[front cover]
J.P. MORGAN
INSTITUTIONAL
SHORT TERM
BOND FUND
[jp morgan logo]
Annual Report
October 31, 2000
LETTER TO THE SHAREHOLDERS
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December 1, 2000
Dear Shareholder,
The J.P. Morgan Institutional Short Term Bond Fund provided a total return
of 5.49% for the 12 months ended October 31, 2000. The Fund was competitive
with its peer group, the Lipper Short-Intermediate Investment Grade Debt Funds
Average, which had a total return of 5.69% for the same time period. The Fund,
however, underperformed its benchmark, the Merrill Lynch 1-3 Year Treasury
Index, which had a total return of 6.07%.
The Institutional Short Term Bond Fund's net asset value on October 31, was
$9.58, a decrease from $9.67 at the start of the fiscal year. The Fund paid
approximately $0.61 per share in dividends from ordinary income during the
reporting period. On October 31, 2000, the net assets of the Fund were
approximately $415 million, while the assets of the Short Term Bond Portfolio,
in which the Fund invests, totaled approximately $454 million.
This report includes an interview with Mark Settles, the lead portfolio
manager of the Institutional Short Term Bond Fund. Mark discusses the fixed
income market in detail, and explains the factors that influenced fund
performance during the fiscal period. Mark also provides insight in regard to
positioning the Fund for the coming months.
As chairman and president of Asset Management Services, we appreciate your
investment in the Fund. If you have any comments or questions, please contact
your Morgan representative, or call J.P. Morgan Funds Services at (800)
766-7722.
/signature/ /signature/
Sincerely yours,
Ramon de Oliveira Keith M. Schappert
Chairman of Asset Management Services President of Asset Management Services
J.P. Morgan & Co. Incorporated J.P. Morgan & Co. Incorporated
TABLE OF CONTENTS
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Letter to the Shareholders 1
Fund Performance 2
Portfolio Manager Q&A 3
Fund Facts & Highlights 5
Financial Statements 6
1
FUND PERFORMANCE
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EXAMINING PERFORMANCE
There are several ways to evaluate a mutual fund's historical performance.
One way is to look at the growth of a hypothetical investment. The chart at
right shows that $5,000,000 invested on July 31, 1993,* would have increased to
$7,287,546 on October 31, 2000.
Another way is to review a fund's average annual total return. This
calculation takes the Fund's actual 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, and ten years, (or since
inception).
GROWTH OF $5,000,000 SINCE FUND INCEPTION*
July 31, 1993-October 31, 2000
[data from line chart]
Merrill Lynch 1-3 Year Treasury Index** $7,416,729
J.P. Morgan Institutional Short Term Bond $7,287,546
Lipper Short-Intermediate Investment Grade Debt Funds Average*** $7,158,465
PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS
---------------------------------------
ONE THREE FIVE SINCE
YEAR YEARS YEARS INCEPTION*
AS OF OCTOBER 31, 2000
J.P. Morgan Institutional Short Term Bond 5.49% 5.29% 5.63% 5.33%
Merrill Lynch 1-3 Year Treasury Index** 6.07% 5.57% 5.82% 5.59%
Lipper Short-Intermediate Investment
Grade Debt Funds Average*** 5.69% 4.70% 5.25% 5.07%
AS OF SEPTEMBER 30, 2000
J.P. Morgan Institutional Short Term Bond 5.53% 5.32% 5.70% 5.35%
Merrill Lynch 1-3 Year Treasury Index** 5.79% 5.64% 5.89% 5.58%
Lipper Short-Intermediate Investment
Grade Debt Funds Average*** 5.74% 4.91% 5.42% 5.10%
* The Fund commenced operations on July 8, 1993, and has provided an average
annual total return of 5.28% from that date through October 31, 2000. For the
purpose of comparison, the "since inception" returns in the table above are
calculated from July 31, 1993, the first date when data for the Fund,
its benchmark, and its Lipper category average were all available.
** The Merrill Lynch 1-3 Year Treasury Index is an unmanaged index which
measures short-term bond performance. The index does not include fees
or expenses and is not available for actual investment.
*** Describes the average total return for all funds in the indicated Lipper
category, as defined by Lipper, Inc., and does not take into account applicable
sales charges. Lipper Analytical Services, Inc. is a leading source for mutual
fund data.
Past performance is no guarantee of future results. Fund returns are net of
fees, assume the reinvestment of distributions and reflect reimbursement
of certain fund and portfolio expenses as described in the prospectus. Had
expenses not been subsidized, returns would have been lower.
2
PORTFOLIO MANAGER Q&A
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[photo of Mark Settles]
The following is an interview with Mark Settles, vice president and member
of the portfolio management team for the Short Term Bond Portfolio, in which the
Fund invests. Mark joined Morgan in 1994, and spent five years trading
fixed-income products in our New York and London offices before coming to J.P.
Morgan Investment Management. Prior to joining Morgan, he was a foreign
exchange trader at The First National Bank of Chicago, and a teacher of
government at the Paideia School in Atlanta, Georgia. Mark holds a B.A. in
economics from Columbia University and a Masters of Management from Northwestern
University. This interview was conducted on November 15, 2000, and reflects
Mark's views on that date.
WHAT THEMES DOMINATED FIXED INCOME MARKETS OVER THE PAST YEAR?
One key theme of interest to our clients was the announcement--and
subsequent implementation--of the U.S. Treasury's decision to buy back govern-
ment debt and issue fewer securities in the future. An effective reduction in
the supply of what is globally perceived to be the lowest-risk investment has
had a profound effect on fixed income markets. This spurred a search for
investment alternatives that can take the place of Treasuries in conservative
portfolios and hedging strategies.
Another key theme surfaced last spring when a senior Treasury official
questioned the nature of implied guarantees associated with certain government
sponsored entities. These agencies have traditionally funded themselves at
quasi-government type levels due to their near "risk-free" status. This
questioning of the government's commitment led to significant volatility in the
agency and mortgage-backed securities markets.
Also during this period, the Federal Reserve continued to raise interest
rates in an effort to tame economic growth. The Fed's last increase of 50 basis
points (0.50%) to 6.5% in May 2000, marked the sixth consecutive rate
increase--totaling 175 basis points (1.75%)--since June 1999. These moves,
along with an announced bias toward further tightening, served to markedly
increase volatility in U.S. and global equity markets. Around the same time,
evidence emerged that our economy was indeed slowing from its previous red-hot
pace, and that global growth was following suit.
As we moved toward the end of this reporting period, we also experienced a
major surge in energy prices. For the most part, corporations lacked the pricing
power to pass along higher costs, and we began to hear talk of a hard landing
for the U.S. economy. The equity markets fell, and the Treasury curve
steepened.
IN REGARD TO THE REDUCTION OF DEBT ISSUANCE BY THE TREASURY, IS THIS ACROSS THE
ENTIRE MATURITY SPECTRUM, OR IS IT FOCUSED ON SPECIFIC SEGMENTS?
