<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN EMERGING MARKETS EQUITY FUND
December 1, 1998
Dear Shareholder:
It has been a turbulent 12-month period in global emerging markets. While early
in the period many markets had been recovering from the Asian crisis of late
1997, events in Russia in mid-August set off another wave of risk aversion to
the emerging market asset class. As a result, the investment environment has
been very challenging indeed for emerging markets over the past year, with
extremes in sentiment and indiscriminate selling often severely discounting the
values of otherwise sound investments.
For the fiscal year ended October 31, 1998, the J.P. Morgan Emerging Markets
Equity Fund lost 35.54%, causing the fund to underperform the -30.99% return of
its benchmark for the period.
The fund's net asset value decreased from $9.78 per share to $6.25 per share
after paying an income dividend of approximately $0.08 per share during the
year. The fund's net assets totaled $23.4 million on October 31,1998, while the
total net assets of The Emerging Markets Equity Portfolio, in which the fund
invests, totaled $145.2 million.
Included in this report is a Q&A with Leigh Wasson, a member of the fund's
portfolio management team and leader of the Emerging Markets Equity Strategy
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. We hope you find it informative.
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 Oliveria /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 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 right shows that $10,000 invested on November 30, 1993,*
would have declined to $6,334 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.
<TABLE>
<CAPTION>
GROWTH OF $10,000 SINCE FUND INCEPTION*
NOVEMBER 30, 1993 - OCTOBER 31, 1998
J.P. Morgan Emerging Emerging Markets
Markets Equity Fund Benchmark
<S> <C> <C>
$32,812 $10,000 $10,000
$33,146 $12,127 $13,118
$33,511 $ 9,562 $10,492
$33,877 $10,165 $11,034
$34,242 $ 9,852 $10,098
$34,607 $ 6,334 $ 6,969
</TABLE>
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
---------------------- ------------------------------------------
THREE SIX ONE THREE SINCE
AS OF OCTOBER 31, 1998 MONTHS MONTHS YEAR YEARS INCEPTION*
- --------------------------------------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C>
J.P. Morgan Emerging Markets Equity Fund -18.83% -36.42% -35.54% -12.83% -8.87%
Emerging Markets Benchmark** -16.44% -33.41% -30.99% -12.75% -7.08%
Lipper Emerging Markets Equity Fund Index -18.87% -34.30% -33.17% -11.02% N/A
AS OF SEPTEMBER 30, 1998
- --------------------------------------------------------------------------- ------------------------------------------
J.P. Morgan Emerging Markets Equity Fund -23.25% -41.44% -51.48% -16.74% -10.70%
Emerging Markets Benchmark** -22.01% -40.41% -47.81% -17.24% -9.10%
Lipper Emerging Markets Equity Fund Index -23.72% -39.77% -49.21% -14.91% N/A
</TABLE>
*11/15/93 -- COMMENCEMENT OF OPERATIONS (AVERAGE ANNUAL TOTAL RETURNS BASED ON
MONTH END FOLLOWING INCEPTION). THE FUND'S AVERAGE ANNUAL TOTAL RETURN SINCE ITS
COMMENCEMENT OF OPERATIONS ON 11/15/93 THRU 10/31/98 IS -8.34%.
**INTERNATIONAL FINANCE CORPORATION (IFC) GLOBAL INDEX ADJUSTED FOR
LIMITED-ACCESS COUNTRIES (CAPPED WEIGHTS OF 5% IN CHILE, INDIA, KOREA AND
TAIWAN, AND 15% IN MALAYSIA THROUGH AUGUST 31, 1993, FROM SEPTEMBER 1, 1993
FORWARD MALAYSIA NOT CAPPED) THROUGH DECEMBER 31, 1994. FROM JANUARY 1, 1995
THROUGH DECEMBER 31, 1995 IFC INVESTABLE INDEX (EXCLUDING SOUTH AFRICA AFTER
APRIL 1, 1995) AND THE MSCI EMERGING MARKETS FREE INDEX THEREAFTER. THE INDICES
ARE UNMANAGED PORTFOLIOS WHICH MEASURE EMERGING MARKET EQUITY PERFORMANCE. THEY
DO NOT INCLUDE FEES OR EXPENSES AND ARE NOT AVAILABLE FOR ACTUAL INVESTMENT.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. RETURNS ARE NET OF FEES AND
ASSUME THE REINVESTMENT OF DISTRIBUTIONS AND REFLECT THE REIMBURSEMENT OF
CERTAIN 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]
The following is an interview with LEIGH WASSON, a member of the portfolio
management team for the Emerging Markets Equity Portfolio in which the fund
invests. Prior to this assignment, she worked in the firms Melbourne office as
relationship manager and product liason to clients invested in J.P. Morgan
Investment Managementinternational strategies and in the New York office
marketing to U.S. based consultants. Ms. Wasson received her Bachelor of Science
degree from the University of Texas and her M.B.A. from the Wharton School of
Business. This interview was conducted November 16, 1998 and reflects Leigh's
views on that date.
THE VOLATILITY IN EMERGING 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?
LW: It might help to understand how we invested by thinking about the year as
four distinct periods, beginning with the Asian crisis of 1997. 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 emerging market equities (EME)
everywhere came under siege. The selling surrounding Asia's events, however,
created some very compelling investment opportunities in Latin America, Emerging
Europe, Africa, and, most notably, in Asia itself. During that period, we
maintained the portfolio's underweight positions in Malaysia and Indonesia --
which helped the fund's performance -- and kept the portfolio focused on the
opportunities we identified elsewhere, both within and outside of Asia.
During the first quarter of 1998, we then saw some recovery in the markets as
some of the panic of the fourth quarter calmed and some stability returned. The
quarter was notable, from a performance perspective, for the strong results
turned in by a handful of Asian markets, suggesting investors accepted initial
signs of reform as meaningful steps to a sustainable turnaround in these
markets. Outside Asia, Brazil also experienced a surprising turnaround, because
of positive investor reaction to that government's privatization platform.
During that time we continued to take advantage of the drastic downward
valuations that occurred from the fourth quarter panic: we continued to
selectively invest in EME companies where our analysis determined fundamentals
remained strong despite price declines. In other words, the panic of the fourth
quarter brought down the values of not only fundamentally deteriorated EME
investments, but fundamentally sound ones as well.
3
<PAGE>
LIKE THROWING OUT THE GOOD WITH THE BAD?
LW: Exactly. And in the first quarter of 1998, we identified those issues where
random, sympathetic selling occurred, and kept the portfolio invested in, or
established new positions in, what we determined were unjustifiably oversold
opportunities.
THEN WE MOVED INTO THE SUMMER OF 1998, AND MORE TURMOIL.
LW: That's right. The next distinctive period within the year occurred in
mid-August when we saw another financial crisis, this time in Russia. The
portfolio was hurt by its exposure to Russia, which wiped out its gains
experienced by a continued underweight to Malaysia. A renewed wave of risk
aversion once again flooded the EME sector. Investors flocked to only the
highest quality, most liquid securities of developed markets on the heels of
Russia's crisis and on concerns of a global recession, totally avoiding the more
vulnerable emerging markets (such as Brazil).
WHICH BRINGS US TO THE CURRENT.
LW: Right now, stability has once again returned to the emerging markets, with
the worst seemingly behind us. Still, many valuations in the global universe of
emerging markets remain extremely depressed, due to a continued risk-aversion to
the asset class. However, we are opportunistically taking advantage of the
mispricings this behavior has created, and continue to focus on what our
research identifies as fundamentally sound, undervalued opportunities.
