
c) The trust, on behalf of the fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal account
maintenance service to fund shareholders. The agreement provides for the
fund to pay Morgan a fee for these services which is computed daily and
paid monthly at an annual rate of 0.25% of the average daily net assets of
the fund. For the fiscal year ended October 31, 1998, the fee for these
services amounted to $271,861.
Morgan, Charles Schwab & Co. ("Schwab") and the trust are parties to
separate services and operating agreements (the "Schwab Agreement")
whereby Schwab makes the 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
13
<PAGE>
J.P. MORGAN INTERNATIONAL EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 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
$3,379 for the fiscal year ended October 31, 1998.
e) An aggregate annual fee of $75,000 is paid to each trustee for serving as
a trustee of the trust, the J.P. Morgan Institutional Funds, the master
portfolios and J.P. Morgan Series Trust. The Trustees' Fees and Expenses
shown in the financial statements represents the fund's allocated portion
of 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 Funds
Services Fee shown in the financial statements was $700.
3. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the trustees to issue an unlimited number of
full and fractional shares of beneficial interest of one or more series.
Transactions in shares of beneficial interest of the fund were as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
Shares sold...................................... 2,471,987 3,087,525
Reinvestment of dividends and distributions...... 670,069 862,798
Shares redeemed.................................. (9,271,796) (8,220,861)
---------------- ----------------
Net Decrease..................................... (6,129,740) (4,270,538)
---------------- ----------------
---------------- ----------------
</TABLE>
4. CREDIT AGREEMENT
The trust, on behalf of the fund, together with other affiliated investment
companies (the "funds"), entered into a revolving line of credit agreement (the
"Agreement") on May 28, 1997, with unaffiliated lenders. Additionally, since all
of the investable assets of the fund are in the portfolio, the portfolio is
party to certain covenants of the Agreement. The maximum borrowing under the
Agreement was $100,000,000. The Agreement expired on May 27, 1998, however, the
fund as party to the Agreement has extended the Agreement and continues its
participation therein for an additional 364 days until May 26, 1999. The maximum
borrowing under the new Agreement is $150,000,000. The purpose of the Agreement
is to provide another alternative for settling large fund shareholder
redemptions. Interest on 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 the procedures established by their respective trustees or directors. There
were no outstanding borrowings pursuant to the Agreement at October 31, 1998.
The average daily balance outstanding for the fiscal year ended October 31,
1998, was $246,575 at a weighted average interest rate of 5.9965 %.The average
amount of debt per share during the period was $0.03.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan International Equity Fund
(Formerly The JPM Pierpont International 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 International Equity Fund (one of the series constituting part of
the J.P. Morgan Funds, hereafter referred to as the "fund") at October 31, 1998,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
December 17, 1998
15
<PAGE>
J.P. MORGAN INTERNATIONAL EQUITY FUND
SUPPLEMENTAL PROXY INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
A Joint Special Meeting of Shareholders of the J.P. Morgan Family of Funds was
held on August 20, 1998. Each of the applicable funds voted in favor of adopting
the following proposals, therefore, the results are aggregated for the trust
unless otherwise specified. The meeting was held for the following purposes:
1. To elect a slate of five trustees to hold office for a term of unlimited
duration subject to the current retirement age of 70.
2a.To approve the amendment of the fund's investment restriction relating to
diversification of assets.
2b.To approve the amendment of the fund's investment restriction relating to
concentration of assets in a particular industry.
2c.To approve the amendment of the fund's investment restriction relating to the
issuance of senior securities.
2d.To standardize the borrowing ability of the fund to the extent permitted by
applicable law.
2e.To approve the amendment of the fund's investment restriction relating to
underwriting.
2f.To approve the amendment of the fund's investment restriction relating to
investment in real estate.
2g.To approve the amendment of the fund's investment restriction relating to
commodities.
2h.To approve the amendment of the fund's investment restriction relating to
lending.
2i.To approve the reclassification of the fund's other fundamental restrictions
as nonfundamental.
3. To approve the reclassification of the fund's investment objective from
fundamental to nonfundamental.