The Treasury is attempting to use part of the budget surplus to shorten the
average maturity of the country's outstanding debt. As a consequence, the very
existence of the 30-year bond and the Treasury Inflation Protected Securities
(TIPS) program has been called into question. Auctions for the 1-year bill,
and 2-, 5-, and 10-year notes have all been reduced. For example, the
traditional monthly auction for the 1-year bill has now moved to a quarterly
auction.
HOW WAS THE FUND POSITIONED OVER THIS PERIOD?
During the fiscal year just ended, we maintained a significant
concentration in floating rate notes and asset-backed securities. The floating
rate notes were largely short-dated corporate bonds offering attractive yields
that we would seek to sell once they became money market fund eligible--meaning
their having a maturity of 397 days or less. As the Fed raised rates, we also
maintained a short duration position versus the Merrill Lynch 1-3 Treasury
Index.
WHAT CAUSED THE LACK OF LIQUIDITY IN FIXED INCOME MARKETS DURING THE FISCAL
YEAR?
This illiquidity was and is the result of several developments. One is a
significant decline over the past several years in the number of broker-dealers
participating in the market. Those remaining have
3
PORTFOLIO MANAGER Q&A
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(Continued)
proven to be less willing to commit their capital to the market and assume
the risk associated with it. A flat yield curve exacerbates the problem. High
short-term rates make it expensive for dealers to finance inventory, so they're
inclined to minimize their positions. The traditional portfolio
buyers--insurance companies for example--have also become less willing to step
in. This is due to the changing regulatory and accounting environment for many
traditional portfolio buyers, which moved to more mark-to-market accounting.
Their pull back essentially removed what shock absorber there was left in the
market, and illiquidity increased.
In all, these developments--fewer dealers, high carrying costs, and a
pullback by traditional buyers--helped to chill the market for corporate and
high yield debt.
One of the key developments impacting bond market performance over the past
year was a dramatic deterioration of credit quality in the high-yield sector,
as well as the investment-grade corporate sector. Moreover, with a reduced risk
appetite, the market severely punished any bad news, causing precipitous drops
in the value of any outstanding bonds of an affected issuer. The number of
negative credit events this year is many times that of recent years. Many of the
issuers impacted are household names, like Xerox and AT&T.
HOW ARE FIXED INCOME MARKETS ADJUSTING TO THESE AND OTHER CHANGING DYNAMICS?
Short-term fixed income mandates revolve around three essential
requirements: safety, liquidity, and return. With the present and expected
future decline in the availability of low risk Treasuries, all three of these
requirements have to be reevaluated and reintegrated into an investment
strategy. For example, we, and other bond investors, are searching for
acceptable alternatives to Treasuries, such as Agency bonds. We're also
beginning to see more use of swaps to protect against risk and provide
competitive returns.
HOW ARE YOU DEALING WITH THESE CHANGES AT J.P. MORGAN?
We're educating our clients on the uses of credit in a conservative
portfolio, in particular, the tools and strategies needed to outperform in this
market environment.
We've also taken significant steps toward reengineering our credit
processes to take advantage of changing market dynamics. One of these steps has
been the development and implementation of improved guidelines on concentration
limits per credit. We are also utilizing derivatives, where possible, to
enhance our portfolio strategy.
Beyond this, we are continuing to forge closer relationships with both buy-
and sell-side analysts, and we're examining new electronic-based trading
solutions. These steps and others are helping us to fine-tune our credit
process so that we can meet the demands of today's marketplace.
HOW DO YOU SEE THINGS PLAYING OUT IN THE FIXED INCOME MARKETS OVER, SAY, THE
NEXT THREE MONTHS?
We anticipate a bond friendly environment, one marked by continued
moderation in U.S. economic growth. As far as the Fed is concerned, the present
behavior of the market for Fed funds futures suggests that its next move might
be an easing of credit conditions. However, we believe the recent surge in
energy prices, the firmness in unit labor costs, and associated inflationary
fears, should keep the Fed on hold for the time being.
HOW ARE YOU POSITIONING THE FUND IN LIGHT OF THIS OUTLOOK?
In a bond friendly environment, we're looking to maintain a long duration
position relative to the benchmark. This will enable us to take advantage of
what we expect to be lower yields. In addition, we'll keep a significant
concentration in triple A-rated asset-backed securities, which have fared well
despite negative developments in the corporate bond market.
4
FUND FACTS
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INVESTMENT OBJECTIVE
J.P. Morgan Institutional Short Term Bond Fund seeks to provide high total
return, consistent with low volatility of principal. It is designed for
investors who do not require the stable net asset value typical of a money
market fund, but who seek less price fluctuation than is typcial of a longer
term bond fund.
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Inception Date: 7/8/1993
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Fund Net Assets as of 10/31/2000: $415,416,978
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Portfolio Net Assets as of 10/31/2000: $453,529,604
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Dividend Payable Dates: Monthly
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Capital Gain Payable Dates
(if applicable): 12/13/2000
EXPENSE RATIO
The Fund's current annualized expense ratio of 0.30% 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
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All data as of October 31, 2000
PORTFOLIO ALLOCATION
(As a percentage of total investment securities)
Corporate Bonds 31.0%
Asset-Backed Securities 28.0%
Collateralized Mortgage Obligations 17.1%
Short-Term Investments 7.2%
Mortgage Pass Thru 6.8%
U.S. Government Agency Securities 6.1%
Foreign Corporate Bonds 2.7%
U.S. Treasury Securities 0.4%
Private Placements 0.3%
Preferred Stocks 0.2%
Sovereign Governments and Agencies 0.2%
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30 Day SEC Yield: 7.41%
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Duration: 1.81 Years
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Quality Breakdown
AAA** 57.72%
AA 1.79%
A 25.57%
BBB 14.92%
Other 0.00%
Not Rated 0.00%
Total 100.00%
**Includes U.S. Government Agency, Treasury Obligations, Repurchase Agreements
and Commercial Paper.
Distributed by Funds Distributor, Inc. J.P. Morgan Investment Management Inc.
serves as investment advisor. Shares of the Fund are not insured by the FDIC,
are not bank deposits or other obligations of the financial institution and are
not guaranteed by the financial institution. Shares of the fund are subject to
investment risk, including possible loss of the principal invested. Return and
share price will fluctuate and redemption value may be worth 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).
Call J.P. Morgan Funds Services at (800) 766-7722 for a prospectus containing
more complete information about the Fund, including management fees and other
expenses. Please read the prospectus carefully before investing.
