LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN DISCIPLINED EQUITY FUND
July 1, 2000
Dear Shareholder,
For the 12 months ended May 31, 2000, the J.P. Morgan Disciplined Equity Fund
posted a 5.19% return, underperforming the 10.47% return of the S&P 500, but
outperforming the 4.00% return of the Lipper Large Cap Value Average.
The fund's net asset value increased to $18.67 on May 31, 2000, from $18.22 on
May 31, 1999. During the year, the fund made distributions of approximately
$0.13 per share from ordinary income, approximately $0.23 per share from
short-term capital gains and approximately $0.14 per share from long-term
capital gains. On May 31, 2000, the net assets of the fund were approximately
$160.5 million, while the assets of The Disciplined Equity Portfolio, in which
the fund invests, amounted to approximately $1.6 billion.
This report includes a discussion with Timothy J. Devlin, the portfolio manager
primarily responsible for The Disciplined Equity Portfolio. In this interview,
Tim talks about the events of the previous year that had the greatest effect on
the portfolio and discusses his investment strategy.
As chairman and president of Asset Management Services, we appreciate your
investment in the fund. If you have any comments or questions, please call your
Morgan representative or J.P. Morgan Funds Services at (800) 521-5411.
Sincerely yours,
/s/ Ramon de Oliveira /s/ Keith M. Schappert
Ramon de Oliveira Keith M. Schappert
Chairman of Asset Management Services President of Asset Management Services
J.P. Morgan & Co. Incorporated J.P. Morgan & Co. Incorporated
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TABLE OF CONTENTS
LETTER TO THE SHAREHOLDERS............ 1 FUND FACTS AND HIGHLIGHTS.......... 7
FUND PERFORMANCE...................... 2 FINANCIAL STATEMENTS...............10
PORTFOLIO MANAGER Q&A................. 3
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1
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 January 3, 1997,
would have grown to $18,750 on May 31, 2000.
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.
[CHART]
GROWTH OF $10,000 SINCE FUND INCEPTION*
JANUARY 3, 1997 - MAY 31, 2000
J.P. MORGAN
DISCIPLINED S&P 500 LIPPER LARGE
EQUITY FUND INDEX** CAP VALUE AVERAGE
1/31/97 $10000 10000 10000
2/28/97 10076 10078 10091
3/31/97 9657 9664 9727
4/30/97 10210 10241 10145
5/31/97 10924 10865 10740
6/30/97 11410 11351 11178
7/31/97 12362 12255 12008
8/31/97 11728 11568 11474
9/30/97 12283 12202 12046
10/31/97 11900 11794 11615
11/30/97 12407 12340 12022
12/31/97 12579 12552 12248
1/31/98 12792 12691 12282
2/28/98 13742 13606 13123
3/31/98 14459 14303 13698
4/30/98 14682 14447 13809
5/31/98 14507 14198 13553
6/30/98 15012 14775 13823
7/31/98 14876 14618 13537
8/31/98 12680 12504 11594
9/30/98 13516 13305 12245
10/31/98 14653 14388 13234
11/30/98 15673 15260 13941
12/31/98 16601 16139 14535
1/31/99 17178 16814 14828
2/28/99 16553 16291 14443
3/31/99 17227 16943 14891
4/30/99 18225 17599 15744
5/31/99 17824 17184 15479
6/30/99 18725 18138 16140
7/31/99 18127 17571 15724
8/31/99 18029 17483 15392
9/30/99 17499 17004 14864
10/31/99 18422 18080 15604
11/30/99 18697 18448 15720
12/31/99 19594 19534 16225
1/31/00 18540 18553 15556
2/29/00 18089 18202 14946
3/31/00 19925 19983 16354
4/30/00 19242 19381 16160
5/31/00 18750 $18984 $16118
LIPPER PERFORMANCE AVERAGES ARE CALCULATED BY TAKING AN ARITHMETIC AVERAGE OF
THE RETURNS OF THE FUNDS IN THE GROUP. THE AVERAGE ANNUALIZED RETURNS THAT
RESULT FROM THIS METHODOLOGY WILL DIFFER FROM ANNUALIZING THE GROWTH OF THE
MINIMUM INITIAL INVESTMENT.
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
-------------------- ------------------------------
THREE SIX ONE SINCE
AS OF MAY 31, 2000 MONTHS MONTHS YEAR INCEPTION*
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J.P. Morgan Disciplined Equity Fund* 3.65% 0.28% 5.19% 20.98%
S&P 500 Index** 4.29% 2.90% 10.47% 21.20%
Lipper Large Cap Value Average*** 7.90% 2.33% 4.00% 15.27%
AS OF MARCH 31, 2000
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J.P. Morgan Disciplined Equity Fund* 1.69% 13.86% 15.66% 24.32%
S&P 500 Index** 2.29% 17.51% 17.94% 24.43%
Lipper Large Cap Value Average*** 0.76% 10.13% 9.83% 16.82%
* THE J.P. MORGAN DISCIPLINED EQUITY FUND'S RETURNS INCLUDE HISTORICAL
RETURNS OF THE J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND, A SEPARATE
FEEDER FUND INVESTING IN THE SAME MASTER PORTFOLIO, WHICH HAD A LOWER EXPENSE
RATIO, FROM JANUARY 3, 1997 (THE INCEPTION DATE OF THE J.P. MORGAN
INSTITUTIONAL DISCIPLINED EQUITY FUND), THROUGH DECEMBER 31, 1997 (THE
INCEPTION DATE OF THE J.P. MORGAN DISCIPLINED EQUITY FUND). THEREFORE, THE
FUND'S RETURNS WOULD HAVE BEEN LOWER HAD IT EXISTED DURING THE SAME PERIOD.
FOR THE PURPOSES OF COMPARISON, THE "SINCE INCEPTION" RETURNS ARE CALCULATED
FROM JANUARY 31, 1997, THE FIRST DATE WHEN DATA FOR THE FUND, ITS BENCHMARK,
AND ITS LIPPER CATEGORY WERE AVAILABLE. THE J.P. MORGAN DISCIPLINED EQUITY
FUND'S TOTAL RETURN SINCE ITS COMMENCEMENT OF OPERATIONS ON DECEMBER 31,
1997, IS 17.98%.
** S&P 500 INDEX IS AN UNMANAGED INDEX USED TO PORTRAY THE PATTERN OF COMMON
STOCK MOVEMENT BASED ON THE AVERAGE PERFORMANCE OF 500 WIDELY HELD COMMON
STOCKS. IT DOES NOT INCLUDE FEES OR OPERATING 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 FUND DISTRIBUTIONS, AND REFLECT THE
REIMBURSEMENT OF FUND EXPENSES AS DESCRIBED IN THE PROSPECTUS. HAD EXPENSES
NOT BEEN SUBSIDIZED, RETURNS WOULD HAVE BEEN LOWER.