4. To approve a new investment advisory agreement of the fund.
5. To amend the Declaration of Trust to provide dollar-based voting rights.
6. To ratify the selection of independent accountants, PricewaterhouseCoopers
LLP.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
DIRECTORS/MATTER VOTES FOR VOTES AGAINST ABSTENTIONS
- ------------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
1. Frederick S. Addy............................. 2,692,335,831 18,884,648 --
William G. Burns............................... 2,692,395,937 18,824,542 --
Arthur C. Eschenlauer.......................... 2,691,798,990 19,421,489 --
Matthew Healey................................. 2,692,393,425 18,827,054 --
Michael P. Mallardi............................ 2,692,488,290 18,732,189 --
2. Amending of Investment Restrictions:
a. Relating to diversification of assets....... 5,088,267 185,839 113,444
b. Relating to concentration of assets......... 5,088,257 185,839 113,444
c. Relating to issuance of senior securities... 8,088,257 185,839 113,444
d. Relating to borrowing....................... 5,079,705 194,391 113,444
e. Relating to underwriting.................... 5,088,257 185,839 113,444
f. Relating to investment in real estate....... 5,086,759 187,337 113,444
g. Relating to commodities..................... 5,084,116 189,980 113,444
h. Relating to lending......................... 5,084,116 189,980 113,444
i. Reclassification of other restrictions as
nonfundamental............................ 5,088,071 185,839 113,630
3. Reclassification of investment objectives..... 5,077,354 190,019 120,168
4. Investment advisory agreement................. 5,135,682 185,839 113,744
5. Dollar-based voting rights.................... 2,645,059,081 16,807,551 47,376,755
6. Independent accountants,
PricewaterhouseCoopers LLP................ 2,682,031,391 4,303,418 24,885,671
</TABLE>
16
<PAGE>
The International Equity Portfolio
Annual Report October 31, 1998
(The following pages should be read in conjunction
with J.P. Morgan International Equity Fund
Annual Financial Statements)
17
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
COMMON STOCK (91.9%)
AUSTRALIA (3.3%)
AMP Ltd. (Insurance)(s)+......................... 104,685 $ 1,239,843
Brambles Industries Ltd. (Commercial
Services)(s)................................... 46,102 1,006,649
Broken Hill Proprietary Co. Ltd. (Metals &
Mining)(s)..................................... 158,105 1,338,010
Foster's Brewing Group Ltd. (Food, Beverages &
Tobacco)(s).................................... 481,505 1,177,520
Lend Lease Corp. Ltd. (Financial Services)(s).... 65,800 1,445,236
National Australia Bank Ltd. (Banking)(s)........ 143,605 1,894,438
Pioneer International Ltd. (Building
Materials)(s)+................................. 451,772 933,324
Telstra Corp. Ltd. (Telecommunication
Services)(s)................................... 560,900 2,216,328
Westpac Banking Corp. Ltd. (Banking)(s).......... 223,121 1,350,916
WMC Ltd. (Metals & Mining)(s).................... 301,200 1,017,536
Woolworths Ltd. (Retail)(s)...................... 323,000 1,131,582
-------------
14,751,382
-------------
AUSTRIA (0.9%)
Bank Austria AG (Banking)(s)..................... 70,422 3,831,711
-------------
BELGIUM (0.4%)
PetroFina SA (Oil-Production)(s)................. 5,000 1,858,953
-------------
DENMARK (1.2%)
Danisco A/S (Food, Beverages & Tobacco)(s)....... 39,400 2,177,787
GN Store Nord A/S (Telecommunications-
Equipment)(s).................................. 78,700 2,600,027
Olicom A/S (Technology)(s)+...................... 60,793 347,130
-------------
5,124,944
-------------
FINLAND (0.6%)
MeritaNordbanken Oyj (Banking)(s)................ 515,623 2,763,146
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
FRANCE (9.5%)
Carrefour SA (Retail)(s)......................... 3,740 $ 2,482,172
Compagnie de Saint Gobain (Building
Materials)(s).................................. 11,334 1,676,580
Compagnie Financiere de Paribas (Financial
Services)(s)................................... 62,115 4,565,113
Elf Aquitaine SA (Oil-Services)(s)............... 37,941 4,390,248
Groupe Danone (Food, Beverages & Tobacco)(s)..... 7,900 2,088,422
Lagardere S.C.A. (Multi - Industry)(s)........... 46,300 1,863,040
Rhodia SA (Chemicals)(s)+........................ 113,166 1,883,766
Rhone-Poulenc SA, A Shares (Chemicals)(s)........ 49,700 2,271,744
Sanofi SA (Pharmaceuticals)(s)................... 10,568 1,654,556
Societe Generale
(Banking)(s)................................... 8,750 1,157,350
STMicroelectronics NV (Electronics)(s)+.......... 60,552 3,704,902
Total SA, B Shares (Oil-Services)(s)............. 45,573 5,256,963
Union des Assurances Federales (Insurance)(s).... 8,560 1,070,602