HOW DID THE FUND PERFORM DURING ITS ANNUAL REPORTING PERIOD?
LW: The fund did not outperform its benchmark for the period. The investment
environment has been very challenging indeed for emerging market investors over
the past year, with extremes in sentiment and indiscriminate selling often
severely discounting the values of otherwise sound investments. With such
volatility, mispricings occur and will often negatively skew performance.
We continue to believe, however, our country-allocation decision has directed us
to markets with high expected returns and our stock-selection capabilities have
led us to good value securities. We believe the value of the portfolio's
holdings will eventually be recognized as the external environment once again
becomes more supportive, identified by factors such as further progress in
Japan, receding global recession fears, and a turn in commodity prices.
4
<PAGE>
WHAT IS YOUR OUTLOOK FOR THE NEXT THREE MONTHS? HOW IS THE PORTFOLIO BEING
POSITIONED?
LW: We believe that we are at the bottom of a cyclical slump and therefore
at the cusp of a turning point. We see the current environment as providing a
window of opportunity to continue to make investments in fundamentally sound
companies that are now trading at depressed values.
Regarding how we are positioning the portfolio in general, current strategy
targets a small overweight position in Latin America and in Europe/Middle East,
an underweight in Asia and in Africa, and a modest cash position.
Specifically, the portfolio is underweighted Mexico, yet maintains overweights
in Chile and Venezuela. In Asia, the portfolio is currently overweight Korea, as
volatility in this market has been decreasing. To a lesser extent, the portfolio
also maintains overweight positions in the Philippines and Thailand. While
volatility has also decreased in these markets, recent rallies have shifted
these markets to less undervalued prices. However, the portfolio maintains
underweight positions in Taiwan and Malaysia, and thus an overall underweight to
the region.
Overall, we are optimistic about the future prospects for the emerging markets
asset class, both equities and debt. Valuations suggest that emerging markets
will outperform developed markets over the next 12 months, barring any major
event that further rattles the investment world. In fact, several factors have
already begun to work in the asset class' favor, including this fall's round of
policy intervention by the U.S. and European central banks. Asian economies have
showed signs of reaching cyclical lows and a technical earnings recovery for
Asia is now expected to occur in 1999.
While two key sources of risk still exist for the asset class -- the impact of
the extended downturn in commodity prices, particularly oil, and the risk of
financial crisis in Brazil and China -- we believe J.P. Morgan's robust research
skills enable us to focus the portfolio on high conviction investment
opportunities, at both the country and stock levels. The portfolio holds
undervalued stocks in high expected return markets which we believe will
continue to participate in the price recovery in emerging markets as extreme
valuations reached over the past year in the asset class reverse.
5
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
J.P. Morgan Emerging Markets Equity Fund seeks to provide a high total return
from a portfolio of equity securities of companies in emerging markets. It is
designed for long-term investors who want to diversify their investments by
adding exposure to the rapidly growing emerging markets. As an international
investment, the fund is subject to foreign market, political, and currency risk.
- --------------------------------------------------------------------------------
COMMENCEMENT OF INVESTMENT OPERATIONS
11/15/93
- --------------------------------------------------------------------------------
FUND NET ASSETS AS OF 10/31/98
$23,386,874
- --------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 10/31/98
$145,213,620
- --------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/18/98
EXPENSE RATIO
The fund's current expense ratio of 1.76% 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 OCTOBER 31, 1998
COUNTRY ALLOCATION
(PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
<TABLE>
<S> <C>
LATIN AMERICA 39.1%
ASIA 29.5%
AFRICA/MIDDLE EAST 15.8%
EUROPE 14.8%
OTHER 0.8%
</TABLE>
<TABLE>
<CAPTION>
LARGEST EQUITY HOLDINGS % OF TOTAL INVESTMENTS
- -----------------------------------------------------------------
<S> <C>
TELEFONOS DE MEXICO SA DE CV, CLASS L 3.2%
(SPON. ADR) (MEXICO)
YPF SOCIEDAD ANONIMA 2.4%
(SPON. ADR) (ARGENTINA)
AYALA LAND, INC., CLASS B (PHILIPPINES) 1.9%
TELECOMUNICACOES BRASILEIERAS SA
(ADR) (PREFERRED) (BRAZIL) 1.9%
NATIONAL BANK OF GREECE SA (GREECE) 1.8%
PHILIPPINE LONG DISTANCE
TELEPHONE CO. (ADR) (PHILIPPINES) 1.6%
ABSA GROUP LTD. (SOUTH AFRICA) 1.5%
BILLITON PLC (SOUTH AFRICA) 1.4%
COMPANIA DE TELECOMUNICACIONES DE CHILE
SA (SPON. ADR) (CHILE) 1.4%
POHANG IRON & STEEL CO. LTD (SOUTH KOREA) 1.4%
</TABLE>
6
<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 fund's
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.
7
<PAGE>
J.P. MORGAN EMERGING MARKETS EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The Emerging Markets Equity
Portfolio ("Portfolio"), at value $ 23,300,828
Receivable for Shares of Beneficial Interest Sold 105,336
Receivable for Expense Reimbursements 16,493
Deferred Organization Expenses 340
Prepaid Administration Fees 108
Prepaid Expenses and Other Assets 6,881
------------
Total Assets 23,429,986
------------
LIABILITIES
Payable for Shares of Beneficial Interest
Redeemed 9,063
Shareholder Servicing Fee Payable 4,684
Administrative Services Fee Payable 528
Accrued Trustees' Fees and Expenses 108
Fund Services Fee Payable 18
Accrued Expenses 28,711
------------
Total Liabilities 43,112
------------
NET ASSETS
Applicable to 3,742,634 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $ 23,386,874
------------
------------
Net Asset Value, Offering and Redemption Price
Per Share $6.25
---
---
ANALYSIS OF NET ASSETS
Paid-in Capital $ 43,126,665
Undistributed Net Investment Income 913,988
Accumulated Net Realized Loss on Investment and
Foreign Currency Contracts and Transactions (19,192,767)
Net Unrealized Depreciation of Investment and
Foreign Currency Contracts and Translations (1,461,012)
------------
Net Assets $ 23,386,874
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
8
<PAGE>
J.P. MORGAN EMERGING MARKETS 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 Foreign
Withholding Tax of $138,182) $ 1,258,635
Allocated Interest Income 49,751
Allocated Portfolio Expenses (575,987)
------------
Net Investment Income Allocated from
Portfolio 732,399
FUND EXPENSES
Shareholder Servicing Fee $109,292
Transfer Agent Fees 34,968
Registration Fees 18,693
Professional Fees 15,136
Administrative Services Fee 12,828
Printing Expenses 11,509
Amortization of Organization Expenses 8,773
Fund Services Fee 1,387
Administration Fee 997
Trustees' Fees and Expenses 963
Insurance Expense 293
Miscellaneous 5,952
--------
Total Fund Expenses 220,791
Less: Reimbursement of Expenses (28,944)
--------
NET FUND EXPENSES 191,847
------------
NET INVESTMENT INCOME 540,552
NET REALIZED LOSS ON INVESTMENT AND FOREIGN
CURRENCY CONTRACTS AND TRANSACTIONS ALLOCATED
FROM PORTFOLIO (21,321,466)
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT AND FOREIGN CURRENCY CONTRACTS AND
TRANSLATIONS ALLOCATED FROM PORTFOLIO 4,221,119
------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $(16,559,795)
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
J.P. MORGAN EMERGING MARKETS 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 $ 540,552 $ 369,246
Net Realized Gain (Loss) on Investment and
Foreign Currency Contracts and Transactions
Allocated from Portfolio (21,321,466) 4,134,189
Net Change in Unrealized Appreciation
(Depreciation) of Investment and Foreign
Currency Contracts and Translations Allocated
from Portfolio 4,221,119 (5,358,891)
---------------- ----------------
Net Decrease in Net Assets Resulting from
Operations (16,559,795) (855,456)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (314,588) (323,280)
---------------- ----------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 50,161,046 25,423,835
Reinvestment of Dividends 270,492 265,307
Cost of Shares of Beneficial Interest Redeemed (55,614,003) (38,174,151)
---------------- ----------------
Net Decrease from Transactions in Shares of