2
PORTFOLIO MANAGER Q&A
[PHOTO]
The following is an interview with TIMOTHY J. DEVLIN, vice president, a
member of the portfolio management team for The Disciplined Equity Portfolio
since its inception. Tim joined J.P. Morgan in 1996 after spending nine years
at Mitchell Hutchins Asset Management, where he managed quantitatively driven
equity portfolios for institutional and retail investors. Tim received his
B.A. in economics from Union College. This interview was conducted on June
15, 2000, and reflects Tim's views on that date.
WHAT WOULD YOU SAY WERE THE PRINCIPAL EVENTS THAT IMPACTED U.S. EQUITIES OVER
THE PAST YEAR?
TJD: Certainly, the string of interest rate hikes by the Fed was very
influential. In an effort to cool what was perceived to be an overheated
economy, the Fed started raising rates last June, beginning with five
consecutive quarter-point increases and culminating, at least for now, in a
half-point increase in mid-May of this year. The first five increases were
generally disregarded by a marketplace that seemed to embrace growth at any
price. In fact, our economy grew at the incredible pace of more than 7% in
1999's fourth quarter and over 5% in the first quarter of 2000. It was during
this period that the stock market almost literally shot through the roof,
particularly the tech-heavy NASDAQ, which set new records, seemingly on a
weekly basis.
This all came to an end during the closing days of the first quarter and most
of April 2000, when investors got the message that the Fed was serious about
dampening the economy's torrid growth. Looking ahead to a slower growth
economy, they began to re-evaluate the earnings prospects of many of the
technology companies that had dominated the market until then. The result was
a significant correction in the NASDAQ during April and a volatile equity
market that persists to this day.
This said, the overall market as measured by the S&P 500 is still up 10%-11%
through May 2000, a return that would be consistent with a normal year,
historically. To me, it is somewhat unnerving to see the market respond this
way, particularly in the face of a 175 basis point increase in interest rates
and the prospect of more to come.
The other major event would be the continued advances of technology in
virtually every business sector. Until recently, investors were focused
almost purely on technology-related companies, particularly those that were
perceived to be leading the growth of the Internet. What we've seen lately is
a broadening of investor interest to include those companies, tech or not
tech, that are using new technologies to leapfrog the competition and create
new operating environments. In the business-to-business arena, you can see
this most prominently in ongoing efforts to create Internet-based exchanges
for virtually anything from auto parts to basic commodities. You also see it
in individual efforts to improve customer service, streamline distribution,
and do just about everything more efficiently by utilizing the technological
tools at hand.
Investors have taken note and are paying significant premiums for companies
that are successful in their efforts to adapt and use technology, knowing
that they will be best positioned to compete in the new
3
economy. Those that haven't been able to adapt have really been thrashed.
I think this division between the technological haves and have-nots will
be a key investment theme for some time yet to come.
YOU MENTIONED INTEREST RATES, THE STORY THAT'S BEEN ON VIRTUALLY EVERYONE'S
MINDS THESE DAYS. WHAT DO YOU THINK THE FEDERAL RESERVE BOARD IS GOING TO DO
IN COMING MONTHS?
TJD: In our view, the most likely economic scenario going forward is that the
Fed succeeds in its efforts to engineer a soft landing for the U.S. economy.
We've already seen some signs of a cooling economy, including a fairly recent
decline in job growth, a significant reduction in new home sales and weaker
than expected retail sales, particularly in the interest rate-sensitive
durable goods sector. We don't think the Fed will increase rates at the next
Federal Open Market Committee meeting, but between now and year-end, we think
we'll see additional tightening, on the order of 50 basis points or so. This
should serve to slow our economy's growth, without slowing it down too far,
too fast.
HOW HAVE INVESTORS' PERCEPTIONS CHANGED SINCE THE NEAR COLLAPSE OF THE NASDAQ?
TJD: One thing we are starting to see is a move away from the kind of
momentum-based investing that ruled the market in late 1999 and early 2000,
to more rational, valuation-based investing.
WHAT MAKES YOU THINK VALUATION WILL STAGE A COMEBACK?
TJD: The price of any investment ultimately MUST relate in some way to its
ability to earn money for the investor. It's common sense. Hype can only
drive the market for a little while, before investors start to look beyond it
and focus on real earnings, or earnings potential.
HOW DO YOU MANAGE THE PORTFOLIO IN SUCH AN ENVIRONMENT?
TJD: Pretty much the same way we always have. For us, valuation investing is
a process of forecasting a company's future earnings, discounting these back
to the stock price, and comparing stocks based on their dividend discount
rate (DDR), or internal rate of return. By ranking stocks within each sector
by their DDR, we can identify and avoid the priciest stocks in each sector,
while maintaining portfolio characteristics and sector weightings similar to
the S&P 500 Index. The end result is a diversified portfolio that relies
exclusively on valuation-based stock selection in an effort to beat the
market.
LET'S GET TO PERFORMANCE. HOW DID YOU DO OVER THE PAST 12 MONTHS?
TJD: There's no question that the last 12 months have been a difficult time
for valuation-driven investors, such as ourselves. We just don't do well in a
market that is driven almost exclusively by price momentum. This was
particularly true in the fourth quarter of 1999, a period in which we
incurred most of our negative, annualized performance. According to our
analysis, the return to price momentum in 1999, and especially the fourth
quarter, far exceeded any other year in the last 30 years, which is as far
back as we went.
With momentum investing, investors focus, almost exclusively, on price. If
investors see a stock going up, they see it as good and continue to buy it,
which, of course, makes it continue to go up - at least for a time.
4
In such an environment, fundamentals go out the window. All that matters is
that the stock is going up, not whether it should be going up based on
present and expected future earnings growth.
Under our investment philosophy, all things being equal, if a stock's price
goes up, it looks less, not more, attractive. For us, this means that the
stock is being more fully valued and, rationally, has less room to
appreciate. The key word here is "rationally." Until lately, we've been in
the grips of an exceedingly irrational and very narrow market, in which
investors were willing to bet their fortunes on essentially 25 tech names.
With our broad diversification and focus on valuation, this price-driven
market mentality created a very significant headwind for us over the past 12
months, and stock selection wasn't enough to pull us out of it.
WHICH HOLDINGS DID WELL OVER THE PAST 12 MONTHS?