Vivendi (Utilities)(s)........................... 34,847 7,957,860
-------------
42,023,318
-------------
GERMANY (10.2%)
BASF AG (Chemicals)(s)........................... 57,100 2,420,285
Bilfinger & Berger Bau AG (Construction &
Housing)(s).................................... 41,740 831,686
Deutsche Bank AG (Banking)(s).................... 33,700 2,095,851
Hochtief AG (Construction & Housing)(s).......... 27,800 1,015,532
HypoVereinsbank AG (Banking)(s).................. 43,811 3,478,581
Karstadt AG (Retail)(s).......................... 6,671 3,403,619
Merck KgAA (Pharmaceuticals)(s).................. 52,800 2,167,884
Muenchener Rueckversicherungs-Gesellschaft AG
(Insurance)(s)................................. 20,524 9,393,436
Muenchener Rueckversicherungs-Gesellschaft AG,
New Shares (Insurance)(s)+..................... 808 367,854
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
GERMANY (CONTINUED)
RWE AG (Utilities)(s)............................ 70,810 $ 3,839,407
SAP AG (Computer Software)(s).................... 5,350 2,245,080
Schering AG (Pharmaceuticals)(s)................. 11,700 1,378,983
SGL Carbon AG (Chemicals)(s)..................... 24,600 1,945,807
Siemens AG (Electrical Equipment)(s)............. 45,710 2,748,931
SKW Trostberg AG (Chemicals)(s).................. 31,000 765,558
VEBA AG (Utilities)(s)........................... 97,500 5,445,523
Volkswagen AG (Automotive)(s).................... 22,035 1,656,440
-------------
45,200,457
-------------
HONG KONG (0.3%)
CLP Holdings Ltd. (Electric)(s).................. 81,000 459,683
Hutchison Whampoa Ltd. (Multi - Industry)(s)..... 65,000 466,680
Sun Hung Kai Properties Ltd. (Real Estate)(s).... 71,000 493,497
-------------
1,419,860
-------------
IRELAND (1.0%)
CRH PLC (Building Materials)(s).................. 78,200 1,145,590
Greencore Group PLC (Food, Beverages &
Tobacco)(s).................................... 196,000 765,680
Irish Life PLC (Insurance)(s).................... 141,500 1,254,372
Jefferson Smurfit Group PLC (Forest Products &
Paper)(s)...................................... 842,500 1,392,453
-------------
4,558,095
-------------
ITALY (5.1%)
Assicurazioni Generali SPA (Insurance)(s)........ 89,300 3,199,796
Banca Fideuram SPA (Financial Services)(s)....... 483,903 2,776,636
ENI SPA (Oil-Services)(s)........................ 575,300 3,423,984
Instituto Bancario San Paolo di Torino SPA
(Banking)(s)................................... 80,900 1,190,141
Mediaset SPA (Broadcasting & Publishing)(s)...... 287,600 1,823,174
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
ITALY (CONTINUED)
Mediolanum SPA (Financial Services)(s)........... 60,400 $ 1,504,284
Telecom Italia SPA - RNC (Telecommunication
Services)(s)................................... 1,708,100 8,612,438
-------------
22,530,453
-------------
JAPAN (14.2%)
Asahi Bank Ltd. (Banking)(s)..................... 653,000 2,185,511
Bridgestone Corp. (Chemicals)(s)................. 57,000 1,254,693
Canon, Inc. (Electronics)(s)..................... 41,000 775,832
Dainippon Ink & Chemicals, Inc. (Chemicals)(s)... 273,000 655,988
DDI Corp. (Telecommunications)(s)................ 648 1,890,728
Ebara Corp. (Machinery)(s)....................... 147,000 1,110,133
Fanuc Ltd. (Machinery)(s)........................ 34,300 1,030,237
Fujitsu Ltd. (Computer Systems)(s)............... 186,000 1,979,292
Honda Motor Co. Ltd. (Automotive)(s)............. 75,000 2,252,706
Ito - Yokado Co. Ltd. (Retail)(s)................ 37,000 2,159,165
Japan Tobacco, Inc. (Food, Beverages &
Tobacco)(s).................................... 193 1,618,181
Kawasaki Steel Corp. (Metals & Mining)(s)........ 924,000 1,466,962
Minebea Co. Ltd. (Capital Goods)(s).............. 150,000 1,409,550
Mitsubishi Chemical Corp. (Chemicals)(s)......... 882,000 1,589,509
Mitsubishi Corp. (Wholesale & International
Trade)(s)...................................... 235,000 1,244,309
Mitsubishi Estate Co. Ltd. (Real Estate)(s)...... 215,000 1,950,242
Mitsui Mining & Smelting Co. Ltd. (Metals &
Mining)(s)..................................... 179,000 812,613
Mitsui Trust & Banking Co. Ltd. (Banking)(s)..... 569,696 743,125
Nichiei Co. Ltd. (Financial Services)(s)......... 21,400 1,729,975
Nippon Telegraph & Telephone Corp.
(Telecommunications)(s)........................ 396 3,099,311
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
JAPAN (CONTINUED)
Nippon Yusen Kabushiki Kaisha (Transport &
Services)(s)................................... 466,000 $ 1,543,648
Nishimatsu Construction Co. Ltd. (Construction &
Housing)(s).................................... 391,000 2,013,275
Nomura Securities Co. Ltd. (Financial
Services)(s)................................... 70,000 528,635
NTT Mobile Communication Network, Inc.