Beneficial Interest (5,182,465) (12,485,009)
---------------- ----------------
Total Decrease in Net Assets (22,056,848) (13,663,745)
NET ASSETS
Beginning of Fiscal Year 45,443,722 59,107,467
---------------- ----------------
End of Fiscal Year (including undistributed net
investment income of $913,988 and $49,126,
respectively) $ 23,386,874 $ 45,443,722
---------------- ----------------
---------------- ----------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN EMERGING MARKETS EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 15, 1993
FOR THE FISCAL YEAR ENDED OCTOBER 31, (COMMENCEMENT OF
--------------------------------------- OPERATIONS) THROUGH
1998 1997 1996 1995 OCTOBER 31, 1994
-------- ------- ------- -------- -------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.78 $ 10.18 $ 9.65 $ 12.43 $ 10.00
-------- ------- ------- -------- -------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.12+ 0.08 0.08 0.05 0.02
Net Realized and Unrealized Gain (Loss) on
Investment and Foreign Currency Transactions (3.57)+ (0.42) 0.53 (2.66) 2.41
-------- ------- ------- -------- -------------------
Total from Investment Operations (3.45) (0.34) 0.61 (2.61) 2.43
-------- ------- ------- -------- -------------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.08) (0.06) (0.08) (0.03) --
Net Realized Gain -- -- -- (0.14) --
-------- ------- ------- -------- -------------------
Total Distributions to Shareholders (0.08) (0.06) (0.08) (0.17) --
-------- ------- ------- -------- -------------------
NET ASSET VALUE, END OF PERIOD $ 6.25 $ 9.78 $ 10.18 $ 9.65 $ 12.43
-------- ------- ------- -------- -------------------
-------- ------- ------- -------- -------------------
RATIOS AND SUPPLEMENTAL DATA
Total Return (35.54)% (3.34)% 6.31% (21.15)% 24.30%(a)
Net Assets, End of Period (in thousands) $ 23,387 $45,444 $59,107 $ 49,295 $ 53,431
Ratios to Average Net Assets
Expenses 1.76% 1.65% 1.69% 1.80% 1.84%(b)
Net Investment Income 1.24% 0.62% 0.68% 0.55% 0.25%(b)
Expenses without Reimbursement 1.82% 1.65% 1.69% 1.80% 1.96%(b)
</TABLE>
- ------------------------
(a) Not annualized.
(b) Annualized.
+ Based on amounts prior to Statement of Position 93-2 adjustments.
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN EMERGING MARKETS EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan Emerging Markets 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 commenced operations on November 15, 1993. Prior to January 1, 1998,
the trust's and the fund's names were The JPM Pierpont Funds and The JPM
Pierpont Emerging Markets Equity Fund, respectively.
The fund invests all of its investable assets in The Emerging Markets 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 (approximately
16% 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 1 of the
portfolio's Notes to Financial Statements which are included elsewhere in
this report.
b) The fund records its share of net investment income, realized and
unrealized gain and loss and adjusts its investment in the portfolio each
day. All the net investment income and realized and unrealized gain and
loss of the portfolio is allocated pro rata among the fund and other
investors in the portfolio at the time of such determination.
c) Distributions to shareholders of net investment income and net realized
capital gain, if any, are declared and paid annually.
d) The fund incurred organization expenses in the amount of $43,837. Morgan
Guaranty Trust Company of New York ("Morgan"), a wholly owned subsidiary
of J.P. Morgan & Co. Incorporated ("J.P. Morgan"), has paid the
organization expenses of the fund. The fund has agreed to reimburse Morgan
for these costs which are being deferred and amortized on a straight-line
basis over a period not to exceed five years beginning with the
commencement of operations of the fund.
e) The fund is treated as a separate entity for federal income tax purposes
and intends to comply with the provisions of the Internal Revenue Code of
1986, as amended, applicable to regulated investment companies and to
distribute 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.
12
<PAGE>
J.P. MORGAN EMERGING MARKETS EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
f) Expenses incurred by the trust with respect to any two or more funds in
the trust are allocated in proportion to the net assets of each fund in
the trust, except where allocations of direct expenses to each fund can
otherwise be made fairly. Expenses directly attributable to a fund are
charged to that fund.
g) The fund accounts for and reports distributions to shareholders in
accordance with Statement of Position 93-2 "Determination, Disclosure, and
Financial Statements Presentation of Income, Capital Gain, and Return of
Capital Distributions by Investment Companies." The effect of applying
this statement for the year ended October 31, 1998 was to increase
undistributed net investment income by $638,898, decrease accumulated net
realized loss on investment and foreign currency transactions by
$3,313,148 and decrease paid-in capital by $3,952,046. The adjustments are
primarily attributable to foreign currency gains and the net realized loss
on transfer of securities as discussed in Note 6 of the portfolio's Notes
to Financial Statements which are included elsewhere in this report. Net
investment income, net realized gains and net assets were not affected by
this change.
h) For federal income tax purposes, the fund had a capital loss carryforward
at October 31, 1998 of $16,901,011, in which $1,159,298 expires in the
year 2004 and $15,741,713 expires in 2006. To the extent that this capital
loss is used to offset future capital gains, it is probable that gains so
offset will not be distributed to shareholders.
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
$997.
b) The trust, on behalf of the fund, has an Administrative Services Agreement
(the "Services Agreement") with Morgan under which Morgan is responsible
for certain aspects of the administration and operation of the fund. Under
the Services Agreement, the fund has agreed to pay Morgan a fee equal to
its allocable share of an annual complex-wide charge. This charge is
calculated based on the aggregate average daily net assets of the
portfolio and the other portfolios (the "master portfolios") in which the
trust and the J.P. Morgan Institutional Funds (formerly The JPM
Institutional Funds) invest 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
13
<PAGE>
J.P. MORGAN EMERGING MARKETS EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
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 $12,828.
Beginning January 23, 1998, J.P. Morgan 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 1.75% of the average daily net assets of the fund until further
notice. For the period from January 23, 1998 to October 31, 1998, J.P.
Morgan has agreed to reimburse the fund $28,944 for expenses under this
agreement.
c) The trust, on behalf of the fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal and account
maintenance 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 $109,292.
Morgan, Charles Schwab & Co. ("Schwab") and the trust are parties to
separate services and operating agreements (the "Schwab Agreements")
whereby Schwab makes fund shares available to customers of investment
advisors and other financial intermediaries who are Schwab's clients. The
fund is not responsible for payments to Schwab under the Schwab
Agreements; however, in the event the services agreement with Schwab is
terminated for reasons other than a breach by Schwab and the relationship
between the trust and Morgan is terminated, the fund would be responsible
for the ongoing payments to Schwab with respect to pre-termination shares.
d) The trust, on behalf of the fund, has a Fund Services Agreement with
Pierpont Group, Inc. ("Group") to assist the trustees in exercising their
overall supervisory responsibilities for the trust's affairs. The trustees
of the trust represent all the existing shareholders of Group. The fund's
allocated portion of Group's costs in performing its services amounted to
$1,387 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 the total fees and expenses. The trust's Chairman and Chief Executive
Officer also serves as Chairman of Group and receives compensation and
employee benefits from Group in his role as Group's Chairman. The
allocated portion of such compensation and benefits included in the Fund
Services Fee shown in the financial statements was $300.