5
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
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OCTOBER 31, 2000
ASSETS
Investment in The Short Term Bond
Portfolio ("Portfolio"), at value $415,824,543
Receivable for Shares of Beneficial Interest Sold 100,000
Prepaid Trustees' Fees and Expenses 683
Prepaid Expenses and Other Assets 582
Receivable for Expense Reimbursements 53,288
--------------------
TOTAL ASSETS 415,979,096
--------------------
LIABILITIES
Dividends Payable to Shareholders 286,640
Payable for Shares of Beneficial Interest Redeemed 176,500
Shareholder Servicing Fee Payable 34,933
Administrative Services Fee Payable 8,358
Administration Fee Payable 176
Fund Services Fee Payable 278
Accrued Expenses and Other Liabilities 55,233
--------------------
TOTAL LIABILITIES 562,118
--------------------
NET ASSETS
Applicable to 43,360,962 Shares of
Beneficial Interest Outstanding
(par value $0.001, unlimited shares authorized) $415,416,978
====================
Net Asset Value, Offering and Redemption Price Per Share $9.58
====================
ANALYSIS OF NET ASSETS
Paid-in Capital $424,034,066
Undistributed Net Investment Income 593,140
Accumulated Net Realized Loss on Investment (9,094,832)
Net Unrealized Depreciation of Investment (115,396)
--------------------
NET ASSETS $415,416,978
====================
The Accompanying Notes are an Integral Part of the Financial Statements.
6
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
STATEMENT OF OPERATIONS
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FOR THE YEAR ENDED OCTOBER 31, 2000
INVESTMENT INCOME
INCOME
Allocated Investment Income from Portfolio $24,390,679
Allocated Portfolio Expenses (Net of Reimbursement $40,444) (1,054,900)
--------------------
Net Investment Income Allocated from Portfolio 23,335,779
--------------------
FUND EXPENSES
Shareholder Servicing Fee 368,780
Administrative Services Fee 89,708
Registration Fees 43,744
Financial and Fund Accounting Services Fee 24,138
Transfer Agent Fees 19,326
Professional Fees 14,757
Interest Expense 6,825
Fund Services Fee 5,854
Trustees' Fees and Expenses 4,761
Administration Fee 4,133
Printing Expenses 2,945
Miscellaneous 7,445
--------------------
Total Fund Expenses 592,416
Less: Reimbursement of Expenses (540,904)
--------------------
Net Fund Expenses 51,512
--------------------
NET INVESTMENT INCOME 23,284,267
--------------------
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED LOSS ON INVESTMENT ALLOCATED FROM PORTFOLIO (4,664,750)
--------------------
NET CHANGE IN UNREALIZED APPRECIATION ON
INVESTMENT ALLOCATED FROM PORTFOLIO 1,619,133
--------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $20,238,650
--------------------
The Accompanying Notes are an Integral Part of the Financial Statements.
7
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
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FOR THE YEARS ENDED OCTOBER 31
INCREASE IN NET ASSETS 2000 1999
FROM OPERATIONS
Net Investment Income $ 23,284,267 $ 15,766,950
Net Realized Loss on Investment Allocated from Portfolio (4,664,750) (3,317,267)
Net Change in Unrealized Appreciation (Depreciation)
of Investment Allocated from Portfolio 1,619,133 (3,485,937)
------------------- -------------------
Net Increase in Net Assets Resulting from Operations 20,238,650 8,963,746
------------------- -------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (23,294,989) (15,764,223)
Net Realized Gain - (1,227,303)
------------------- -------------------
Total Distributions to Shareholders (23,294,989) (16,991,526)
------------------- -------------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Fund Shares of Beneficial Interest Sold 277,954,671 287,162,190
Reinvestment of Dividends and Distributions 19,251,550 11,403,888
Cost of Shares of Beneficial Interest Redeemed (232,999,634) (169,257,112)
------------------- -------------------
Net Increase from Transactions in
Shares of Beneficial Interest 64,206,587 129,308,966
------------------- -------------------
Total Increase in Net Assets 61,150,248 121,281,186
------------------- -------------------
NET ASSETS
Beginning of Year 354,266,730 232,985,544
------------------- -------------------
End of Year $415,416,978 $354,266,730
=================== ===================
Undistributed Net Investment Income $ 593,140 $ 373,526
=================== ===================
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Shares of Beneficial Interest Sold 28,944,285 29,367,282
Shares of Beneficial Interest Reinvested 2,007,149 1,167,883
Shares of Beneficial Interest Redeemed (24,208,536) (17,303,033)
------------------- -------------------
Net Increase (Decrease) from Transactions
in Shares of Beneficial Interest 6,742,898 13,232,132
=================== ===================
The Accompanying Notes are an Integral Part of the Financial Statements.
8
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
FINANCIAL HIGHLIGHTS
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SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH YEAR ARE AS FOLLOWS:
FOR THE YEARS ENDED OCTOBER 31
2000 1999 1998 1997 1996
----------------------------------------------------------------
NET ASSET VALUE PER SHARE, BEGINNING OF YEAR $ 9.67 $9.96 $9.84 $9.85 $9.83
----------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.60 0.58 0.59 0.61 0.55
Net Realized and Unrealized Gain (Loss) on Investments (0.08) (0.29) 0.12 (0.01) 0.02
----------------------------------------------------------------
Total from Investment Operations 0.52 0.29 0.71 0.60 0.57
----------------------------------------------------------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.61) (0.54) (0.59) (0.61) (0.55)
Net Realized Gain - (0.04) - - -
----------------------------------------------------------------
Total Distributions to Shareholders (0.61) (0.58) (0.59) (0.61) (0.55)
----------------------------------------------------------------
NET ASSET VALUE PER SHARE, END OF YEAR $9.58 $9.67 $9.96 $9.84 $9.85
================================================================
RATIOS AND SUPPLEMENTAL DATA
Total Return 5.49% 3.03% 7.40% 6.27% 6.01%
Net Assets, End of Year (in thousands) $415,417 $354,267 $232,986 $27,375 $17,810
Ratio to Average Net Assets
Net Expenses 0.30% 0.29% 0.25% 0.25% 0.37%
Net Investment Income 6.30% 5.51% 5.84% 6.19% 5.69%
Expenses without Reimbursement 0.47% 0.51% 0.62% 0.96% 1.37%
The Accompanying Notes are an Integral Part of the Financial Statements.
9
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS
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OCTOBER 31, 2000
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--J.P. Morgan Institutional Short Term Bond 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 July 8, 1993.
The Fund invests all of its investable assets in The Short Term Bond
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 Statements of Assets and Liabilities reflects the
Fund's proportionate interest in the net assets of the Portfolio (approximately
92% at October 31, 2000). 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 accounting
principles generally accepted in the United States 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:
Security Valuation--Valuation of securities by the Portfolio is discussed in
Note 1 of the Portfolio's Notes to Financial Statements that are included
elsewhere in this report.
Security Transactions--Security transactions are accounted for as of the
trade date. Realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
Investment Income--The Fund earns income, net of expenses, daily on its
investment in the Portfolio. All net investment income, realized and unrealized
gains and losses of the Portfolio is allocated pro-rata among the Fund and
other investors in the Portfolio at the time of such determination.
Expenses--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.
Income Tax Status--It is the Fund's policy to distribute all net investment
income and net realized gains to shareholders and to otherwise qualify as a
regulated investment company under the provisions of the Internal Revenue Code.