(Telecommunication Services)(s)................ 21 758,711
Osaka Gas Co. Ltd. (Natural Gas)(s).............. 199,000 638,704
Pioneer Electronic Corp. (Electronics)(s)........ 45,000 741,462
Ricoh Co. Ltd. (Electrical Equipment)(s)......... 134,000 1,132,703
Rohm Co. Ltd. (Electrical Equipment)(s).......... 16,000 1,414,270
Sekisui Chemical Co. Ltd. (Chemicals)(s)......... 176,000 959,095
Sony Corp. (Electronics)(s)...................... 31,700 2,013,104
Sony Music Entertainment, Inc. (Entertainment,
Leisure & Media)(s)............................ 53,600 1,867,523
Sumitomo Trust & Banking Co. Ltd. (Banking)(s)... 420,000 1,171,407
Takashimaya Co. Ltd. (Retail)(s)................. 132,000 992,323
Takeda Chemical Industries (Chemicals)(s)........ 104,000 3,382,577
Takefuji Corp. (Financial Services)(s)........... 33,100 1,763,984
The Sanwa Bank Ltd. (Banking)(s)................. 78,000 608,462
Tokyo Electric Power Co., Inc. (Electric)(s)..... 59,200 1,498,714
Tokyo Electron Ltd. (Electronics)(s)............. 41,000 1,333,516
Tokyo Steel Manufacturing Co. Ltd. (Metals &
Mining)(s)..................................... 60,000 272,899
Tostem Corp. (Construction & Housing)(s)......... 130,000 2,020,398
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
JAPAN (CONTINUED)
Toyota Motor Corp. Ltd. (Automotive)(s).......... 107,000 $ 2,571,088
West Japan Railway Co. (Railroads)(s)............ 575 2,565,939
-------------
62,750,499
-------------
NETHERLANDS (6.1%)
Heineken NV (Food, Beverages & Tobacco)(s)....... 64,070 3,413,311
ING Groep NV (Financial Services)(s)............. 40,000 1,936,094
Koninklijke Ahold NV (Retail)(s)................. 42,221 1,403,842
Koninklijke Numico NV (Food, Beverages &
Tobacco)(s).................................... 23,600 924,355
KPN NV (Telecommunication Services)(s)........... 106,078 4,123,442
Laurus NV (Retail)(s)............................ 35,950 904,677
Moeara Enim Petroleum Maatschappij NV, New shares
(Oil-Services)(s).............................. 110 2,238,073
Philips Electronics NV (Electronics)(s).......... 69,773 3,713,400
Royal Dutch Petroleum Co. (Oil-Services)(s)...... 28,370 1,370,137
TNT Post Group NV (Transport & Services)(s)...... 79,896 2,138,913
Vedior NV (Business & Public Services)(s)........ 50,679 1,291,615
Vendex NV (Retail)(s)............................ 51,357 1,306,145
Wolters Kluwer NV (Broadcasting &
Publishing)(s)................................. 11,151 2,161,327
-------------
26,925,331
-------------
NEW ZEALAND (0.5%)
Fletcher Challenge Paper Division Ltd. (Forest
Products & Paper)(s)........................... 961,800 611,030
Telecom Corp. of New Zealand Ltd.
(Telecommunications)(s)........................ 397,200 1,629,699
-------------
2,240,729
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
NORWAY (0.3%)
Nycomed Amersham PLC (Medical Supplies)(s)....... 199,250 $ 1,418,966
-------------
PORTUGAL (0.6%)
Banco Pinto & Sotto Mayor SA (Banking)(s)........ 148,139 2,841,310
-------------
SPAIN (2.8%)
Acerinox SA (Metals & Mining)(s)................. 36,500 821,223
Actividades de Construction y Servicios SA
(Construction & Housing)(s).................... 54,800 1,745,560
Endesa SA (Electric)(s).......................... 124,100 3,121,940
Iberdrola SA (Electric)(s)....................... 130,300 2,100,633
Telefonica SA (Telecommunications)(s)............ 101,700 4,583,555
-------------
12,372,911
-------------
SWEDEN (3.9%)
Astra AB, A Shares (Pharmaceuticals)(s).......... 63,500 1,027,618
Autoliv, Inc. (SDR) (Automotive Supplies)(s)..... 158,900 5,285,240
Ericsson AB, B Shares (Telecommunications-
Equipment)(s).................................. 184,500 4,154,096
Gambro AB, A Shares (Pharmaceuticals)(s)......... 70,200 781,311
Skandia Forsakrings AB (Insurance)(s)............ 110,899 1,411,621
Stora Kopparbergs Bergslags Aktiebolag AB, A
Shares (Forest Products & Paper)(s)............ 303,100 3,334,663
Volvo AB, B Shares (Automotive)(s)............... 54,900 1,183,422
-------------
17,177,971
-------------
SWITZERLAND (9.0%)
ABB AG (Machinery)(s)............................ 1,355 1,623,086
Nestle SA (Food, Beverages & Tobacco)(s)......... 5,065 10,772,672
Novartis AG (Pharmaceuticals)(s)................. 2,215 3,991,306
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
SWITZERLAND (CONTINUED)
Roche Holding AG (Pharmaceuticals)(s)............ 657 $ 7,666,091
Swiss Life (Insurance)(s)........................ 2,280 1,372,284
Swisscom AG (Telecommunication Services)(s)+..... 13,400 4,542,229