14
<PAGE>
J.P. MORGAN EMERGING MARKETS EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
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...................................... 6,067,756 2,229,006
Reinvestment of dividends and distributions...... 29,724 25,934
Shares redeemed.................................. (7,002,643) (3,413,201)
---------------- ----------------
Net Decrease..................................... (905,163) (1,158,261)
---------------- ----------------
---------------- ----------------
</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 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. The purpose of the Agreement
is to provide another alternative for settling large fund shareholder
redemptions. Interest on any such borrowings outstanding will approximate market
rates. The funds pay a commitment fee at an annual rate of 0.065% on the unused
portion of the committed amount which is allocated to the funds in accordance
with procedures established by their respective trustees or directors. There
were no outstanding borrowings pursuant to the Agreement at October 31, 1998.
5. OTHER MATTERS
Prior to January 23, 1998, the fund invested in the portfolio along with another
registered management investment company and a non-U.S. fund both managed by
Morgan. On January 23, 1998, the non-U.S. fund withdrew its interest in the
portfolio through an in-kind withdrawal amounting to $381,757,617. The
withdrawal did not create a taxable event to the fund or reduce the net assets
of the fund, but did reduce the net assets of the portfolio.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan Emerging Markets Equity Fund
(formerly The JPM Pierpont Emerging Markets 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 Emerging Markets Equity Fund (one of the series constituting part of
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 four years in the period then ended and for the period November
15, 1993 (commencement of operations) through October 31, 1994, 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
16
<PAGE>
J.P. MORGAN EMERGING MARKETS EQUITY FUND
SUPPLEMENTAL PROXY INFORMATION
- --------------------------------------------------------------------------------
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....... 3,766,809 62,840 13,450
b. Relating to concentration of assets......... 3,764,753 64,874 13,472
c. Relating to issuance of senior securities... 3,764,201 64,456 14,442
d. Relating to borrowing....................... 3,763,837 65,790 13,472
e. Relating to underwriting.................... 3,765,488 64,170 13,441
f. Relating to investment in real estate....... 3,760,069 69,707 13,323
g. Relating to commodities..................... 3,765,757 63,893 13,449
h. Relating to lending......................... 3,765,483 64,167 13,449
i.Reclassification of other restrictions as
nonfundamental............................. 3,724,303 105,093 13,703
3. Reclassification of investment objectives..... 3,725,479 99,466 18,153
4. Investment advisory agreement................. 4,026,704 63,352 17,663
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>
17
<PAGE>
The Emerging Markets Equity Portfolio
Annual Report October 31, 1998
(The following pages should be read in conjunction
with the J.P. Morgan Emerging Markets Equity Fund
Annual Financial Statements)
18
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
COMMON STOCK (86.4%)
ARGENTINA (6.3%)
Banco de Galicia y Buenos Aires SA (ADR)
(Banking)...................................... 56,505 $ 960,585
Banco Frances del Rio de la Plata SA (ADR)
(Banking)...................................... 1,907 39,809
Corcemar SA, Class B (Building Materials)........ 226,692 1,133,799
Nobleza Piccardo SA, Class B (Food, Beverages &
Tobacco)....................................... 198,900 696,358
Perez Companc SA (Spon. ADR) (Oil-Services)...... 164,132 1,600,287
Telefonica de Argentina SA (Spon. ADR)
(Telecommunications)........................... 38,900 1,286,131
YPF Sociedad Anonima (Spon. ADR)
(Oil-Production)............................... 120,590 3,489,573
-------------
9,206,542
-------------
BRAZIL (2.4%)
Bompreco Supermercados do Norde SA (GDR) (144A)
(Food, Beverages & Tobacco).................... 67,399 404,394
Ceval Alimentos SA (Food, Beverages &
Tobacco)+...................................... 164,073,731 316,354
Makro Atacadista SA (Spon. GDS) (144A)
(Retail)....................................... 148,500 871,413
Perdigao SA (Food, Beverages & Tobacco).......... 18,314,895 16,889
Santista Alimentos SA (Food, Beverages &
Tobacco)+...................................... 7,040 4,485
Souza Cruz SA (Food, Beverages & Tobacco)........ 263,600 1,789,935
-------------
3,403,470
-------------
CHILE (6.0%)
Administradora de Fondos de Pensiones Provida SA
(ADR) (Banking)................................ 68,100 966,169
Banco Santander Chile SA (ADS) (Banking)......... 126,600 1,171,050
Compania de Telecomunicaciones de Chile SA (Spon.
ADR) (Telecommunication Services).............. 91,572 2,008,861
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
CHILE (CONTINUED)
Embotelladora Andina SA (ADR) (Food, Beverages &
Tobacco)....................................... 97,400 $ 1,296,637
Enersis SA (ADR) (Utilities)..................... 63,000 1,315,125
Madeco SA (Spon. ADR) (Construction & Housing)... 53,200 412,300
Sociedad Quimica y Minera de Chile SA (ADR)
(Chemicals).................................... 44,046 1,464,529
-------------
8,634,671
-------------
CHINA (0.9%)
Beijing North Star Co. Ltd., Series H (Real
Estate)........................................ 7,460,300 1,329,134
Shanghai Erfangji Co. Ltd., Series B (Capital
Goods)+........................................ 80,452 5,310
Shanghai Tyre and Rubber Co. Ltd., Series B
(Metals & Mining)+............................. 133,279 16,793
-------------
1,351,237
-------------
COLOMBIA (0.1%)
Cementos Diamante SA (ADR) (Building
Materials)..................................... 50,700 126,750
Corporacion Financiera Del Valle SA (ADR) (144A)
(Banking)...................................... 9,407 5,879
-------------
132,629
-------------
CROATIA (0.9%)
Pliva D.D. (GDR) (144A) (Pharmaceuticals)........ 88,260 1,297,422
-------------
CZECH REPUBLIC (0.2%)
Central European Media Enterprises Ltd., Class A
(Entertainment, Leisure & Media)+.............. 50,800 319,087
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
EGYPT (1.2%)
Commercial International Bank of Egypt (GDR)
(144A) (Banking)............................... 91,455 $ 720,208
Paints & Chemicals Industry Co. (GDR)
(Chemicals).................................... 34,600 315,725
Suez Cement Co. (Building Materials)............. 43,300 669,081
-------------
1,705,014
-------------
GHANA (1.3%)
Guiness Ghana Ltd. (Food, Beverages & Tobacco)... 761,545 237,583
Pioneer Tobacco Co. (Food, Beverages &
Tobacco)+...................................... 1,152,500 270,894
Social Security Bank Ltd. (Banking)+............. 1,464,303 1,245,319
Unilever Ghana Ltd. (Food, Beverages &
Tobacco)+...................................... 185,700 152,374
-------------
1,906,170
-------------
GREECE (4.6%)
Hellenic Telecommunication Organization SA (OTE)