TJD: Overweight positions in Intel, EMC, Cisco, and Warner-Lambert helped us
a great deal, as all performed admirably over the past 12 months. Intel has
benefited from continued strong PC demand, including a larger percentage of
higher margin laptops, stable average selling price (asp's), and strong
server/PC demand fueled by the explosive growth of the Internet. Intel has
also lowered costs through shrinking line width and improved packaging. EMC
remains the leader of the data storage market, and demand for storage is
booming. Despite competitive pressures and a high cost structure, the market
is its to lose. Investors have agreed, as the stock climbed dramatically in
the last 12 months. Cisco was up appreciably over this reporting period. It's
just a fantastic company. Even though it trades at 85X times next year's
earnings, it still looks attractive relative to other companies in its
sector. Its management is excellent, as is its track record in successfully
identifying and integrating new acquisitions. We are highly confident in our
earnings forecast for the company, as are we in management's ability to
deliver these earnings. We are less so with Cisco's competitors. Given this
level of confidence and Cisco's premier position as a primary provider of
Internet-related infrastructure products and services, we believe it deserves
the premium that the market has assigned to it. Warner-Lambert, a favorite
holding since the fund's inception, rose strongly on the year, on the heels
of its blockbuster cholesterol drug, Lipitor, and the just-completed merger
with Pfizer.
WHICH DIDN'T PERFORM UP TO EXPECTATIONS?
TJD: As noted, we had generally good stock selection in the tech sector, but
we were hurt by underweighting, relative to the benchmark, a couple of stocks
that significantly outperformed their respective sectors, these being Oracle
and Qualcomm, both of which were up substantially during this time. More
recently, we were hurt by an overweight position in Microsoft, which declined
substantially during the recent Department of Justice antitrust proceedings.
Beyond the technology sector, an underweight position in Disney hurt us over
the past year. Disney's success from 1990 to 1997 has been largely driven by
home video sales. As a result, the market for home videos has been saturated
and will need time to regenerate. Additionally, theme park attendance has
been slowing as competition has been intense. Disney's surprising success
this year has been on the back of the phenomenally popular ABC television
show "Who Wants to Be a Millionaire?"
5
GIVEN THE VOLATILITY OF THE MARKET AND ITS IMPACT ON THE PORTFOLIO, DO YOU PLAN
TO MAKE ANY CHANGES IN YOUR MANAGEMENT STYLE?
TJD: No. As I said, we are confident that valuation investing will rise from
the ashes of momentum, and that the portfolio will benefit when it does. We
have, however, elected to apply a few additional analytical tools to our
process that will enable us to make better use of near term information, such
as revisions in earnings estimates. This should have the effect of buffering
the portfolio against the kind of volatility we've endured over the past year.
6
FUND FACTS
INVESTMENT OBJECTIVE
J.P. Morgan Disciplined Equity Fund seeks to provide a high total return from
a broadly diversified portfolio of equity securities. It is designed for
investors who want the potential to outperform the S&P 500 Index without
assuming a level of risk substantially greater than that of the index.
- ------------------------------------------------------------------------------
COMMENCEMENT OF INVESTMENT OPERATIONS
12/31/97
- ------------------------------------------------------------------------------
FUND NET ASSETS AS OF 5/31/00
$160,455,334
- ------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 5/31/00
$1,632,835,292
- ------------------------------------------------------------------------------
DIVIDEND PAYABLE DATES
6/23/00, 8/18/00, 12/20/00
- ------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/20/00
- ------------------------------------------------------------------------------
EXPENSE RATIO
The fund's current annualized expense ratio of 0.75% 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 dividend or
redemption proceeds from the fund.
FUND HIGHLIGHTS
ALL DATA AS OF MAY 31, 2000
PORTFOLIO ALLOCATION
(AS A PERCENTAGE OF TOTAL INVESTMENTS)
TECHNOLOGY 29.2%
CONSUMER GOODS & SERVICES 19.5%
FINANCE 14.0%
HEALTHCARE 10.6%
INDUSTRIAL PRODUCTS & SERVICES 8.7%
UTILITIES 6.5%
ENERGY 6.3%
SHORT-TERM AND OTHER INVESTMENTS 2.5%
BASIC INDUSTRIES 2.2%
TRANSPORTATION 0.5%
LARGEST EQUITY HOLDINGS % OF TOTAL INVESTMENTS
- ------------------------------------------------------------
INTEL CORP. (TECHNOLOGY) 4.4%
CISCO SYSTEMS, INC. (TECHNOLOGY) 4.2%
GENERAL ELECTRIC CO. 4.1%
(INDUSTRIAL PRODUCTS & SERVICES)
MICROSOFT CORP. (TECHNOLOGY) 3.6%
EXXON MOBIL CORP. (ENERGY) 3.1%
WAL-MART STORES, INC. 2.3%
(CONSUMER GOODS & SERVICES)
NORTEL NETWORKS CORP. (TECHNOLOGY) 2.2%
SUN MICROSYSTEMS, INC. (TECHNOLOGY) 1.7%
SBC COMMUNICATIONS, INC. (UTILITIES) 1.7%
CITIGROUP, INC. (FINANCE) 1.6%
7
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.
References to specific securities and their issuers are for illustrative
purposes only and are not intended to be, and should not be interpreted as,
recommendations to purchase or sell such securities. Opinions expressed
herein and other fund data presented are based on current market conditions
and are subject to change without notice. The fund invests in a master
portfolio (another fund with the same objective).
CALL J.P. MORGAN FUNDS SERVICES AT (800) 521-5411 FOR A PROSPECTUS CONTAINING
MORE COMPLETE INFORMATION ABOUT THE FUND INCLUDING MANAGEMENT FEES AND OTHER
EXPENSES. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
8
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
9
J.P. MORGAN DISCIPLINED EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2000
- -------------------------------------------------------------------------------
ASSETS
Investment in The Disciplined Equity Portfolio
("Portfolio"), at value $156,948,884
Receivable for Shares of Beneficial Interest Sold 3,579,164
Receivable for Expense Reimbursements 23,715
Deferred Organization Expenses 3,660
Prepaid Trustees' Fees 12
Prepaid Expenses 239
------------
Total Assets 160,555,674
------------
LIABILITIES
Shareholder Servicing Fee Payable 32,798
Payable for Shares of Beneficial Interest
Redeemed 4,730
Administrative Services Fee Payable 3,198
Administration Fee Payable 134
Fund Services Fee Payable 130
Accrued Expenses 59,350
------------
Total Liabilities 100,340
------------
NET ASSETS
Applicable to 8,593,561 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $160,455,334
============
Net Asset Value, Offering and Redemption Price
Per Share $18.67
-----
-----
ANALYSIS OF NET ASSETS
Paid-in Capital $145,684,996
Undistributed Net Investment Income 415,658
Accumulated Net Realized Gain on Investment 176,424
Net Unrealized Appreciation of Investment 14,178,256
------------
Net Assets $160,455,334
============
The Accompanying Notes are an Integral Part of the Financial Statements.