UBS AG (Banking)(s).............................. 17,075 4,684,584
Zurich Allied AG (Insurance)(s).................. 8,900 5,409,304
-------------
40,061,556
-------------
UNITED KINGDOM (22.0%)
Allied Zurich PLC (Insurance)(s)+................ 126,550 1,513,203
Barclays PLC (Banking)(s)........................ 84,000 1,810,484
Bass PLC (Food, Beverages & Tobacco)(s).......... 119,928 1,458,123
Billiton PLC (Metals & Mining)(s)................ 340,300 834,904
British Airways PLC (Airlines)(s)................ 197,000 1,431,835
British American Tobacco PLC (Food, Beverages &
Tobacco)(s)+................................... 94,050 845,411
British Petroleum Co. PLC (Oil-Services)(s)...... 354,654 5,208,844
British Sky Broadcasting Group PLC (Broadcasting
& Publishing)(s)............................... 158,000 1,288,614
British Telecommunications PLC
(Telecommunications)(s)........................ 397,700 5,141,737
Burmah Castrol PLC (Oil-Production)(s)........... 30,200 455,183
Cable & Wireless PLC (Telecommunications)(s)..... 347,300 3,896,875
Cadbury Schweppes PLC (Food, Beverages &
Tobacco)(s).................................... 109,300 1,674,859
Compass Group PLC (Food, Beverages &
Tobacco)(s).................................... 255,400 2,587,696
Diageo PLC (Food, Beverages & Tobacco)(s)........ 263,961 2,851,257
Glaxo Wellcome PLC (Pharmaceuticals)(s).......... 258,300 8,028,590
Glynwed International PLC (Metals & Mining)(s)... 477,200 1,414,525
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
Great Universal Stores PLC (Retail)(s)........... 201,000 $ 2,161,066
Hays PLC (Commercial Services)................... 38,000 560,020
HSBC Holdings PLC (75p) (Banking)(s)............. 146,700 3,439,498
Kingfisher PLC (Retail)(s)....................... 210,200 1,846,355
Lloyds TSB Group PLC (Banking)(s)................ 669,150 8,264,611
LucasVarity PLC (Automotive Supplies)(s)......... 718,900 2,456,041
MEPC PLC (Real Estate)(s)........................ 179,565 1,305,114
MFI Furniture Group PLC (Household
Products)(s)................................... 973,334 603,116
National Power PLC (Electric)(s)................. 228,589 1,986,825
Nycomed Amersham PLC (Medical Supplies)(s)....... 66,264 465,529
Ocean Group PLC (Transport & Services)(s)........ 63,000 684,207
Pearson PLC (Broadcasting & Publishing)(s)....... 55,000 959,770
Pilkington PLC (Building Materials)(s)........... 732,000 809,081
PowerGen PLC (Electric)(s)....................... 36,000 509,444
Prudential Corp. PLC (Insurance)(s).............. 236,000 3,070,930
Racal Electronic PLC (Telecommunications-
Equipment)(s).................................. 182,600 828,718
Rank Group PLC (Entertainment, Leisure &
Media)(s)...................................... 113,000 465,533
Reed International PLC (Broadcasting &
Publishing)(s)................................. 58,000 491,005
RMC Group PLC (Building Materials)(s)............ 97,000 1,380,790
Royal & Sun Alliance Insurance Group PLC
(Insurance)(s)................................. 269,000 2,464,203
Royal Bank of Scotland Group PLC (Banking)(s).... 134,300 1,781,304
Sainsbury (J.) PLC (Retail)(s)................... 307,000 2,714,621
Shell Transport & Trading Co. PLC
(Oil-Services)(s).............................. 139,200 841,557
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
Smith & Nephew PLC (Medical Supplies)(s)......... 185,000 $ 514,300
SmithKline Beecham PLC (Pharmaceuticals)(s)...... 285,700 3,574,109
Tomkins PLC (Multi - Industry)(s)................ 350,000 1,620,691
Unilever PLC (Food, Beverages & Tobacco)(s)...... 248,000 2,491,953
Vickers PLC (Capital Goods)(s)................... 163,866 458,292
Vodafone Group PLC (Telecommunications)(s)....... 336,600 4,509,631
Zeneca Group PLC (Pharmaceuticals)(s)............ 104,400 4,010,798
-------------
97,711,252
-------------
TOTAL COMMON STOCK (COST $354,073,259)......... 407,562,844
-------------
CONVERTIBLE PREFERRED STOCKS (0.1%)
JAPAN (0.1%)
AB International Cayman Trust, 0.500% (Banking)
(cost $340,223)................................ 56,000,000 371,246
-------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
PREFERRED STOCK (1.4%)
AUSTRALIA (0.5%)(S)
News Corp. Ltd. (Broadcasting & Publishing)(s)... 373,963 2,238,611
-------------
GERMANY (0.9%)
ProSieben Media AG (Broadcasting &
Publishing)(s)................................. 39,160 2,009,809
ProSieben Media Aktiengesell (ADR)(144A)
(Broadcasting & Publishing)(s)+................ 6,764 173,578
Volkswagen AG (Automotive)(s).................... 37,161 1,745,662