Accordingly, no provision has been made for federal or state income taxes.
Distributions to Shareholders--Distributions to a shareholder are recorded
on the ex-dividend date. Distributions from net investment income are declared
daily and paid monthly. Distributions from net realized gains, if any, are paid
annually.
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2. TRANSACTIONS WITH AFFILIATES
Administrative Services--The Trust has an Administrative Services Agreement
(the "Services Agreement") with Morgan Guaranty Trust Company of New York
("Morgan"), a wholly owned subsidiary of J.P. Morgan & Co. Incorporated ("J.P.
Morgan"), under which Morgan is responsible for certain aspects of the
administration and operation of the Fund. Under the Services Agreement, the
Trust 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 Trust and certain other registered investment companies
for which J.P. Morgan Investment Management, Inc. ("JPMIM") acts as investment
advisor 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 Funds Distributor, Inc. 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 and certain other investment companies for which Morgan
provides similar services.
Morgan has agreed to reimburse the Fund to the extent necessary to maintain
the total operating expenses (which excludes interest and dividend expenses,
taxes and extra-ordinary items) of the Fund, including the expenses allocated to
the Fund from the Portfolio, at no more than 0.30% of the average daily net
assets of the Fund. This reimbursement arrangement can be changed or terminated
at any time after February 28, 2001 at the option of Morgan.
Administration--The Trust has retained Funds Distributor, Inc. ("FDI"), a
registered broker-dealer, to serve as the co-administrator and distributor for
the Fund. Under
10
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS
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(Continued)
OCTOBER 31, 2000
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH AFFILIATES (CONTINUED)
a Co-Administration Agreement between FDI and the Trust, 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 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 and certain other investment companies for
which FDI provides similar services.
Shareholder Servicing--The Trust has a Shareholder Servicing Agreement with
Morgan under which Morgan provides account administration and personal account
maintenance service to Fund shareholders. The agreement provides for the Fund to
pay Morgan a fee for these services that is computed daily and paid monthly at
an annual rate of 0.25% of the average daily net assets of the Fund.
Fund Services--The Trust has a Fund Services Agreement with Pierpont Group,
Inc. ("PGI") 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 PGI.
Each Trustee receives an aggregate annual fee of $75,000 for serving on the
boards of the Trust, the J.P. Morgan Funds, the J.P. Morgan Institutional
Funds, and other registered investment companies in which they invest. The
Trustees' Fees and Expenses shown in the financial statements represent the
Fund's allocated portion of the total Trustees' fees and expenses. The Trust's
Chairman and Chief Executive Officer also serves as Chairman of PGI and
receives compensation and employee benefits from PGI. The allocated portion of
such compensation and benefits included in the Fund Services Fee shown on the
Statement of Operations was $1,110.
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3. FEDERAL INCOME TAXES
For federal income tax purposes, the Fund had a capital loss carryforward as
of October 31, 2000, of approximately $9,066,577, of which, $4,257,708 expires
in 2007 and $4,808,869 expires in 2008. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of this amount.
Income distributions and capital gain distributions, if any, are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
differing treatment of net operating losses, foreign currency and tax
allocation. Accordingly, these permanent differences in the character of income
and distributions between financials statements and tax basis have been
reclassified to paid-in-capital.
During the year ended October 31, 2000, the following reclassifications were
made: Increase Undistributed Net Investment Income by $230,336. Increase
Paid-in-Capital by $147 and increase Accumulated Net Realized Loss on
Investment by $230,483. The adjustments are primarily attributable to foreign
currency reclasses. Net investment income, net realized gains and net assets
were not affected by this change.
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4. TRANSACTIONS IN SHARES OF BENEFICIAL INTERESTS
From time to time, the Fund may have a concentration of several shareholders
holding a significant percentage of shares outstanding. Investment activities of
these shareholders could have a material impact on the Fund and Portfolio.
11
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 2000
- --------------------------------------------------------------------------------
5. BANK LOANS
The Fund may borrow money for temporary or emergency purposes, such as
funding shareholder redemptions. Effective May 23, 2000, the Fund, along with
certain other Funds managed by JPMIM, entered into a $150,000,000 bank line of
credit agreement with Deutsche Bank. Borrowings under the agreement will bear
interest at approximate market rates and a commitment fee at an annual rate of
0.085% is charged on the unused portion of the committed amount.
- --------------------------------------------------------------------------------
6. SUBSEQUENT EVENTS
On September 13, 2000, J.P. Morgan & Co. Incorporated and The Chase
Manhattan Corporation announced that they have entered into an agreement and
plan of merger. The transaction is expected to close in December 2000 and is
subject to approval by shareholders of both companies.
12
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
J.P. Morgan Institutional Short Term Bond 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 Institutional Short Term Bond Fund (one of the series constituting
part of the J.P. Morgan Institutional Funds, hereafter referred to as the