(Telecommunications)........................... 42,111 957,352
National Bank of Greece SA (Banking)............. 18,696 2,656,468
Silver & Baryte Ores Mining (Metals & Mining).... 43,824 1,606,526
Titan Cement Co. SA (Building Materials)......... 23,330 1,441,982
-------------
6,662,328
-------------
HONG KONG (1.0%)
Concord Land Development Co. Ltd. (Real
Estate)........................................ 400 76
Yue Yuen Industrial Holdings Ltd. (Retail)....... 818,000 1,457,357
-------------
1,457,433
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
HUNGARY (1.8%)
Matav RT (Telecommunications).................... 238,768 $ 1,237,302
MOL Magyar Olaj-es Gazipari RT
(Oil-Production)............................... 32,200 719,997
OTP Bank RT (Banking)............................ 18,600 659,865
-------------
2,617,164
-------------
INDIA (4.4%)
ITC Ltd. (Food, Beverages & Tobacco)............. 116,000 1,916,275
Larsen & Toubro Ltd. (GDR) (Diversified
Manufacturing)................................. 185,300 1,250,775
Reliance Industries (GDR) (Diversified
Manufacturing)................................. 182,900 932,790
SIEL Ltd. (GDR) (Multi-Industry)+................ 19,400 14,550
SIEL Ltd. (GDR) (144A) (Multi-Industry)+......... 21,300 15,975
State Bank of India (GDR) (Banking).............. 199,700 1,612,577
Wockhardt Ltd. (GDR) (Pharmaceuticals)........... 117,300 674,475
-------------
6,417,417
-------------
INDONESIA (1.2%)
P.T. Goodyear Indonesia (Capital Goods).......... 13,000 2,566
P.T. International Nickel Indonesia (Metals &
Mining)........................................ 1,467,200 424,727
P.T. Multi Bintang Indonesia (Food, Beverages &
Tobacco)....................................... 82,500 542,778
P.T. Surya Toto Indonesia (Capital Goods)........ 220,500 36,993
P.T. Unilever Indonesia (Food, Beverages &
Tobacco)....................................... 105 242
PT Telekomunikasi Indonesia (Spon. ADR)
(Telecommunications)........................... 156,100 780,500
-------------
1,787,806
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
ISRAEL (3.7%)
Bank Hapoalim Ltd. (Banking)..................... 371,600 $ 672,185
Bank Leumi Le-Israel (Banking)................... 552,900 704,231
Israel Chemicals Ltd. (Chemicals)................ 1,332,300 1,167,631
Koor Industries Ltd. (Spon. ADR)
(Multi-Industry)............................... 86,400 1,398,600
Teva Pharmaceutical Industries Ltd. (ADR)
(Pharmaceuticals).............................. 37,500 1,475,391
-------------
5,418,038
-------------
MALAYSIA (0.9%)
Antah Holdings Berhad (Multi-Industry)(f)........ 200 20
Box Pak Berhad (Packaging & Containers)(f)....... 896 273
Golden Hope Plantations Berhad (Metals &
Mining)(f)..................................... 1,240,166 532,165
Lion Corp. Berhad (Multi-Industry)(f)............ 458,600 60,810
London & Pacific Insurance Co. Berhad
(Insurance)(f)................................. 10,800 7,996
Malaysian Tobacco Co. Berhad (Food, Beverages &
Tobacco)(f).................................... 133,000 37,476
Matsushita Electric Co. Berhad
(Electronics)(f)............................... 400 832
Nestle Berhad (Food, Beverages & Tobacco)(f)..... 285,000 682,337
UMW Holdings Berhad (Holding Companies)(f)+...... 200 73
-------------
1,321,982
-------------
MEXICO (11.2%)
Cemex SA de CV (Building Materials).............. 13,790 32,831
Cemex SA de CV, B Shares (Building Materials).... 459,675 1,280,570
Empaques Ponderosa SA de CV, Series B (Forest
Products & Paper)+............................. 1,023,000 527,533
Empresas ICA Sociedad Controladora SA de CV
(Spon. ADR) (Construction & Housing)........... 95,112 499,338
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
MEXICO (CONTINUED)
Empresas La Moderna SA de CV (ADR) (Food,
Beverages & Tobacco)+.......................... 62,700 $ 1,496,962
Fomento Economico Mexicano SA de CV (Spon. ADR)
(Food, Beverages & Tobacco).................... 35,400 922,613
Grupo Carso SA de CV, Class A (Multi-Industry)... 246,600 852,637
Grupo Casa Autrey SA de CV (Spon. ADR) (Food,
Beverages & Tobacco)........................... 45,300 300,113
Grupo Financiero Banamex Accival SA de CV, Class
B (Banking)+................................... 812,000 842,265
Grupo Financiero Banamex Accival SA de CV, Class
L (Banking)+................................... 6,960 6,188
Grupo Financiero Bancomer SA de CV, Class B
(Financial Services)........................... 6,250,100 1,271,913
Grupo Financiero Probursa SA de CV, Class B
(Financial Services)+.......................... 231 22
Grupo Gigante SA DW CV, Class B (Food, Beverages
& Tobacco)+.................................... 2,990,000 753,207
Grupo Iusacell SA (ADR) (Telecommunications)+.... 97,500 670,313
Grupo Radio Centro SA de CV (Spon. ADR)
(Broadcasting & Publishing).................... 20,200 92,163
Grupo Televisa SA (Spon. GDR)
(Telecommunications)+.......................... 51,400 1,394,225
Panamerican Beverages, Inc. (ADR) (Food,
Beverages & Tobacco)........................... 34,600 700,650
Telefonos de Mexico SA de CV, Class L (Spon. ADR)
(Telecommunications)........................... 86,720 4,579,900
-------------
16,223,443
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
PAKISTAN (0.9%)
Hub Power Co. Ltd. (Spon. GDR) (Utilities)....... 86,900 $ 391,050
Pakistan State Oil Co. Ltd. (Oil-Production)+.... 206,201 222,434
Pakistan Telecom Corp (Class A)
(Telecommunications)+.......................... 1,603,200 612,696
-------------
1,226,180
-------------
PERU (1.9%)
Cementos Norte Pacasmayo SA, Class T (Building
Materials)..................................... 576,728 601,551
Compania de Minas Buenaventura SA (Spon. ADR)
(Metals & Mining).............................. 56,800 695,800
Creditcorp Ltd. (Financial Services)............. 65,558 442,517
Telefonica del Peru SA (ADR) (Telecommunication
Services)...................................... 72,900 947,700
-------------
2,687,568
-------------
PHILIPPINES (3.8%)
Ayala Land Inc., Class B (Real Estate)........... 9,021,890 2,739,066
First Philippine Holdings Corp., Class B
(Multi-Industry)............................... 774,840 403,274
Philippine Commercial International Bank
(Banking)...................................... 38,750 88,354
Philippine Long Distance Telephone Co. (ADR)
(Telecommunications)........................... 95,790 2,334,881
-------------
5,565,575
-------------
POLAND (2.4%)
Bank Slaski SA (Banking)......................... 7,200 367,796
Elektrim Spolka Akcyjna SA (Electrical
Equipment)..................................... 155,486 1,850,281
Wielkopolski Bank Kredytowy SA (Banking)......... 102,718 670,799
Zyweic SA (Food, Beverages & Tobacco)............ 3,905 529,297
-------------
3,418,173
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
RUSSIA (0.2%)
Surgutneftegaz (Spon. ADR) (Oil-Production)+..... 131,200 $ 278,800
Vimpel-Communications (Spon. ADR)
(Telecommunication Services)+.................. 1,900 22,325
-------------
301,125
-------------
SLOVAKIA (0.4%)
Slovakofarma AS (Pharmaceuticals)................ 12,700 579,297
-------------
SOUTH AFRICA (9.5%)
ABSA Group Ltd. (Banking)........................ 402,600 2,188,886
Anglo-American Corp. of South Africa Ltd.