-------------
3,929,049
-------------
TOTAL PREFERRED STOCK (COST $6,116,451)........ 6,167,660
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
WARRANTS (0.0%)*
GERMANY (0.0%)*
Muenchener Rueckversicherungs-Gesellschaft AG,
Expiring 06/03/02 (Insurance)(s)+.............. 808 $ 35,127
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
-------------
<S> <C> <C>
CONVERTIBLE BONDS (1.1%)
(IN JPY)
-------------
JAPAN (1.1%)
Sanwa International Finance Trust, 1.250% due
07/31/05 (Financial Services).................. 204,000,000 1,352,396
Yamanouchi Pharmaceutical Co. Ltd., 1.250% due
03/31/14 (Commercial Services)................. 250,000,000 3,615,056
-------------
4,967,452
-------------
TOTAL CONVERTIBLE BONDS (COST $4,311,410)...... 4,967,452
-------------
</TABLE>
<TABLE>
<S> <C> <C>
SHORT-TERM INVESTMENTS (0.5%)
EURO DOLLAR TIME DEPOSITS (0.3%)
(IN USD)
-------------
State Street Bank Euro Dollar, 4.000% due
11/02/98....................................... 1,376,000 1,376,000
-------------
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS (0.2%)
Bills, 4.410%(y) due 02/04/99(s)................. $ 1,030,000 $ 1,017,408
-------------
TOTAL SHORT-TERM INVESTMENTS (COST
$2,393,408)................................... 2,393,408
-------------
TOTAL INVESTMENTS (COST $367,234,751) (95.0%)...................
421,497,737
OTHER ASSETS IN EXCESS OF LIABILITIES (5.0%)....................
21,976,881
-------------
NET ASSETS (100.0%)............................................. $ 443,474,618
-------------
-------------
</TABLE>
- ------------------------------
Note: Based on the cost of investments of $369,348,228 for federal income tax
purposes at October 31, 1998, the aggregate gross unrealized appreciation and
depreciation was $83,635,150 and $31,485,641, respectively, resulting in a net
unrealized appreciation of investments of $52,149,509.
+ - 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 future contracts.
$171,409,246 of the market value has been segregated.
(y) - Yield to maturity.
* - Less than 0.1%.
144A - Securities restricted for resale to Qualified Institutional Buyers.
ADR - American Depositary Receipt.
SDR - Swedish Depositary Receipt.
JPY - Japanese Yen.
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION
<TABLE>
<CAPTION>
PERCENT OF
TOTAL INVESTMENTS
-----------------
<S> <C>
Banking........................................... 11.2%
Food, Beverage & Tobacco.......................... 8.3%
Pharmaceuticals................................... 8.2%
Insurance......................................... 7.6%
Telecommunications................................ 5.9%
Oil - Services.................................... 5.4%
Retail............................................ 4.9%
Telecommunication Services........................ 4.8%
Financial Services................................ 4.2%
Chemicals......................................... 4.1%
Utilities......................................... 4.1%
Electronics....................................... 2.9%
Broadcasting & Publishing......................... 2.6%
Electric.......................................... 2.3%
Automotive........................................ 2.2%
Metals & Mining................................... 1.9%
Automotive Supplies............................... 1.8%
Construction & Housing............................ 1.8%
Telecommunications Equipment...................... 1.8%
Building Materials................................ 1.4%
Electrical Equipment.............................. 1.3%
Forest Products & Paper........................... 1.3%
Commercial Services............................... 1.2%
Transport and Services............................ 1.0%
Machinery......................................... 0.9%
Multi - Industry.................................. 0.9%
Real Estate....................................... 0.9%
Entertainment, Leisure & Media.................... 0.6%
Medical Supplies.................................. 0.6%
Oil- Production................................... 0.6%
Railroads......................................... 0.6%
Computer Software................................. 0.5%
Computer Systems.................................. 0.5%
Capital Goods..................................... 0.4%
Airlines.......................................... 0.3%
Business and Public Services...................... 0.3%
Wholesale & International Trade................... 0.3%
Natural Gas....................................... 0.2%
Household Products................................ 0.1%