10
J.P. MORGAN DISCIPLINED EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MAY 31, 2000
- -------------------------------------------------------------------------------
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Dividend Income (Net of Foreign
Withholding Tax of $15,256) $2,201,341
Allocated Interest Income 248,161
Allocated Portfolio Expenses (655,065)
----------
Net Investment Income Allocated from
Portfolio 1,794,437
FUND EXPENSES
Shareholder Servicing Fee $407,701
Registration Fees 65,153
Administrative Services Fee 40,561
Transfer Agent Fees 33,141
Fund Accounting Services Fee 18,629
Professional Fees 12,160
Printing Expenses 10,420
Fund Services Fee 2,772
Administration Fee 2,157
Trustees' Fees and Expenses 1,633
Amortization of Organization Expenses 1,418
Insurance Expense 117
Miscellaneous 11,674
--------
Total Fund Expenses 607,536
Less: Reimbursement of Expenses (45,434)
--------
NET FUND EXPENSES 562,102
----------
NET INVESTMENT INCOME 1,232,335
NET REALIZED GAIN ON INVESTMENT ALLOCATED FROM
PORTFOLIO 3,113,158
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT ALLOCATED FROM PORTFOLIO 3,526,381
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $7,871,874
==========
The Accompanying Notes are an Integral Part of the Financial Statements.
11
J.P. MORGAN DISCIPLINED EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
MAY 31, 2000 MAY 31, 1999
-------------- --------------
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 1,232,335 $ 496,484
Net Realized Gain on Investment Allocated from
Portfolio 3,113,158 674,473
Net Change in Unrealized Appreciation of
Investment Allocated from Portfolio 3,526,381 10,305,886
------------- -------------
Net Increase in Net Assets Resulting from
Operations 7,871,874 11,476,843
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (1,081,741) (248,386)
Net Realized Gain (3,587,440) (128,313)
------------- -------------
Total Distributions to Shareholders (4,669,181) (376,699)
------------- -------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 164,257,053 108,061,646
Reinvestment of Dividends and Distributions 4,396,920 363,369
Cost of Shares of Beneficial Interest Redeemed (131,993,761) (16,969,659)
------------- -------------
Net Increase from Transactions in Shares of
Beneficial Interest 36,660,212 91,455,356
------------- -------------
Total Increase in Net Assets 39,862,905 102,555,500
NET ASSETS
Beginning of Fiscal Year 120,592,429 18,036,929
------------- -------------
End of Fiscal Year (including undistributed net
investment income of $415,658 and $265,064,
respectively) $ 160,455,334 $ 120,592,429
============= =============
The Accompanying Notes are an Integral Part of the Financial Statements.
12
J.P. MORGAN DISCIPLINED EQUITY FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Selected data for a unit outstanding throughout each period are as follows:
FOR THE PERIOD
FOR THE FISCAL YEAR DECEMBER 31, 1997
ENDED MAY 31, (COMMENCEMENT OF
-------------------- OPERATIONS) THROUGH
2000 1999 MAY 31, 1998
--------- --------- -------------------
NET ASSET VALUE PER SHARE, BEGINNING OF PERIOD $ 18.22 $ 14.95 $ 12.98
-------- -------- ------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.13 0.12 0.03
Net Realized and Unrealized Gain on Investments 0.82 3.28 1.96
-------- -------- ------------------
Total from Investment Operations 0.95 3.40 1.99
-------- -------- ------------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.13) (0.09) (0.02)
Net Realized Gain (0.37) (0.04) --
-------- -------- ------------------
Total Distributions to Shareholders (0.50) (0.13) (0.02)
-------- -------- ------------------
NET VALUE PER SHARE, END OF PERIOD $ 18.67 $ 18.22 $ 14.95
======== ======== ==================
RATIOS AND SUPPLEMENTAL DATA
Total Return 5.19% 22.86% 15.33%(a)
Net Assets, End of Period (in thousands) $160,455 $120,592 $ 18,037
Ratio to Average Net Assets
Net Expenses 0.75% 0.75% 0.75%(b)
Net Investment Income 0.76% 0.89% 1.00%(b)
Expenses without Reimbursement 0.78% 0.86% 3.28%(b)
- -----------------------
(a) Not Annualized.
(b) Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
13
J.P. MORGAN DISCIPLINED EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan Disciplined 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 December 31, 1997.
The fund invests all of its investable assets in The Disciplined 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 (10% at
May 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:
a) Valuation of securities by the portfolio is discussed in Note 1a of the
portfolio's Notes to Financial Statements which are included elsewhere in
this report.
b) The fund records its share of net investment income, realized and
unrealized gain and loss and adjusts its investment in the portfolio each
day. All the net investment income and realized and unrealized gain and
loss of the portfolio is allocated pro rata among the fund and other
investors in the portfolio at the time of such determination.
c) Substantially all the fund's net investment income is declared as
dividends and paid quarterly. Distributions to shareholders of net
realized capital gain, if any, are declared and paid annually.
d) The fund incurred organization expenses in the amount of $7,898. 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.
e) Expenses incurred by the trust with respect to any two or more funds in
the trust are allocated in proportion to the net assets of each fund in
the trust, except where allocations of direct expenses to each fund can
otherwise be made fairly. Expenses directly attributable to a fund are
charged to that fund.
f) 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. The fund earns
foreign income which may be subject to foreign withholding tax at various
rates.
14
J.P. MORGAN DISCIPLINED EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2000
- -------------------------------------------------------------------------------
g) The fund accounts for and reports distributions to shareholders in
accordance with Statement of Position 93-2: "Determination, Disclosure,
and Financial Statement Presentation of Income, Capital Gain, and Return
of Capital Distributions by Investment Companies." The effect of applying
this statement as of May 31, 2000 was to decrease accumulated net realized
gain on investment by $12,388 and increase paid in-capital by $12,388. Net
investment income, net realized gains and net assets were not affected by
this change. This adjustment is primarily attributable to reclassification
of dividend income.
h) For federal income tax purposes, the fund incurred approximately
$1,290,827 of long term capital losses in the period from November 1, 1999
to May 31, 2000. These losses were deferred for tax purposes until June 1,
2000.