(Multi-Industry)............................... 31,500 1,025,323
AngloGold Ltd. (Metals & Mining)................. 32,700 1,661,277
Billiton PLC (Metals & Mining)................... 849,000 2,073,374
Edgars Stores Ltd. (Retail)...................... 103,703 466,769
Highveld Steel & Vanadium Corp. Ltd. (Metals &
Mining)........................................ 384,203 1,112,919
Investec Group Ltd. (Financial Services)......... 1,500 55,617
Kersaf Investments Ltd. (Entertainment, Leisure &
Media)......................................... 54,699 167,709
Murray & Roberts Holdings Ltd. (Construction &
Housing)....................................... 718,200 640,125
Plate Glass & Shatterprufe Industries Ltd.
(Automotive Supplies).......................... 63,678 397,289
Sappi Ltd. (Forest Products & Paper)+............ 231,600 1,155,969
Sasol Ltd. (Oil-Production)...................... 139,700 683,578
South Africa Breweries Ltd. (Food, Beverages &
Tobacco)....................................... 75,000 1,454,587
Standard Bank Investment Corp. Ltd. (Banking).... 236,381 712,113
-------------
13,795,535
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
SOUTH KOREA (6.5%)
Hansol Paper Co. Ltd. (Spon. GDR) (Forest
Products & Paper)+............................. 1,240 $ 3,571
Hansol Paper Co. Ltd. (GDS) (Forest Products &
Paper)+........................................ 43,703 125,865
Hanwha Chemical Corp. (Chemicals)+............... 813,396 1,710,679
Kia Motors (Spon. GDR) (144A) (Automotive)+...... 474 356
Korea Electric Power Corp. (Electric)............ 106,365 1,894,393
Korea Zinc Co. Ltd. (Metals & Mining)............ 43,080 538,720
Medison Company Ltd (Medical Supplies)........... 162,797 1,801,369
Pohang Iron & Steel Co. Ltd. (Metals &
Mining)(f)..................................... 35,899 1,972,531
Samsung Corp. (GDR) (144A) (Electronics)......... 1,502 961
Samsung Electronics Co. Ltd. (GDR)(144A)
(Electronics).................................. 41,232 936,997
Samsung Fire & Marine Insurance (Insurance)...... 2,050 512,709
-------------
9,498,151
-------------
TAIWAN (5.2%)
Asia Cement Corp. (Building Materials)........... 743,600 671,147
Asia Cement Corp. (GDS) (Building Materials)..... 53,008 490,324
China Steel Corp. (Spon. ADR) (Metals &
Mining)........................................ 61,716 868,653
Evergreen Marine Corp. (Spon. GDR) (Transport &
Services)...................................... 204,506 1,922,356
Hocheng Group Corp. (GDR) (144A) (Building
Materials)..................................... 204,955 742,962
President Enterprises Corp. (GDR) (144A) (Food,
Beverages & Tobacco)+.......................... 117,338 997,375
Siliconware Precision Industries Co. (GDR)
(Semiconductors)+.............................. 103,768 1,099,941
Yageo Corp. (Spon. GDR) (Electrical
Equipment)+.................................... 122,788 798,122
-------------
7,590,880
-------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
THAILAND (2.7%)
Advanced Info Service Public Co. Ltd.
(Telecommunications)........................... 83,600 $ 614,306
Banpu Public Co. Ltd. (Metals & Mining).......... 74,500 202,755
Dhana Siam Finance and Securities Public Co. Ltd.
(Financial Services)+(f)....................... 136 0
Sahavirya Steel Industries Public Co. Ltd.
(Metals & Mining)+............................. 1,660,900 144,647
Shinawatra Computer Public Co. Ltd. (Computer
Systems)....................................... 247,400 1,185,024
Siam Cement Public Co. Ltd. (Building
Materials)+.................................... 140,300 1,756,428
-------------
3,903,160
-------------
TURKEY (2.5%)
Dogan Sirketler Grubu Holding A.S. (Holding
Companies)..................................... 68,593,000 619,250
Ford Otomotive Sanayii AS (Automotive)........... 1,583,000 351,782
Haci Omer Sabanci Holding AS (Holding
Companies)..................................... 36,772,500 555,425
Migros Turk AS (Food, Beverages & Tobacco)....... 996,000 847,302
Turkiye Is Bankasi (Banking)..................... 29,582,125 811,464
Yapi ve Kredi Bankasi AS (Banking)............... 43,471,630 490,571
-------------
3,675,794
-------------
VENEZUELA (2.3%)
Ceramica Carabobo CA, Class A (Spon. ADR)
(Building Materials)........................... 85,176 63,882
Ceramica Carabobo CA, Class B (Spon. ADR)
(Building Materials)........................... 21,266 15,950
Compania Anonima Nacional Telefonos de Venezuela
(ADR) (Telecommunication Services)............. 117,900 1,827,450
Corimon CA (Chemicals)+.......................... 675 3
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
VENEZUELA (CONTINUED)
International Briquettes Holding, Inc. (Metals &
Mining)+....................................... 36,166 $ 151,445
Mavesa SA (Spon. ADR) (Food, Beverages &
Tobacco)....................................... 325,225 1,300,900
-------------
3,359,630
-------------
ZIMBABWE (0.0%)
Trans Zambesi Industries Ltd. (Holding
Companies)..................................... 4,100 205
-------------
TOTAL COMMON STOCK (COST $188,699,513)......... 125,463,126
-------------
</TABLE>
<TABLE>
<S> <C> <C>
PREFERRED STOCK (9.9%)
BRAZIL (8.7%)
Companhia Brasileira de Distribuicao Grupo Pao de
Acucar (Food, Beverages & Tobacco)............. 53,516,000 897,265
Companhia Brasileira de Distribuicao Grupo Pao de
Acucar (Spon. ADR) (Food, Beverages &
Tobacco)....................................... 114,000 1,838,250
Companhia Cervejaria Brahma (ADR) (Food,
Beverages & Tobacco)........................... 92,800 893,200
Compania Paranaense de Energia-Copel
(Utilities).................................... 162,576,000 1,267,495
Copene Petroquimica do Nordeste SA (Chemicals)... 4,167,000 483,816
Iochpe Maxion SA (Automotive)+................... 8,720,000 270,474
Petroleo Brasileiro SA (Oil-Production).......... 10,189,000 1,281,238
Telecomunicacoes Brasileiras SA (ADR)
(Telecommunications)........................... 35,261 2,677,632
Usinas Siderurgicas de Minas Gerais SA (Spon.
ADR) (Metals & Mining)......................... 613,800 1,841,400
Varig SA (Airlines).............................. 54,000 58,850
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
BRAZIL (CONTINUED)
Votorantim Celulose e Papel SA (Forest Products &
Paper)......................................... 29,916,000 $ 263,330
Votorantim Celulose e Papel SA (ADR) (Forest
Products & Paper).............................. 189,250 832,908
-------------
12,605,858
-------------
COLOMBIA (0.1%)
Banco Ganadero SA (ADR) (Banking)................ 21,900 157,406
Bancolombia SA (Spon. ADR) (Banking)............. 12,500 61,719
-------------
219,125
-------------
GREECE (0.0%)
Delta Dairy SA (Food, Beverages & Tobacco)....... 697 6,920
-------------
SOUTH KOREA (1.1%)
Samsung Co. Ltd. (GDR) (144A) (Electronics)+..... 3,199 2,047
Samsung Electronics Co. Ltd. (GDR) (144A)
(Electronics).................................. 179,403 1,578,746
-------------
1,580,793
-------------
TOTAL PREFERRED STOCK (COST $25,227,207)....... 14,412,696
-------------
</TABLE>
<TABLE>
<S> <C> <C>
WARRANTS (0.0%)
MALAYSIA (0.0%)
UMW Holdings Berhad, Expiring 01/26/00 (Holding
Companies)(f)+................................. 200 13
-------------
THAILAND (0.0%)
Dhana Siam Finance and Securities Public Co.