"Fund") at October 31, 2000, 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 accounting principles generally accepted in the
United States of America. 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 auditing standards generally accepted
in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
New York, New York
December 21, 2000
13
THE SHORT TERM BOND PORTFOLIO
Annual Report October 31, 2000
(The following pages should be read in conjunction with J.P. Morgan
Institutional Short Term Bond Fund Annual Financial Statements)
14
THE SHORT TERM BOND PORTFOLIO - SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
OCTOBER 31, 2000
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES - 28.0%
FINANCIAL SERVICES - 28.0%
$ 2,636,378 Advanta Mortgage Loan Trust, Series 1997-4,
Class A4 SEQ, 6.66%, 3/25/22 $ 2,616,605
2,500,000 AmeriCredit Automobile Receivables
Trust, Series 1999 B, Class A4 SEQ, 5.96%, 3/12/06 2,462,110
9,000,000 Associates Automobile Receivables
Trust, Series 2000-2, Class A3 SEQ, 6.82%, 2/15/05 9,005,625
9,620,043 Associates Manufactured Housing,
Series 1997-2, Class A4 SEQ, 6.48%, 3/15/28 9,559,918
4,950,000 Carco Auto Loan Master Trust,
Series 1999-4, Class A, 6.43%, 11/15/04 4,931,438
1,125,000 Citibank Credit Card Master Trust I,
Series 1997-6, Class A, 0.00%, 8/15/06 861,680
17,300,000 Citibank Credit Card Master Trust I, Series
1998-9, Class A, 5.30%, 1/9/06 16,624,089
2,750,000 Comed Transitional Funding Trust, Series
1998-1, Class A5 SEQ, 5.44%, 3/25/07 2,627,955
6,970,726 Daimler Chrysler Auto Trust, Series 2000 A,
Class A2 SEQ, 6.76%, 1/6/03 6,968,495
4,000,000 Daimler Chrysler Auto Trust, Series 2000 C,
Class A2 SEQ, 6.81%, 7/6/03 4,003,600
5,000,000 Dealer Auto Receivables Trust, Series
2000-1, Class A2 SEQ, 7.01%, 4/15/03 5,003,125
490,986 EQCC Home Equity Loan Trust, Series
1997-3, Class A8, 6.41%, 12/15/04 486,051
8,500,000 First USA Credit Card Master Trust, Series
1999-4, Class C Floater, 7.27%, 11/19/00,
resets monthly off the 1-month LIBOR
plus 0.65% with no caps(v) 8,545,161
5,000,000 Ford Credit Auto Owner Trust, Series 1998 C,
Class D, 7.70%, 1/15/04 5,013,280
10,615,000 Ford Credit Auto Owner Trust, Series 2000 D,
Class A3 SEQ, 7.15%, 12/15/03 10,673,053
2,876,131 Green Tree Financial Corp., Series 1998-2,
Class A4 SEQ, 6.08%, 7/1/09 2,868,021
2,500,000 Green Tree Financial Corp., Series 1999-2,
Class B1, 8.41%, 12/1/30 2,289,050
278,506 Green Tree Recreational,Equipment &
Consumer Trust, Series 1997 C, Class A1
SEQ, 6.49%, 2/15/18 276,615
2,641,706 Nationslink Funding Corp., Series 1999-1,
Class A1 SEQ, 6.04%, 11/20/07 2,556,262
13,500,000 Peco Energy Transition Trust, Series 1999 A,
Class A4 SEQ, 5.80%, 3/1/07 12,989,430
3,112,823 Providian Home Equity Loan Trust, Series
1999-1, Class A Floater, 6.91%, 11/25/00,
resets monthly off the 1-month LIBOR
plus 0.29% with no caps(v) 3,113,788
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------
$1,750,000 Sears Credit Account Master Trust, Series
1995-3, Class A, 7.00%, 10/15/04 $ 1,750,542
5,200,000 Sears Credit Account Master Trust, Series
1999-1, Class A, 5.65%, 3/17/09 5,040,724
15,000,000 WFS Financial Owner Trust, Series 2000 A,
Class A3 SEQ, 7.22%, 9/20/04 15,079,695
-------------------------
TOTAL ASSET-BACKED SECURITIES 135,346,312
-------------------------
(Cost $134,243,198)
COLLATERALIZED MORTGAGE OBLIGATIONS - 17.1%
FINANCIAL SERVICES - 17.1%
3,000,000 COMM, Series 2000 FL1A, Class H,
Floater, 7.90%, 11/16/00, resets monthly
off the 1-month LIBOR plus 1.28% with
a floor of 1.28% and no cap(v) 2,940,000
822,186 Commercial Mortgage Acceptance
Corp.,
Series 1997 ML1, Class A1 SEQ, 6.50%, 11/15/04 811,652
12,000,000 Conseco Finance, Series 2000 B, Class
AF2 SEQ, 7.34%, 2/15/19
11,932,501
7,180,000 CS First Boston Mortgage Securities
Corp., Series 1997 C1, Class A1B SEQ,
7.15%, 8/20/06 7,221,687
1,815,866 FHLMC Pool #2061VJ, Class VJ SEQ,
6.50%, 3/20/03 1,807,350
258,128 FHLMC, Series 1980, Class VA SEQ,
7.00%, 8/15/02 257,643
1,352,672 FNMA, Series 1998-30, Class C SEQ,
6.50%, 11/20/04 1,345,476
9,406,541 FNMA, Series 1998-63, Class PB, 5.50%,
5/25/14 9,250,675
10,198,507 Lehman Large Loan, Series 1997 LLI,
Class A1 SEQ, 6.79%, 6/12/04 10,201,700
5,419,846 Merrill Lynch Mortgage Investors, Inc.,
Series 1996 C2, Class A1 SEQ, 6.69%,
11/21/28 5,391,055
7,972,711 Merrill Lynch Mortgage Investors, Inc.,
Series 1998 C3, Class A1 SEQ, 5.65%,
12/15/30 7,648,819
1,635,258 Morgan Stanley Capital I, Series 1997
XL1, Class A1 SEQ, 6.59%, 10/3/30 1,624,270
8,706,556 Morgan Stanley Capital I, Series 1998
XL1, Class A1 SEQ, 6.22%, 6/3/30 8,499,775
3,837,910 Mortgage Capital Funding, Inc., Series
1998 MC3, Class A1 SEQ, 6.00%,
11/18/31 3,751,557
9,655,000 The Money Store Home Equity Trust,
Series 1996 C, Class A6 SEQ, 7.69%,
5/15/24 9,691,206
-------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS 82,375,366
-------------------------
(Cost $81,833,144)
The Accompanying Notes are an Integral Part of the Financial Statements.
15
THE SHORT TERM BOND PORTFOLIO - SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 2000
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------
CORPORATE BONDS - 31.0%
BANKS - 7.2%
$ 9,030,000 Associate Corp., 6.80%, 2/4/02 $ 9,029,999
1,250,000 Banesto Delaware, Inc., 8.25%, 7/28/02 1,274,463
6,000,000 Nationsbank Corp., VRN, 6.75%,
11/16/00, resets quarterly off the 3-month
LIBOR plus 0.06% with no caps(v) 5,999,400
1,000,000 Bank of America Corp., 5.75%, 1/25/01 997,180
1,000,000 Bank of America Corp., 8.38%, 3/15/02 1,020,460
4,000,000 Capital One Bank, 8.25%, 6/15/05 4,021,640
1,250,000 First Chicago NBD Corp., 8.88%, 3/15/02 1,275,875
7,700,000 First Union Corp., 7.55%, 8/18/05 7,741,426
3,150,000 First Union Corp., 7.70%, 2/15/05 3,189,407
-------------------------
34,549,850
-------------------------
ELECTRICAL UTILITY - 7.2%
4,000,000 Commonwealth Edison Co., 144A, VRN,
7.16%, 12/21/00, resets quarterly off the
3-month LIBOR plus 0.50% with no caps(v) 3,992,400
7,000,000 Constellation Energy Group Inc., VRN,
7.25%, 1/5/01, resets quarterly off the
3-month LIBOR plus 0.45% with no caps(v) 7,000,000
5,600,000 Dominion Resources Inc., Series F, VRN,