Technology........................................ 0.1%
-----------------
100.0%
-----------------
-----------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $367,234,751) $421,497,737
Cash 997
Foreign Currency at Value (Cost $11,593,010) 11,485,353
Receivable for Investments Sold 15,586,255
Foreign Tax Reclaim Receivable 1,557,268
Dividends and Interest Receivable 670,300
Unrealized Appreciation of Forward Foreign
Currency Contracts 612,602
Variation Margin Receivable 190,014
Prepaid Trustees' Fees 1,717
Prepaid Expenses and Other Assets 27,610
------------
Total Assets 451,629,853
------------
LIABILITIES
Payable for Investments Purchased 7,343,440
Unrealized Depreciation of Forward Foreign
Currency Contracts 307,543
Advisory Fee Payable 218,318
Administrative Services Fee Payable 10,244
Administration Fee Payable 620
Fund Services Fee Payable 360
Accrued Expenses 274,710
------------
Total Liabilities 8,155,235
------------
NET ASSETS
Applicable to Investors' Beneficial Interests $443,474,618
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
25
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividend Income (Net of Foreign Withholding Tax
of $1,420,773) $10,371,416
Interest Income (Net of Foreign Withholding Tax
of $678) 871,981
-----------
Investment Income 11,243,397
EXPENSES
Advisory Fee $ 3,581,301
Custodian Fees and Expenses 863,871
Administrative Services Fee 174,789
Professional Fees and Expenses 59,515
Fund Services Fee 18,453
Administration Fee 11,630
Trustees' Fees and Expenses 8,927
Printing Expenses 7,747
Insurance Expense 5,077
-----------
Total Expenses 4,731,310
-----------
NET INVESTMENT INCOME 6,512,087
NET REALIZED GAIN (LOSS) ON
Investment Transactions (4,859,011)
Futures Contracts 2,669,910
Foreign Currency Transactions 6,975,152
-----------
Net Realized Gain 4,786,051
NET CHANGE IN UNREALIZED APPRECIATION OF
Investments 19,661,891
Futures Contracts 2,563,119
Foreign Currency Contracts and Translations 155,398
-----------
Net Change in Unrealized Appreciation 22,380,408
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $33,678,546
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
26
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
DECREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 6,512,087 $ 13,010,955
Net Realized Gain on Investments, Futures and
Foreign Currency Contracts and Transactions 4,786,051 29,988,650
Net Change in Unrealized Appreciation
(Depreciation) of Investments, Futures and
Foreign Currency Contracts and Translations 22,380,408 (4,366,805)
---------------- ----------------
Net Increase in Net Assets Resulting from
Operations 33,678,546 38,632,800
---------------- ----------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 190,933,942 151,295,413
Withdrawals (544,746,196) (353,091,842)
---------------- ----------------
Net Decrease from Investors' Transactions (353,812,254) (201,796,429)
---------------- ----------------
Total Decrease in Net Assets (320,133,708) (163,163,629)
NET ASSETS
Beginning of Fiscal Year 763,608,326 926,771,955
---------------- ----------------
End of Fiscal Year $ 443,474,618 $ 763,608,326
---------------- ----------------
---------------- ----------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
OCTOBER 31,
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.79% 0.77% 0.79% 0.82% 0.95%
Net Investment Income 1.09% 1.47% 1.39% 1.31% 0.93%
Portfolio Turnover 74% 67% 57% 59% 56%
</TABLE>
- ------------------------
The Accompanying Notes are an Integral Part of the Financial Statements.
27
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The International Equity Portfolio (the "portfolio") is registered under the
Investment Company Act of 1940, as amended, as a no-load, diversified, open-end
management investment company which was organized as a trust under the laws of
the State of New York. The portfolio's investment objective is to provide a high
total return from a portfolio of equity securities of foreign companies. The
portfolio commenced operations on October 4, 1993 and received a contribution of
certain assets and liabilities, including securities, with a value of
$160,213,973 on that date from The Pierpont International Equity Fund, Inc. in
exchange for a beneficial interest in the portfolio. At that date, net
unrealized appreciation of $11,116,204 was included in the contributed
securities. The Declaration of Trust permits the trustees to issue an unlimited
number of beneficial interests in the portfolio.