Ltd., Expiring 12/31/02 (Financial
Services)(f)+.................................. 17 0
-------------
TOTAL WARRANTS (COST $46)...................... 13
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT{::} VALUE
- ------------------------------------------------- ------------- -------------
<S> <C> <C>
CONVERTIBLE BONDS (0.6%)
SOUTH KOREA (0.0%)
Daewoo Heavy Industries Ltd., 3.00% due 12/31/01
(Capital Goods)................................ $ 85,000 $ 46,750
-------------
TAIWAN (0.6%)
Far Eastern Department Stores Ltd., 3.00% due
07/06/01 (Retail).............................. 891,000 810,810
-------------
TOTAL CONVERTIBLE BONDS (COST $1,104,288)...... 857,560
-------------
</TABLE>
<TABLE>
<CAPTION>
UNITS
-------------
<S> <C> <C>
PARTNERSHIPS (1.7%)
RUSSIA (1.7%)
New Century Holdings Ltd. (Partnership III; Group
B)(f)+......................................... 800 118,400
New Century Holdings Ltd. (Partnership IV; Group
I)(f)+......................................... 900 245,700
New Century Holdings Ltd. (Partnership V; Group
I)(f)+......................................... 1,600 403,200
New Century Holdings Ltd. (Partnership X)(f)+.... 2,617 1,203,820
New Century Holdings Ltd. (Partnership XIV; Group
I)(f)+......................................... 2,500 525,000
-------------
TOTAL PARTNERSHIPS (COST $7,240,200)........... 2,496,120
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT{::} VALUE
- ---------------------------- ------------- -------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (0.8%)
REPURCHASE AGREEMENT (0.8%)
State Street Bank and Trust
Repurchase Agreement,
4.25% due 11/02/98, dated
10/30/98 proceeds
$1,084,384 (collateralized
by US Treasury Note, 5.50%
due 2/28/03, valued at
1,109,063) (cost
$1,084,000) (Banking)..... $ 1,084,000 $ 1,084,000
-------------
TOTAL INVESTMENTS (COST $223,355,254)
(99.4%).................................. 144,313,515
OTHER ASSETS IN EXCESS OF LIABILITIES
(0.6%)................................... 900,105
-------------
NET ASSETS (100.0%)........................ $ 145,213,620
-------------
-------------
</TABLE>
- ------------------------------
Note: Based on the cost of investments of $224,398,726 for federal income tax
purposes at October 31, 1998 the aggregate gross unrealized appreciation and
depreciation was $10,594,948 and $90,680,159, respectively, resulting in net
unrealized depreciation of $80,085,211.
+ - Non-income producing security
{::} - Denominated in USD unless otherwise indicated.
ADR - American Depositary Receipt
ADS - American Depositary Shares
GDR - Global Depositary Receipt
GDS - Global Depositary Shares
Spon. ADR - Sponsored ADR
Spon. GDR - Sponsored GDR
USD - United States Dollar
144A - Securities restricted for resale to Qualified Institutional Buyers.
(f) - Fair valued security. Approximately 4.0% of the market value of the
securities have been valued at fair value. (See Notes 1a and 6)
The Accompanying Notes are an Integral Part of the Financial Statements.
25
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION
<TABLE>
<CAPTION>
PERCENT OF
TOTAL INVESTMENTS
-----------------
<S> <C>
Food, Beverages & Tobacco......................... 14.7%
Banking........................................... 13.1%
Telecommunications................................ 11.9%
Metals & Mining................................... 9.6%
Building Materials................................ 6.3%
Oil-Production.................................... 4.6%
Chemicals......................................... 3.6%
Telecommunication-Services........................ 3.3%
Real Estate....................................... 2.8%
Pharmaceuticals................................... 2.8%
Multi-Industry.................................... 2.6%
Retail............................................ 2.5%
Utilities......................................... 2.1%
Holding Companies................................. 2.1%
Forest Products & Paper........................... 2.0%
Electrical Equipment.............................. 1.8%
Electronics....................................... 1.8%
Partnerships...................................... 1.7%
Diversified Manufacturing......................... 1.5%
Transport & Services.............................. 1.3%
Electric.......................................... 1.3%
Financial Services................................ 1.2%
Oil-Services...................................... 1.1%
Construction & Housing............................ 1.1%
Computers-Systems................................. 0.8%
Semiconductors.................................... 0.8%
Automotive........................................ 0.7%
Insurance......................................... 0.4%
Entertainment, Leisure & Media.................... 0.3%
Capital Goods..................................... 0.1%
Broadcasting & Publishing......................... 0.1%
Airlines.......................................... 0.0%
-----------------
100.0%
-----------------
-----------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
26
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $223,355,254 ) $144,313,515
Cash 773
Foreign Currency at Value (Cost $1,220,160 ) 1,190,432
Receivable for Investments Sold 558,073
Dividend and Interest Receivable 253,399
Prepaid Trustees' Fees 5,854
Prepaid Administration Fees 949
Deferred Organization Expenses 62
Prepaid Expenses and Other Assets 2,212
------------
Total Assets 146,325,269
------------
LIABILITIES
Payable for Investments Purchased 747,579
Custody Fee Payable 208,472
Advisory Fee Payable 116,230
Administrative Services Fee Payable 3,275
Fund Services Fee Payable 115
Accrued Expenses 35,978
------------
Total Liabilities 1,111,649
------------
NET ASSETS
Applicable to Investors' Beneficial Interests $145,213,620
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
27
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividend Income (Net of Withholding Tax of
$875,755 ) $ 8,902,354
Interest Income 468,843
-------------
Investment Income 9,371,197
EXPENSES
Advisory Fee $ 3,584,676
Custodian Fees and Expenses 873,548
Administrative Services Fee 106,124
Professional Fees and Expenses 55,570
Fund Services Fee 11,566
Printing Expenses 7,572
Administration Fee 7,255
Insurance Expense 3,681
Trustees' Fees and Expenses 1,939
Amortization of Organization Expenses 1,648
Miscellaneous 374
-------------
Total Expenses 4,653,953
-------------
NET INVESTMENT INCOME 4,717,244
NET REALIZED GAIN (LOSS) ON INVESTMENTS
Investment Transactions (198,864,070)
Foreign Currency Contracts and Transactions 12,168,297
-------------
Net Realized Loss (186,695,773)
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF
Investments 34,497,128
Foreign Currency Contracts and Translations (10,035,173)
-------------
Net Change in Unrealized Appreciation 24,461,955
-------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $(157,516,574)
-------------
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
28
<PAGE>
THE EMERGING MARKETS 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 $ 4,717,244 $ 10,403,473
Net Realized Gain (Loss) on Investments and
Foreign Currency Contracts and Transactions (186,695,773) 57,180,706
Net Change in Unrealized Appreciation
(Depreciation) of Investments and Foreign
Currency Contracts and Translations 24,461,955 (97,850,207)
---------------- ----------------
Net Decrease in Net Assets Resulting from
Operations (157,516,574) (30,266,028)
---------------- ----------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 292,356,504 342,652,801
Withdrawals (786,290,579) (375,081,272)
---------------- ----------------
Net Decrease from Investors' Transactions (493,934,075) (32,428,471)
---------------- ----------------
Total Decrease in Net Assets (651,450,649) (62,694,499)
NET ASSETS
Beginning of Fiscal Year 796,664,269 859,358,768
---------------- ----------------
End of Fiscal Year $ 145,213,620 $ 796,664,269
---------------- ----------------
---------------- ----------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL YEAR ENDED NOVEMBER 15, 1993
OCTOBER 31, (COMMENCEMENT OF
------------------------- OPERATIONS) THROUGH
1998 1997 1996 1995 OCTOBER 31, 1994
---- ---- ---- ---- -------------------
<S> <C> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 1.30% 1.20% 1.23% 1.31% 1.36%(a)
Net Investment Income 1.32% 1.10% 1.14% 1.07% 0.66%(a)
Portfolio Turnover 44% 55% 31% 41% 27%
</TABLE>
- ------------------------
(a) Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
29
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Emerging Markets Equity Portfolio (the "portfolio") is registered under the
Investment Company Act of 1940, as amended, (the "Act") 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 on June 16, 1993. The portfolio
commenced operations on November 15, 1993 and received a contribution of certain
assets and liabilities, including securities, with a value of $223,722,513 on
that date from the JPM Emerging Markets Equity Fund, Ltd. in exchange for a
beneficial interest in the portfolio. The portfolio's investment objective is to
provide a high total return from a portfolio of equity securities of companies
in emerging markets. The Declaration of the Trust permits the Trustees to issue
an unlimited number of beneficial interests in the portfolio.