7.31%, 12/15/00, resets quarterly off the
3-month LIBOR plus 0.65% with no caps(v) 5,602,800
10,000,000 Georgia Power Company, VRN, 6.67%,
11/22/00, resets monthly off the 1-month
LIBOR plus 0.05% with no caps(v) 9,982,000
5,850,000 Pacific Gas & Electric Company, 144A, VRN,
0.086%, 11/1/00, resets quarterly off the
3-month LIBOR plus 0.30% with no caps(v) 5,844,969
2,500,000 TXU Eastern Funding Company, 144A,
6.15%, 5/15/02 2,462,225
-------------------------
34,884,394
-------------------------
FINANCIAL SERVICES - 7.8%
1,500,000 Beneficial Corp., 8.20%, 3/15/02 1,521,375
1,500,000 Case Credit Corp., 6.24%, 11/6/00 1,499,844
2,200,000 Comdisco, Inc., 6.38%, 11/30/01 1,845,800
10,800,000 Countrywide Home Loan, VRN, 6.81%,
12/22/00, resets quarterly off the 3-month
LIBOR plus 0.15% with no caps(v) 10,793,843
5,000,000 ERP Operating Limited Partnership, VRN,
7.34%, 11/25/00, resets quarterly off the
3-month LIBOR plus 0.65% with no caps(v) 4,997,950
5,000,000 Finova Capital Corp., 7.25%, 4/1/01 3,325,000
7,900,000 Ford Credit Co., MTN, VRN, 6.95%,
12/21/00, resets quarterly off the
3-month LIBOR plus 0.29% with no caps(v) 7,856,550
1,000,000 General Motors Acceptance Corp., 5.80%,
2/23/01 995,530
1,000,000 General Motors Acceptance Corp., 6.75%,
2/7/02 995,660
1,500,000 General Motors Acceptance Corp., 7.13%,
5/1/03 1,505,040
800,000 Homeside Lending Inc., 6.88%, 6/30/02 798,568
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------
$1,000,000 Mellon Funding Corp., 6.88%, 3/1/03 $ 999,150
458,728 Oil Purchase Company, 7.10%, 4/30/02 438,085
-------------------------
37,572,395
-------------------------
FOOD & BEVERAGE - 1.0%
5,000,000 General Mills Inc., 6.68%, 2/9/01 4,995,750
-------------------------
FOREST PRODUCTS & PAPER - 0.1%
500,000 Stone Container Corp., 12.25%, 4/1/02 500,000
-------------------------
MEDIA - 0.3%
1,500,000 News America Holdings, 8.63%, 2/1/03 1,532,475
-------------------------
MOTOR VEHICLES & PARTS - 3.1%
15,000,000 Daimler Chrysler AG, 7.13%, 3/1/02 15,003,900
-------------------------
OIL SERVICES - 2.5%
1,000,000 Enron Corp., 6.50%, 8/1/02 991,230
0,000,000 Enron Corp., 144A, VRN, 7.11%, 12/12/00,
resets quarterly off the 3-month LIBOR
plus 0.45% with no caps(v) 9,995,000
1,000,000 Williams Cos. Inc., 6.13%, 2/15/12 985,820
-------------------------
11,972,050
-------------------------
RAILROADS - 0.5%
2,500,000 Norfolk Southern Corp., 6.88%, 5/1/01 2,493,350
-------------------------
TELEPHONE - 1.3%
6,500,000 Sprint Capital Corp., MTN, VRN, 7.01%,
12/22/00, resets quarterly off the 3-month
LIBOR plus 0.35% with no caps(v) 6,488,950
-------------------------
TOTAL CORPORATE BONDS 149,993,114
-------------------------
(Cost $152,112,458)
PREFERRED STOCKS - 0.2%
ENTERTAINMENT - 0.1%
10,000 AT&T Corp. 253,125
-------------------------
REAL ESTATE INVESTMENT TRUST - 0.1%
19,774 Equity Residential Properties Trust 484,463
-------------------------
TOTAL PREFERRED STOCKS 737,588
-------------------------
(Cost $787,415)
FOREIGN CORPORATE BONDS - 2.7%
TELEPHONE - 1.9%
4,500,000 Deutsche Telekom International
Finance BV, 7.75%, 6/15/05 4,574,790
4,350,000 Telefonica Europe BV, 7.35%, 9/15/05 4,355,351
-------------------------
8,930,141
-------------------------
WIRELESS TELECOMMUNICATIONS - 0.8%
4,000,000 Vodafone Group PLC, 144A, VRN, 6.86%,
12/21/00, resets quarterly off the 3-month
LIBOR plus 0.20% with no caps(v) 3,997,000
-------------------------
TOTAL FOREIGN CORPORATE BONDS 12,927,141
-------------------------
(Cost $12,955,257)
The Accompanying Notes are an Integral Part of the Financial Statements.
16
THE SHORT TERM BOND PORTFOLIO - SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 2000
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------
MORTGAGE PASS THRU - 6.8%
$20,500,000 FNMA, TBA, 6.50%, 11/1/30 $ 19,699,270
220,000 FNMA, TBA, 7.00%, 11/1/15 218,625
839,000 FNMA, TBA, 7.00%, 9/1/29 821,960
2,600,726 FNMA, 6.50%, 5/1/28 - 4/1/29 2,500,679
9,289,426 GNMA, 6.50%, 12/15/28 8,968,941
518,056 GNMA, 7.00%, 3/15/09 - 7/15/09 520,808
-------------------------
TOTAL MORTGAGE PASS THRU 32,730,283
-------------------------
(Cost $32,476,006)
PRIVATE PLACEMENTS - 0.3%
1,500,000 Charter Communication TL, 8.59%,
11/19/00(v) 1,488,750
-------------------------
(Cost $1,497,750)
SOVEREIGN GOVERNMENTS AND AGENCIES - 0.2%
1,000,000 Province of Quebec, 7.50%, 7/15/02 1,011,070
-------------------------
(Cost $1,022,631)
U.S. GOVERNMENT AGENCY SECURITIES - 6.1%
15,200,000 FHLMC, 7.00%, 7/15/05 15,485,000
14,000,000 FNMA MTN, 6.16%, 5/8/03 13,768,160
-------------------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES 29,253,160
-------------------------
(Cost $29,086,529)
U.S. TREASURY SECURITIES - 0.4%
1,125,000 U.S. Treasury Notes, 5.63%, 9/30/01(s) 1,117,789
1,000,000 U.S. Treasury Notes, 6.25%, 2/28/02(s) 1,000,620
-------------------------
TOTAL U.S. TREASURY SECURITIES 2,118,409
-------------------------
(Cost $2,122,302)
SHORT-TERM INVESTMENTS - 7.2%
COMMERCIAL PAPER - 1.0%
5,000,000 International Paper, 6.81%, 12/11/00(y) 4,960,879
-------------------------
INVESTMENT COMPANIES - 6.2%
29,683,481 J.P. Morgan Institutional Prime Money
Market Fund*(s) 29,683,481
-------------------------
TOTAL SHORT-TERM INVESTMENTS 34,644,360
-------------------------
(Cost $34,645,314)
TOTAL INVESTMENT SECURITIES - 100.0% $482,625,553
=========================
(Cost $482,782,004)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
CONTRACTS EXPIRATION UNDERLYING FACE UNREALIZED
SOLD DATE AMOUNT AT VALUE GAIN
- -------------------------------------------------------------------------------------
71 U.S. Five-Year Note December 2000 $7,148,813 $30,672
==========================================
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
LIBOR - London Interbank Offered Rate
MTN - Medium Term Note
SEQ - Sequential Payor
TBA - Securities purchased (sold) on a forward commitment basis with an
approximate principal amount and no definite maturity date. The actual
principal amount and maturity will be determined upon settlement.
VRN - Variable rate note. Interest rate date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is effective
October 31, 2000.