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 May 31, 2000, the fee for these services amounted to
$2,157.
b) The trust, on behalf of the fund, has an Administrative Services Agreement
(the "Services Agreement") with Morgan, under which Morgan is responsible
for certain aspects of the administration and operation of the fund. Under
the Services Agreement, the fund has agreed to pay Morgan a fee equal to
its allocable share of an annual complex-wide charge. This charge is
calculated based on the aggregate average daily net assets of the
portfolio and other portfolios in which the trust and the J.P. Morgan
Institutional Funds invest (the "master portfolios") and J.P. Morgan
Series Trust in accordance with the following annual schedule: 0.09% on
the first $7 billion of their aggregate average daily net assets and 0.04
% of 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 fund is determined by the proportionate share that its net assets
bear to the net assets of the trust, the master portfolios, other
investors in the master portfolios for which Morgan provides similar
services, and J.P. Morgan Series Trust. For the fiscal year ended May 31,
2000, the fee for these services amounted to $40,561.
In addition, J.P.Morgan has agreed to reimburse the fund to the extent
necessary to maintain the total operating expenses of the fund, including
the expenses allocated to the fund from the portfolio, at no more than
0.75 % of the average daily net assets of the fund. This reimbursement
arrangement can be changed or terminated at any time after September 30,
2000, at the option of J.P.Morgan. For the fiscal year ended May 31, 2000,
Morgan has agreed to reimburse the fund $45,434 for expenses that exceeded
this limit.
15
J.P. MORGAN DISCIPLINED EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2000
- -------------------------------------------------------------------------------
c) The trust, on behalf of the fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal account
maintenance service to fund shareholders. The agreement provides for the
fund to pay Morgan a fee for these services which is computed daily and
paid monthly at an annual rate of 0.25% of the average daily net assets of
the fund. For the fiscal year ended May 31, 2000, the fee for these
services amounted to $407,701.
Morgan, Charles Schwab & Co. ("Schwab") and the trust are parties to
separate services and operating agreements (the "Schwab Agreement")
whereby Schwab makes the fund shares available to customers of investment
advisors and other financial intermediaries who are Schwab's clients. The
fund is not responsible for payments to Schwab under the Schwab
Agreements; however, in the event the services 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
$2,772 for the fiscal year ended May 31, 2000.
e) An aggregate annual fee of $75,000 is paid to each trustee for serving as
a trustee of the trust, the J.P. Morgan Institutional Funds, the master
portfolios and J.P. Morgan Series Trust. The Trustees' Fees and Expenses
shown in the financial statements represent the fund's allocated portion
of 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 $500.
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:
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
MAY 31, 2000 MAY 31, 1999
-------------- ----------------
Shares sold...................................... 8,517,873 6,403,080
Reinvestment of dividends and distributions...... 281,048 22,322
Shares redeemed.................................. (6,823,631) (1,014,007)
------------- ---------------
Net Increase..................................... 1,975,290 5,411,395
============= ===============
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 26, 1999, with unaffiliated lenders. The maximum borrowing
under the Agreement was $150,000,000. The Agreement expired on May 23, 2000,
16
J.P. MORGAN DISCIPLINED EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2000
- -------------------------------------------------------------------------------
however, the fund as party to the Agreement has extended the Agreement and
continues its participation therein for an additional 364 days until May 21,
2001. The maximum borrowing under the new Agreement is $150,000,000.
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
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
0.085% on the unused portion of the committed amount. This is allocable to the
funds in accordance with the procedures established by their respective trustees
or directors. There were no outstanding borrowings pursuant to the agreement as
of May 31, 2000.
* * * * *
5. TAX INFORMATION NOTICE (UNAUDITED)
For corporate taxpayers 37.93% of the ordinary income distributions paid during
the fiscal year ended May 31, 2000 qualify for the corporate dividends received
deductions.
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan Disciplined 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 Disciplined Equity Fund (one of the series constituting part of J.P.
Morgan Funds, hereafter referred to as the "fund") at May 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 two years in the period then ended and for the period December 31,
1997 (commencement of operations) through May 31, 1998, in conformity with
accounting principles generally accepted in the United States. 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, 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 audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
July 14, 2000
18
The Disciplined Equity Portfolio
Annual Report May 31, 2000
(The following pages should be read in conjunction
with the J.P. Morgan Disciplined Equity Fund
Annual Financial Statements)
19
THE DISCIPLINED EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
MAY 31, 2000
- -------------------------------------------------------------------------------
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------ ------------- ---------------
COMMON STOCKS (97.2%)
BASIC INDUSTRIES (2.2%)
CHEMICALS (1.1%)
Air Products & Chemicals, Inc.................... 134,100 $ 4,643,212
Dow Chemical Co.................................. 14,000 1,498,875
IMC Global, Inc.................................. 1,300 19,987
PPG Industries, Inc.............................. 61,900 3,067,919
Praxair, Inc..................................... 56,700 2,381,400
Rohm & Haas Co................................... 160,200 5,466,825
Solutia, Inc..................................... 43,300 525,012
--------------
17,603,230
--------------
FOREST PRODUCTS & PAPER (0.4%)
Bowater, Inc..................................... 9,800 506,537
Fort James Corp.................................. 76,400 1,728,550
Georgia-Pacific Group............................ 7,200 235,800
International Paper Co........................... 66,300 2,308,069
Smurfit-Stone Container Corp.+................... 73,000 1,035,687
Temple-Inland, Inc............................... 18,600 924,187
--------------
6,738,830
--------------
METALS & MINING (0.7%)
Alcoa, Inc....................................... 149,600 8,742,250
Allegheny Technologies, Inc...................... 38,200 861,887
Nucor Corp....................................... 29,400 1,142,925
Phelps Dodge Corp................................ 23,200 1,041,100
--------------
11,788,162
--------------
TOTAL BASIC INDUSTRIES......................... 36,130,222
--------------
CONSUMER GOODS & SERVICES (19.4%)
APPARELS & TEXTILES (0.1%)
Jones Apparel Group, Inc.+....................... 58,000 1,555,125
--------------
AUTOMOTIVE (2.0%)
Dana Corp........................................ 58,200 1,502,287
Delphi Automotive Systems Corp................... 193,100 3,487,869
Ford Motor Co.................................... 333,800 16,210,162
General Motors Corp.............................. 136,900 9,668,562
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------ ------------- ---------------
AUTOMOTIVE (CONTINUED)
Goodyear Tire and Rubber Co...................... 51,500 $ 1,281,062
Lear Corp.+...................................... 36,800 862,500
--------------
33,012,442
--------------
BROADCASTING & PUBLISHING (2.3%)
AT&T Corp. - Liberty Media Group, Class A........ 80,100 3,549,431
Comcast Corp., Class A+.......................... 161,500 6,116,812
Gannett Co., Inc................................. 124,700 8,074,325
Knight-Ridder, Inc............................... 43,600 2,310,800
MediaOne Group, Inc.+............................ 246,000 16,435,875
New York Times Co., Class A...................... 8,300 318,512
--------------
36,805,755
--------------
ENTERTAINMENT, LEISURE & MEDIA (3.2%)
America Online, Inc.+............................ 425,400 22,546,200
Fox Entertainment Group, Inc. , Class A+......... 56,000 1,463,000
International Game Technology+................... 41,500 1,125,687
Seagram Company Ltd.(i).......................... 164,000 7,820,750
Time Warner, Inc................................. 243,500 19,221,281
--------------
52,176,918
--------------
FOOD, BEVERAGES & TOBACCO (3.2%)
Bestfoods........................................ 82,200 5,301,900
Coca-Cola Co..................................... 138,700 7,403,112
General Mills, Inc............................... 69,200 2,746,375
H.J. Heinz Co.................................... 104,600 4,099,012
Hershey Foods Corp............................... 2,300 119,312
Kellogg Co....................................... 85,400 2,594,025
Nabisco Holdings Corp., Class A.................. 6,300 290,981
Philip Morris Companies, Inc..................... 794,100 20,745,862
Quaker Oats Co................................... 42,400 3,119,050
Ralston-Ralston Purina Group..................... 21,700 402,806
Unilever NV (ADR)(i)............................. 122,500 6,224,531
--------------
53,046,966
--------------
The Accompanying Notes are an Integral Part of the Financial Statements.