Investments in international markets may involve certain considerations and
risks not typically associated with investments in the United States. Future
economic and political developments in foreign countries could adversely affect
the liquidity or value, or both, of such securities in which the portfolio is
invested. The ability of the issuers of 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
28
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
exchange rates at the end of the period. Purchases, sales, income and
expenses are translated at the exchange rates prevailing on the respective
dates of such transactions.Translation gains and losses resulting from
changes in the 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) 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 October 31, 1998, the portfolio had open forward
currency contracts as follows:
SUMMARY OF OPEN FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
U.S. DOLLAR NET UNREALIZED
CONTRACTUAL VALUE AT APPRECIATION/
VALUE 10/31/98 (DEPRECIATION)
----------- ----------- --------------
<S> <C> <C> <C>
PURCHASE CONTRACTS
British Pound 4,205,597, expiring 1/22/99........ $ 7,125,088 $ 7,014,179 $ (110,909)
French Franc 23,000,000, expiring 1/22/99........ 4,175,744 4,155,165 (20,579)
German Mark 2,332,584 for HKD 11,000,000,
expiring 1/22/99................................ 1,415,822 1,413,781 (2,041)
Hong Kong Dollar 38,867,605, expiring 1/22/99.... 5,009,357 5,002,692 (6,665)
Japanese Yen 354,040,000 for GBP 1,802,143,
expiring 1/22/99................................ 3,005,650 3,076,336 70,686
Japanese Yen 2,717,713,864, expiring 1/22/99..... 23,764,280 23,614,848 (149,432)
Netherlands Guilder 1,801,748, expiring
1/22/99......................................... 983,218 969,086 (14,132)
Swiss Franc 1,332,004, expiring 1/22/99.......... 996,337 992,699 (3,638)
</TABLE>
29
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. DOLLAR NET UNREALIZED
SETTLEMENT VALUE AT APPRECIATION/
VALUE 10/31/98 (DEPRECIATION)
----------- ----------- --------------
<S> <C> <C> <C>
SALES CONTRACTS
Australian Dollar 7,064,429, expiring
1/22/99......................................... 4,473,903 4,401,503 72,400
British Pound 2,808,568, expiring 1/22/99........ 4,754,631 4,684,187 70,444
German Mark, 24,315,650, expiring 1/22/99........ 14,938,057 14,737,740 200,317
New Zealand Dollar 3,887,563, expiring 1/22/99... 2,090,343 2,061,749 28,594
Swedish Krona 18,700,000, expiring 1/22/99....... 2,413,152 2,399,293 13,859
Swiss Franc 9,539,754, expiring 1/22/99.......... 7,265,824 7,109,669 156,155
--------------
Net Unrealized Appreciation on Forward Foreign
Currency Contracts.............................. $ 305,059
--------------
--------------
</TABLE>
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 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. Futures contracts at October 31, 1998
are summarized as follows:
<TABLE>
<CAPTION>
NET UNREALIZED PRINCIPAL AMOUNT
CONTRACTS LONG APPRECIATION OF CONTRACTS
-------------- -------------- ----------------
<S> <C> <C> <C>
Australian All Ord. Index, expiring December
1998............................................ 43 $ 40,114 $ 1,767,558
CAC 40 Index, expiring November 1998............. 25 13,145 780,789
DAX Index, expiring December 1998................ 3 25,850 827,830
FTSE 100 Index, expiring December 1998........... 48 116,262 4,285,335
Hang Seng Index, expiring November 1998.......... 34 8,922 2,234,098
IBEX Plus Index, expiring December 1998.......... 16 131,555 869,232
-------------- -------------- ----------------
Totals........................................... 169 $ 335,848 $ 10,764,842
-------------- -------------- ----------------
-------------- -------------- ----------------
</TABLE>
30
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
f) 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) Prior to October 1, 1998, the portfolio had an Investment Advisory
Agreement with Morgan Guaranty Trust Company of New York ("Morgan"), a
wholly owned subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan").
Under the terms of the agreement, the portfolio paid Morgan at an annual
rate of 0.60% of the portfolio's average daily net assets. Effective
October 1, 1998, the portfolio's Investment Advisor is J.P. Morgan
Investment Management Inc.("JPMIM"), an affilliate of Morgan and a wholly
owned subsidiary of J.P. Morgan, and the terms of the agreement will
remain the same. For the fiscal year ended October 31, 1998, such fees
amounted to $3,581,301
b) The portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as the co-administrator and exclusive placement
agent for the portfolio. Under a Co-Administration Agreement between FDI
and the portfolio, FDI provides administrative services necessary for the
operation 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 fiscal year ended October 31, 1998,
the fee for these services amounted to $11,630.
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 other portfolios for which JPMIM acts as investment advisor
(the "master portfolios") and J.P. Morgan Series Trust (formerly JPM
Series Trust) in accordance with the following annual schedule: 0.09% on
the first $7 billion of their aggregate average daily net assets and 0.04%
of their aggregate average daily net assets in excess of $7 billion less
the complex-wide fees payable to FDI. The portion of this charge payable
by the portfolio is determined by the proportionate share that its net
assets bear to the net assets of the master portfolios, other investors in
the master portfolios for which Morgan provides similar services, and J.P.
Morgan Series Trust. For the fiscal year ended October 31, 1998, the fee
for these services amounted to $174,789.
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
31
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
the portfolio represent all the existing shareholders of Group. The
portfolio's allocated portion of Group's costs in performing its services
amounted to $18,453 for the fiscal year ended October 31, 1998.
e) An aggregate annual fee of $75,000 is paid to each trustee for serving as
a trustee of the 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 $3,875.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended October 31, 1998 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
----------------- ------------
<S> <C>
$416,298,269...... $744,057,744
</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.
32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The International 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 International Equity Portfolio (the
"portfolio") at October 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the supplementary data for each of the five years in the
period then ended, 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 October
31, 1998 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
December 17, 1998
33
<PAGE>
J.P. MORGAN FUNDS
PRIME MONEY MARKET FUND
FEDERAL MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
SHORT TERM BOND FUND
BOND FUND
GLOBAL STRATEGIC INCOME FUND
EMERGING MARKETS DEBT FUND
TAX EXEMPT BOND FUND
NEW YORK TAX EXEMPT 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
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
INTERNATIONAL EQUITY FUND
ANNUAL REPORT
OCTOBER 31, 1998