144A - Securities restricted for resale to Qualified Institutional Buyers
(s) Security is fully or partially segregated with custodian as collateral for
futures or with brokers as initial margin for futures contracts.
(v) Variable or floating rate instrument or instrument with step coupon rate.
(y) Yield to maturity
* Money Market mutual fund registered under the Investment Act of 1940, as
amended, and advised by J.P. Morgan Investment Management, Inc.
The Accompanying Notes are an Integral Part of the Financial Statements.
17
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
OCTOBER 31, 2000
ASSETS
Investments at Value (Cost $482,782,004) $482,625,553
Cash 7,906
Dividend and Interest Receivable 4,094,011
Receivable for Investments Sold 2,474,472
Prepaid Trustees Fees and Expenses 751
Prepaid and Other Assets 4,034
------------------
TOTAL ASSETS 489,206,727
------------------
LIABILITIES
Payable for Investments Purchased 35,498,279
Advisory Fee Payable 96,063
Administration Services Fee Payable 9,196
Variation Margin Payable 4,438
Fund Services Fee Payable 305
Administration Fee Payable 236
Accrued Expenses and Other Liabilities 68,606
------------------
TOTAL LIABILITIES 35,677,123
------------------
NET ASSETS
Applicable to Investors' Beneficial Interests $453,529,604
==================
The Accompanying Notes are an Integral Part of the Financial Statements.
18
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 2000
INVESTMENT INCOME
INCOME
Interest Income $25,270,367
Dividend Income 71,345
Dividend Income from Affiliated Investment
(Includes reimbursement of $55,932
from affiliate) 1,591,617
------------------
Investment Income 26,933,329
------------------
EXPENSES
Advisory Fee 1,018,928
Administrative Services Fee 99,162
Custodian Fees and Expenses 79,791
Professional Fees and Expenses 38,474
Printing Expenses 9,709
Fund Services Fee 6,453
Trustees' Fees and Expenses 6,143
Administration Fee 2,933
Insurance Expenses 902
Miscellaneous 1,081
------------------
Total Expenses 1,263,576
Less: Reimbursement of Expenses (45,204)
------------------
Net Expenses 1,218,372
------------------
NET INVESTMENT INCOME 25,714,957
------------------
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON
Investment Transactions (3,201,377)
Futures Contracts (2,208,102)
Foreign Currency Contracts and Translations 255,841
------------------
Net Realized Loss (5,153,638)
------------------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON
Investments 1,954,392
Futures Contracts 102,424
Foreign Currency Contracts and Translations (255,841)
------------------
Net Change in Unrealized Appreciation (Depreciation) 1,800,975
------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $22,362,294
==================
The Accompanying Notes are an Integral Part of the Financial Statements.
19
THE SHORT TERM BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31
INCREASE IN NET ASSETS 2000 1999
FROM OPERATIONS
Net Investment Income $ 25,714,957 $ 17,750,854
Net Realized Loss on Investments, Futures and Foreign
Currency Contracts and Transactions (5,153,638) (3,791,010)
Net Change in Unrealized Appreciation (Depreciation) of Investments
Futures, and Foreign Currency Contracts and Translations 1,800,975 (3,929,871)
------------------- --------------------
Net Increase in Net Assets Resulting from Operations 22,362,294 10,029,973
------------------- --------------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTEREST
Contributions 309,730,016 312,753,504
Withdrawals (272,384,441) (193,444,721)
------------------- --------------------
Net Increase from Investors' Transactions 37,345,575 119,308,783
------------------- --------------------
Total Increase in Net Assets 59,707,869 129,338,756
------------------- --------------------
NET ASSETS
Beginning of Year 393,821,735 264,482,979
------------------- --------------------
End of Year $453,529,604 $393,821,735
=================== ====================
SUPPLEMENTARY DATA
FOR THE YEARS ENDED OCTOBER 31
2000 1999 1998 1997 1996
------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Net Expenses 0.30% 0.29% 0.25% 0.25% 0.38%
Net Investment Income 6.31% 5.49% 5.84% 6.17% 5.65%
Expenses without Reimbursement 0.31% 0.34% 0.38% 0.55% 0.61%
Portfolio Turnover 271% 398% 381% 219% 191%
The Accompanying Notes are an Integral Part of the Financial Statements.
20
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
OCTOBER 31, 2000
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--The Short Term Bond Portfolio (the "Portfolio") is registered
under the Investment Company Act of 1940, as amended, as a no-load, open-end
management investment company which was organized as a trust under the laws of
the State of New York on January 29, 1993. The Portfolio commenced operations
on July 8, 1993. The Portfolio's investment objective is to provide a high total
return, consistent with low volatility of principal. The Declaration of Trust
permits the Trustees to issue an unlimited number of beneficial interests in
the Portfolio.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States 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:
Security Valuations--Fixed Income Securities, (other than convertible
bonds), with a maturity of 60 days or more held by Funds other than money market
funds will be valued each day based on readily available market quotations
received from independent or affiliated commercial pricing services. Such
pricing services will generally provide bidside quotations. Convertible bonds
are valued at the last sale price on the primary exchange on which the bond is
principally traded. When valuations are not readily available, securities are
valued at fair value as determined in accordance with procedures adopted by the
Trustees. All short-term securities with a remaining maturity of sixty days or
less are valued using 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.
Security Transactions--Security transactions are accounted for as of the
trade date. Realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
Investment Income--Dividend income less foreign taxes withheld (if any) is
recorded as of the ex-dividend date or as of the time that the relevant
ex-dividend and amount becomes known. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
Futures Contracts--The Portfolio may enter into futures contracts in order
to hedge 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 and to manage exposure to changing
interest rates and securities prices. The risks of entering into futures
contracts include the possibility that the change in value of the contract may
not correlate with the changes in value of the underlying securities. Upon
entering into a futures contract, the Portfolio is required to deposit either
cash or securities in an amount equal to a certain percentage of the contract
value (initial margin). Subsequent payments (variation margin) are made or
received daily, in cash, by the Portfolio. The variation margin is equal to the
daily change in the contract value and is recorded as unrealized gain or loss.
The Portfolio will recognize a gain or loss when the contract is closed or
expires.
Foreign Currency Transactions--All assets and liabilities initially
expressed in foreign currencies are translated into U.S. dollars at prevailing
exchange rates at period end. Purchases and sales of investment securities,
dividend and interest income, and certain expenses are translated at the rates
of exchange prevailing on the respective dates of such transactions. Realized
and unrealized gains and losses from foreign currency translations arise from
changes in currency exchange rates and 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 from changes in foreign
exchange rates from the fluctuations arising from changes in the market prices
of securities during the period.
Forward Foreign Currency Exchange Contracts--The Portfolio may enter into
forward foreign currency exchange contracts to facilitate transactions of
securities denominated in a foreign currency or to manage the Portfolio's
exposure to foreign currency exchange fluctuations. The net U.S. dollar value
of foreign currency underlying all contractual commitments held by the Portfolio
and the resulting unrealized appreciation or depreciation are determined daily
using prevailing exchange rates. The Portfolio bears the risk of an unfavorable
change in the foreign currency exchange rate underlying the forward contract.