20
THE DISCIPLINED EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 2000
- -------------------------------------------------------------------------------
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------ ------------- ---------------
HOUSEHOLD PRODUCTS (1.5%)
Clorox Co........................................ 69,600 $ 2,757,900
Kimberly-Clark Corp.............................. 16,400 992,200
Procter & Gamble Co.............................. 320,500 21,313,250
--------------
25,063,350
--------------
PERSONAL CARE (0.6%)
Estee Lauder Companies, Inc., Class A............ 17,400 779,737
Gillette Co...................................... 274,100 9,148,087
--------------
9,927,824
--------------
RESTAURANTS & HOTELS (0.5%)
Marriott International, Inc. - Class A........... 51,100 1,852,375
McDonald's Corp.................................. 89,200 3,194,475
Starwood Hotels & Resorts Worldwide, Inc......... 81,700 2,415,256
--------------
7,462,106
--------------
RETAIL (6.0%)
Abercrombie & Fitch Co., Class A+................ 9,300 91,256
Circuit City Stores-Circuit City Group........... 25,200 1,255,275
Federated Department Stores, Inc.+............... 81,000 3,118,500
Gap, Inc......................................... 266,100 9,330,131
Hasbro, Inc...................................... 37,900 620,612
Home Depot, Inc.................................. 221,400 10,807,087
J.C. Penney, Inc................................. 67,000 1,214,375
Kmart Corp.+..................................... 98,800 839,800
Kroger Co.+...................................... 246,800 4,905,150
Limited, Inc..................................... 120,200 2,899,825
Lowe's Companies, Inc............................ 94,600 4,404,812
Mattel, Inc...................................... 154,700 2,098,119
May Department Stores Co......................... 103,700 3,117,481
Safeway, Inc.+................................... 27,900 1,286,887
Sears, Roebuck & Co.............................. 85,700 3,165,544
Target Corp...................................... 142,700 8,945,506
TJX Companies, Inc............................... 109,100 2,359,287
Wal-Mart Stores, Inc............................. 647,300 37,300,662
--------------
97,760,309
--------------
TOTAL CONSUMER GOODS &
SERVICES..................................................... 316,810,795
--------------
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------ ------------- ---------------
ENERGY (6.3%)
GAS EXPLORATION (0.1%)
Union Pacific Resources Group, Inc............... 88,600 $ 2,098,712
--------------
GAS-PIPELINES (0.1%)
Dynegy, Inc. - Class A........................... 25,900 1,997,537
--------------
OIL-PRODUCTION (5.8%)
Chevron Corp..................................... 111,200 10,279,050
Conoco, Inc. - Class B........................... 47,100 1,342,350
Devon Energy Corp................................ 10,400 622,050
Exxon Mobil Corp................................. 595,900 49,645,919
Royal Dutch Petroleum Co. (ADR)(i)............... 374,500 23,382,844
Texaco, Inc...................................... 96,600 5,548,462
Tosco Corp....................................... 61,200 1,874,250
Ultramar Diamond Shamrock Corp.+................. 23,500 609,531
Valero Energy Corp............................... 24,400 713,700
--------------
94,018,156
--------------
OIL-SERVICES (0.3%)
Baker Hughes, Inc................................ 54,300 1,968,375
Cooper Cameron Corp.+............................ 9,000 627,750
Global Marine, Inc.+............................. 67,400 1,908,262
--------------
4,504,387
--------------
TOTAL ENERGY................................... 102,618,792
--------------
FINANCE (14.0%)
BANKING (6.4%)
AmSouth Bancorporation........................... 12,500 225,781
Bank of America Corp............................. 124,000 6,889,750
Bank One Corp.................................... 225,300 7,448,981
Banknorth Group Inc.............................. 16,900 235,544
Charter One Financial, Inc....................... 56,000 1,274,000
Chase Manhattan Corp............................. 53,800 4,018,187
Citigroup, Inc................................... 410,000 25,496,875
Comerica, Inc.................................... 35,400 1,792,125
Compass Bancshares, Inc.......................... 19,400 392,850
Dime Bancorp, Inc................................ 43,200 788,400
First Tennessee National Corp.................... 29,500 604,750
First Union Corp................................. 275,600 9,697,675
Firstar Corp..................................... 146,800 3,752,575
The Accompanying Notes are an Integral Part of the Financial Statements.