Investments in emerging markets may involve certain considerations and risks not
typically associated with investments in the Unites States. Future economic and
political developments in emerging market 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 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.
The portfolio's custodian takes possession of the collateral pledged for
investments in repurchase agreements on behalf of the portfolio. It is the
policy of the portfolio to value the underlying collateral daily on a
mark-to-market basis to determine that the value, including accrued
interest, is at least equal
30
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
to the repurchase price plus the accrued interest. In the event of default
of the obligation to repurchase, the portfolio has the right to liquidate
the collateral and apply the proceeds in satisfication of the obligation.
Under certain circumstances, in the event of default or bankruptcy by the
other party to the agreement, realization and/or retention of the
collateral or proceeds may be subject to legal proceedings.
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 rates prevailing on the respective dates of
such transactions. Translation gains and losses resulting from changes in
exchange rates during the reporting period and gains and losses realized
upon settlement of foreign currency transactions are reported in the
Statement of Operations. Although the net assets of the portfolio are
presented at the exchange rates and market values prevailing at the end of
the period, the portfolio does not isolate the portion of the results of
operations arising as a result of changes in foreign exchange rates from
the fluctuations arising from changes in the market prices of securities
during the period.
c) Securities transactions are recorded on a trade date basis. Dividend
income is recorded on the ex-dividend date or as of the time that the
relevant ex-dividend date and amount becomes known. Interest income, which
includes the amortization of premiums and discounts, if any, is recorded
on an accrual basis. For financial and tax reporting purposes, realized
gains and losses are determined on the basis of specific lot
identification.
d) The portfolio incurred organization expenses in the amount of $7,629.
Morgan Guaranty Trust Company of New York ("Morgan"), a wholly owned
subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan"), has agreed
to pay organization expenses of the portfolio. The portfolio has agreed to
reimburse Morgan for these costs which are being deferred and will be
amortized on a straight-line basis over a period not to exceed five years
beginning with the commencement of operations of the 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 and spot foreign
currency contract translations. At October 31, 1998, the portfolio had no
open forward foreign currency contracts.
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 may
31
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
be subject to taxes imposed by countries in which it invests. Such taxes
are generally based on income and/or capital gains earned. Taxes are
accrued and applied to net investment income, net realized capital gains
and net unrealized appreciation, as applicable, as the income and/or
capital gains are earned.
2. TRANSACTIONS WITH AFFILIATES
a) Prior to October 1, 1998, the portfolio had an Investment Advisory
Agreement with Morgan. Under the terms of the agreement, the portfolio
paid Morgan at an annual rate of 1.00% 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 affiliate 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 $3,584,676.
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 portfolio's
officers affiliated with FDI. The portfolio has agreed to pay FDI fees
equal to its allocable share of an annual complex-wide charge of $425,000
plus FDI's out-of-pocket expenses. The amount allocable to the portfolio
is based on the ratio of the portfolio's net assets to the aggregate net
assets of the portfolio and certain other investment companies subject to
similar agreements with FDI. For the fiscal year ended October 31, 1998,
the fee for these services amounted to $7,255.
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 JPMIM acts as investment
advisor (the "master portfolios") and J.P. Morgan Series Trust in
accordance with the following annual schedule: 0.09% on the first $7
billion of the aggregate average daily net assets and 0.04% of the
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 $106,124.
d) The portfolio has a Fund Services Agreement with Pierpont Group, Inc.
("Group") to assist the trustees in exercising their overall supervisory
responsibilities for the portfolio's affairs. The trustees of the
portfolio represent all the existing shareholders of Group. The
portfolio's allocated portion of Group's costs in performing its services
amounted to $11,566 for the fiscal year ended October 31, 1998.
32
<PAGE>
THE EMERGING MARKETS EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 $2,400.
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>
$153,012,923...... $630,822,815
</TABLE>
4. RESTRICTED INVESTMENTS
<TABLE>
<CAPTION>
SHARES DATE ACQUIRED U.S. $ COST
------ ------------- -----------
<S> <C> <C> <C>
New Century Holdings Ltd. Partnership III........ 800 4/11/94 $ 492,000
New Century Holdings Ltd. Partnership IV......... 900 6/16/94 $ 900,000
New Century Holdings Ltd. Partnership V.......... 1,600 11/9/94 $ 731,200
New Century Holdings Ltd. Partnership X.......... 2,617 1/21/97 $ 2,617,000
New Century Holdings Ltd. Partnership XIV........ 2,500 9/22/97 $ 2,500,000
</TABLE>
The investments shown above are restricted as to sale and have been valued at
fair value in accordance with the procedures described in Note 1a. The value of
these investments at October 31, 1998 is $2,496,120 representing 1.7% of the
portfolio's net assets.
5. CREDIT AGREEMENT
The portfolio is party to a revolving line of credit agreement as discussed more
fully in Note 4 of the fund's Notes to the Financial Statements which are
included elsewhere in this report.
6. OTHER MATTERS
On January 23, 1998, the portfolio received a withdrawal request in the amount
of $381,757,617 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 $74,439,112, which is included in
Net Realized Loss on Investment Transactions in the Statement of Operations.
33
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THE EMERGING MARKETS EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
Beginning September 1, 1998 the Malaysian government fixed the exchange rate of
its currency, the ringgit, to the U.S. dollar and implemented restrictions on
currency and stock trading. Proceeds from the sale of Malaysian securities can
not be repatriated into foreign currencies until a minimum of one year from the
initial purchase date. Additionally, proceeds from the sale of securities held
as of September 1, 1998, the date of implementation of the new exchange control
regulations may not be repatriated until September 1, 1999. At October 31, 1998,
Malaysian securities and currency (representing less than 1% of net assets) are
priced using fair values in accordance with procedures established by the
portfolio's trustees.
34
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The Emerging Markets 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 Emerging Markets 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 four years in the
period then ended and for the period November 15, 1993 (commencement of
operations) through October 31, 1994, in conformity with generally accepted
accounting principles. These financial statements and supplementary data
(hereafter referred to as "financial statements") are the responsibility of the
portfolio's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatements. 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
35
<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
EMERGING MARKETS
EQUITY FUND
ANNUAL REPORT
OCTOBER 31, 1998