Additionally, losses may arise if the counterparties do not perform under the
contract terms.
Commitments--The Portfolio may enter into commitments to buy and sell
investments to settle on furture dates as part of its normal investment
activities.
The Accompanying Notes are an Integral Part of the Financial Statements.
21
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
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(Continued)
OCTOBER 31, 2000
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
These commitments are reported at market value in the financial statements.
Credit risk exists on these commitments to the extent of any unrealized gains on
the underlying securities purchased and any unrealized losses on the underlying
securities sold. Market risk exists on these commitments to the same extent as
if the security were owned on a settled basis and gains and losses are recorded
and reported in the same manner. However, during the commitment period, these
investments earn no interest or dividends.
Income Tax Status--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 provisions of the Internal
Revenue Code.
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2. TRANSACTIONS WITH AFFILIATES
Advisory--The Portfolio has an Investment Advisory Agreement with J.P.
Morgan Investment Management Inc. ("JPMIM"), an affiliate of Morgan Guaranty
Trust Company of New York ("Morgan") and a wholly owned subsidiary of J.P.
Morgan & Co. Incorporated ("J.P. Morgan"). Under the terms of the agreement, the
Portfolio pays JPMIM at an annual rate of 0.25% of the Portfolio's average
daily net assets.
The Portfolio may invest in one or more affiliated money market funds: J.P.
Morgan Institutional Prime Money Market Fund, J.P. Morgan Institutional Tax
Exempt Money Market Fund, J.P. Morgan Institutional Federal Money Market Fund
and J.P. Morgan Institutional Treasury Money Market Fund. The Advisor has agreed
to reimburse its advisory fee from the Portfolio in an amount to offset any
investment advisory, administrative fee and shareholder servicing fees related
to a Portfolio investment in an affiliated money market fund. The amount listed
on the Statement of Operations as Dividend Income from Affiliated Investment is
the amount the Fund earned.
Administrative Services--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 registered investment companies for which JPMIM acts as
investment advisor 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 Funds Distributor, Inc. 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 Trust and certain other investment
companies for which Morgan provides similar services.
Morgan has agreed to reimburse the Portfolio to the extent necessary to
maintain the total operating expenses (which excludes interest and dividend
expenses, taxes and extraordinary items) of the Portfolio at no more than 0.30%
of the average daily net assets of the Portfolio. This reimbursement arrangement
can be changed or terminated at any time after February 28, 2001 at the option
of Morgan.
Administration--The Portfolio has retained Funds Distributor, Inc. ("FDI"),
a registered broker-dealer, to serve as the co-administrator and distributor for
the Fund. 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 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 Trust and
certain other investment companies for which FDI provides similar services.
Fund Services--The Portfolio has a Fund Services Agreement with Pierpont
Group, Inc. ("PGI") 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 PGI.
Each Trustee receives an aggregate annual fee of $75,000 for serving on the
boards of the Trust, the J.P. Morgan
The Accompanying Notes are an Integral Part of the Financial Statements.
22
THE SHORT TERM BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 2000
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2. TRANSACTIONS WITH AFFILIATES (CONTINUED)
Funds, the J.P. Morgan Institutional Funds, and other registered investment
companies in which they invest. The Trustees' Fees and Expenses shown in the
financial statements represent the Portfolio's allocated portion of the total
Trustees' fees and expenses. The Portfolio's Chairman and Chief Executive
Officer also serves as Chairman of PGI and receives compensation and employee
benefits from PGI. The allocated portion of such compensation and benefits
included in the Fund Services Fee (PGI) shown on the Statement of Operations
was $1,230.
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3. FEDERAL INCOME TAXES
As of October 31, 2000, accumulated net unrealized depreciation was
$156,451, based on the aggregate cost of investments for federal income tax
purposes of $482,782,004, which consisted of unrealized appreciation of
$2,643,974 and unrealized depreciation of $2,800,425.
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4. INVESTMENT TRANSACTIONS
During the year ended October 31, 2000, the Portfolio purchased $921,581,045
of investment securities and sold $825,535,464 of investment securities other
than U.S. government securities and short-term investments. Purchases and sales
of U.S. government securities were $513,254,586 and $446,003,072, respectively.
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5. CONCENTRATIONS OF CREDIT RISKS
The ability of the issuers of debt, asset-backed and mortgage-backed
securities to meet their obligations may be affected by the economic and
political developments in a specific industry or region. The value of
asset-backed and mortgage-backed securities can be significantly affected by
changes in interest rates or rapid principal payments including prepayments.
The Portfolio may have elements of risk not typically associated with
investments in the United States of America due to concentrated investments in a
limited number of countries or regions which may vary throughout the year. Such
concentrations may subject the Portfolio to additional risks resulting from
political or economic conditions in such countries or regions and the possible
imposition of adverse governmental laws or currency exchange restrictions could
cause the securities and their markets to be less liquid and their prices more
volatile than those of comparable U.S. securities.
- --------------------------------------------------------------------------------
6. SUBSEQUENT EVENTS
On September 13, 2000, J.P. Morgan & Co. Incorporated and The Chase
Manhattan Corporation announced that they have entered into an agreement and
plan of merger. The transaction is expected to close in December 2000 and is
subject to approval by shareholders of both companies.
23
REPORT OF INDEPENDENT ACCOUNTANTS
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To the Trustees and Investors of
The Short Term Bond 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 Short Term Bond Portfolio (the
"Portfolio") at October 31, 2000, 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 accounting principles generally accepted
in the United States of America. 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 auditing standards generally accepted in
the United States of America, 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, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
December 21, 2000
24
[back cover]
J.P. MORGAN INSTITUTIONAL FUNDS
Federal Money Market Fund
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Prime Money Market Fund
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Treasury Money Market Fund
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Tax Aware Enhanced Income Fund:
Institutional Shares
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Tax Exempt Money Market Fund
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Short Term Bond Fund
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Bond Fund
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Global Strategic Income Fund
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Tax Exempt Bond Fund
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California Bond Fund:
Institutional Shares
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New York Tax Exempt Bond Fund
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Diversified Fund
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Disciplined Equity Fund
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Large Cap Growth Fund:
Institutional Shares
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Market Neutral Fund: Institutional Shares
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Tax Aware Disciplined Equity Fund: Institutional Shares
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U.S. Equity Fund
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U.S. Small Company Fund
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Emerging Markets Equity Fund
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European Equity Fund
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International Equity Fund
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International Opportunities Fund
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SmartIndex(tm) Fund: Institutional Shares
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For more information on the J.P. Morgan
Institutional Funds, call J.P.
Morgan Funds Services at (800) 766-7722.
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Morgan Guaranty Trust Company MAILING
500 Stanton Christiana Road INFORMATION
Newark, Delaware 19713-2107
SH-ANN-23743 1000