21
THE DISCIPLINED EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 2000
- -------------------------------------------------------------------------------
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------ ------------- ---------------
BANKING (CONTINUED)
FleetBoston Financial Corp....................... 206,600 $ 7,812,062
Golden West Financial Corp....................... 35,900 1,498,825
GreenPoint Financial Corp........................ 31,300 653,387
Hibernia Corp., Class A.......................... 35,100 451,912
KeyCorp.......................................... 118,800 2,494,800
Marshall & Ilsley Corp........................... 28,400 1,377,400
Mercantile Bankshares Corp....................... 14,800 490,250
North Fork Bancorporation, Inc................... 39,400 652,562
Pacific Century Financial Corp................... 10,400 234,000
PNC Bank Corp.................................... 81,600 4,110,600
Regions Financial Corp........................... 46,500 1,052,062
Southtrust Corp.................................. 47,500 1,285,469
Summit Bancorp................................... 37,300 1,070,044
SunTrust Bank, Inc............................... 7,000 418,250
TCF Financial Corp............................... 23,500 615,406
U.S. Bancorp..................................... 165,500 4,303,000
U.S. Trust Corp.................................. 67,100 9,532,394
Washington Mutual, Inc........................... 123,700 3,556,375
Wilmington Trust Corp............................ 4,300 218,225
--------------
104,444,516
--------------
FINANCIAL SERVICES (4.8%)
A.G. Edwards, Inc................................ 17,700 618,394
Ameritrade Holding Corp. , Class A+.............. 33,500 381,062
Associates First Capital Corp., Class A.......... 165,600 4,543,650
AXA Financial, Inc............................... 137,300 5,346,119
Bear Stearns Companies, Inc...................... 30,400 1,197,000
Capital One Financial Corp....................... 59,500 2,811,375
Charles Schwab Corp.............................. 29,700 853,875
CIT Group, Inc., Class A......................... 62,800 1,150,025
Countrywide Credit Industries, Inc............... 27,900 857,925
E*TRADE Group, Inc.+............................. 85,300 1,327,481
Fannie Mae....................................... 185,800 11,171,225
Franklin Resources, Inc.......................... 50,000 1,500,000
Freddie Mac...................................... 180,100 8,014,450
Goldman Sachs Group, Inc......................... 118,900 8,746,581
Household International, Inc..................... 86,400 4,060,800
John Hancock Financial Services, Inc.+........... 108,700 2,425,369
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------ ------------- ---------------
FINANCIAL SERVICES (CONTINUED)
Lehman Brothers Holdings, Inc.................... 39,100 $ 3,018,031
Merrill Lynch & Co., Inc......................... 112,900 11,134,763
Morgan Stanley Dean Witter & Co.................. 52,900 3,805,494
Paine Webber Group, Inc.......................... 49,100 2,206,431
Providian Financial Corp......................... 5,000 444,688
TD Waterhouse Group, Inc.+....................... 105,400 1,627,113
--------------
77,241,851
--------------
INSURANCE (2.8%)
Allstate Corp.................................... 397,400 10,531,100
Ambac Financial Group, Inc....................... 33,600 1,692,600
American General Corp............................ 15,900 1,018,594
American International Group, Inc................ 61,200 6,888,825
Aon Corp......................................... 99,100 3,480,888
CIGNA Corp....................................... 58,100 5,160,006
Financial Security Assurance Holdings Ltd........ 3,000 225,375
Fremont General Corp............................. 4,800 21,000
Hartford Financial Services Group, Inc........... 85,300 5,043,363
Lincoln National Corp............................ 56,400 2,185,500
MBIA, Inc........................................ 47,700 2,757,656
MetLife, Inc..................................... 268,400 5,502,200
Torchmark Corp................................... 61,100 1,661,156
--------------
46,168,263
--------------
TOTAL FINANCE.................................. 227,854,630
--------------
HEALTH CARE (10.5%)
BIOTECHNOLOGY (0.1%)
Genzyme Corp.+................................... 16,100 914,681
Human Genome Sciences, Inc.+..................... 9,800 859,950
Incyte Pharmaceuticals, Inc.+.................... 6,100 321,775
--------------
2,096,406
--------------
HEALTH SERVICES (0.9%)
Aetna, Inc....................................... 57,400 3,831,450
HCA - The Healthcare Co.+........................ 153,300 4,139,100
Tenet Healthcare Corp............................ 123,000 3,151,875
The Accompanying Notes are an Integral Part of the Financial Statements.
22
THE DISCIPLINED EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 2000
- -------------------------------------------------------------------------------
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------ ------------- ---------------
HEALTH SERVICES (CONTINUED)
United Health Group, Inc......................... 23,900 $ 1,782,044
Wellpoint Health Networks, Inc.+................. 23,100 1,677,638
--------------
14,582,107
--------------
MEDICAL SUPPLIES (0.7%)
Baxter International Inc......................... 2,100 139,650
Becton, Dickinson & Co........................... 93,400 2,726,113
Boston Scientific Corp.+......................... 50,500 1,294,063
Guidant Corp.+................................... 7,300 369,563
Medtronic, Inc................................... 113,400 5,854,275
PE Corp.- PE Biosystems Group.................... 2,600 144,300
St. Jude Medical, Inc............................ 27,500 988,281
--------------
11,516,245
--------------
PHARMACEUTICALS (8.8%)
Abbott Laboratories.............................. 299,100 12,169,631
ALZA Corp.+...................................... 97,400 4,949,138
American Home Products Corp...................... 329,200 17,735,650
Bristol-Myers Squibb Co.......................... 461,700 25,422,356
Eli Lilly & Co................................... 279,600 21,284,550
Forest Laboratories, Inc.+....................... 23,500 2,079,750
IDEC Pharmaceuticals Corp.+...................... 8,000 510,500
Johnson & Johnson................................ 26,500 2,371,750
Merck & Co., Inc................................. 89,800 6,701,325
Pharmacia Corp................................... 314,900 16,355,119
Schering-Plough Corp............................. 282,600 13,670,775
Warner-Lambert Co................................ 162,800 19,881,950
Watson Pharmaceuticals, Inc.+.................... 20,600 908,975
--------------
144,041,469
--------------
TOTAL HEALTH CARE.............................. 172,236,227
--------------
INDUSTRIAL PRODUCTS & SERVICES (8.7%)
AEROSPACE (1.1%)
Boeing Co........................................ 13,400 523,438
Honeywell International, Inc..................... 275,800 15,082,813
Lockheed Martin Corp............................. 47,400 1,161,300
Raytheon Co., Class A............................ 40,700 958,994
Raytheon Co., Class B............................ 12,800 300,000
--------------
18,026,545
--------------
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------ ------------- ---------------
BUILDING MATERIALS (0.0%)
USG Corp......................................... 16,600 $ 625,613
--------------
CAPITAL GOODS (0.2%)
Eaton Corp....................................... 28,900 2,097,056
PACCAR, Inc...................................... 27,200 1,139,000
--------------
3,236,056
--------------
COMMERCIAL SERVICES (0.3%)
Cendant Corp.+................................... 418,200 5,541,150
--------------
DIVERSIFIED MANUFACTURING (6.2%)
B.F. Goodrich Co................................. 48,200 1,711,100
Cooper Industries, Inc........................... 40,000 1,340,000
Eastman Kodak Co................................. 105,400 6,297,650
General Electric Co.(s).......................... 1,277,600 67,233,700
Ingersoll-Rand Co................................ 47,500 2,164,219
ITT Industries, Inc.............................. 30,000 1,036,875
Johnson Controls, Inc............................ 20,900 1,189,994
Rockwell International Corp...................... 65,700 2,693,700
Tyco International Ltd.(i)....................... 356,300 16,768,369
Xerox Corp....................................... 2,800 75,950
--------------
100,511,557
--------------
ELECTRICAL EQUIPMENT (0.7%)
Caterpillar, Inc................................. 120,700 4,616,775
Emerson Electric Co.............................. 107,100 6,318,900
--------------
10,935,675
--------------
POLLUTION CONTROL (0.2%)
Waste Management, Inc............................ 118,900 2,422,588
--------------
TOTAL INDUSTRIAL PRODUCTS & SERVICES........... 141,299,184
--------------
TECHNOLOGY (29.2%)
COMPUTER PERIPHERALS (1.3%)
EMC Corp.+....................................... 110,600 12,864,163
Lexmark International Group, Inc., Class A+...... 26,700 1,862,325
Quantum Corp.- DLT & Storage Systems+............ 34,900 362,088
Seagate Technology, Inc.+........................ 109,900 6,374,200
--------------
21,462,776
--------------
The Accompanying Notes are an Integral Part of the Financial Statements.
23
THE DISCIPLINED EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 2000
- -------------------------------------------------------------------------------
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------ ------------- ---------------
COMPUTER SOFTWARE (5.7%)
Adobe Systems, Inc............................... 30,100 $ 3,388,131
Autodesk, Inc.................................... 13,300 494,594
BMC Software, Inc.+.............................. 62,500 2,750,000
Citrix Systems, Inc.+............................ 58,200 3,062,775
Computer Associates International, Inc........... 164,700 8,482,050
Microsoft Corp.+................................. 929,400 58,145,588
Network Associates, Inc.+........................ 1,800 39,375
Oracle Corp.+.................................... 145,500 10,457,813
Siebel Systems, Inc.+............................ 42,000 4,914,000
Symantec Corp.+.................................. 13,300 874,475
Tibco Software, Inc.+............................ 14,200 789,875
--------------
93,398,676
--------------
COMPUTER SYSTEMS (4.3%)
Apple Computer, Inc.+............................ 34,600 2,906,400
Compaq Computer Corp............................. 235,600 6,184,500
Dell Computer Corp.+............................. 41,900 1,806,938
Hewlett-Packard Co............................... 142,400 17,105,800
International Business Machines Corp............. 85,000 9,121,563
Sun Microsystems, Inc.+.......................... 363,900 27,883,838
Veritas Software Corp.+.......................... 51,500 5,999,750
--------------
71,008,789
--------------
ELECTRONICS (4.2%)
Cisco Systems, Inc.+(s).......................... 1,192,600 67,903,663
--------------
INFORMATION PROCESSING (0.5%)
DoubleClick, Inc.+............................... 29,600 1,250,600
Exodus Communications, Inc.+..................... 19,200 1,354,800
Yahoo, Inc.+..................................... 43,600 4,929,525
--------------
7,534,925
--------------
SEMICONDUCTORS (7.3%)
Advanced Micro Devices, Inc.+.................... 30,900 2,516,419
Altera Corp.+.................................... 32,500 2,790,938
Applied Materials, Inc.+......................... 183,900 15,355,650
Intel Corp.(s)................................... 570,400 71,121,750
Lattice Semiconductor Corp.+..................... 11,900 705,819
National Semiconductor Corp.+.................... 37,800 2,031,750
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------ ------------- ---------------
SEMICONDUCTORS (CONTINUED)
Texas Instruments, Inc........................... 337,400 $ 24,377,150
Xilinx, Inc.+.................................... 7,700 586,163
--------------
119,485,639
--------------
TELECOMMUNICATION SERVICES (1.6%)
Allegiance Telecom, Inc.+........................ 20,000 1,057,500
Sprint Corp. (PCS Group)+........................ 48,800 2,708,400
WorldCom, Inc.+.................................. 572,900 21,555,363
--------------
25,321,263
--------------
TELECOMMUNICATIONS-EQUIPMENT (4.3%)
JDS Uniphase Corp.+.............................. 1,100 96,800
Lucent Technologies, Inc......................... 177,600 10,189,800
Motorola, Inc.................................... 147,900 13,865,625
Nortel Networks Corp.(i)......................... 649,500 35,275,969
QualComm, Inc.+.................................. 61,400 4,075,425
Tellabs, Inc.+................................... 98,400 6,389,850
--------------
69,893,469
--------------
TOTAL TECHNOLOGY............................... 476,009,200
--------------
TRANSPORTATION (0.5%)
AIRLINES (0.1%)
Northwest Airlines Corp.+........................ 14,400 409,500
Southwest Airlines Co............................ 45,400 871,113
--------------
1,280,613
--------------
RAILROADS (0.4%)
Burlington Northern Railroad Co.................. 84,700 2,001,038
CSX Corp......................................... 39,300 854,775
Norfolk Southern Corp............................ 69,800 1,243,313
Union Pacific Resources Group, Inc............... 62,100 2,627,606
--------------
6,726,732
--------------
TOTAL TRANSPORTATION........................... 8,007,345
--------------
UTILITIES (6.4%)
ELECTRIC (1.8%)
Allegheny Energy, Inc............................ 10,900 337,219
Carolina Power & Light Co........................ 93,600 3,217,500
Central & South West Corp........................ 142,000 2,955,375
Cinergy Corp..................................... 41,000 1,091,625
The Accompanying Notes are an Integral Part of the Financial Statements.
24
THE DISCIPLINED EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 2000
- -------------------------------------------------------------------------------
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------ ------------- ---------------
ELECTRIC (CONTINUED)
CMS Energy Corp.................................. 40,800 $ 928,200
Dominion Resources, Inc.......................... 65,700 3,005,775
DTE Energy Co.................................... 49,200 1,700,475
Edison International............................. 76,900 1,643,738
Entergy Corp..................................... 65,000 1,885,000
FPL Group, Inc................................... 48,200 2,385,900
GPU, Inc......................................... 41,000 1,158,250
NiSource, Inc.................................... 40,600 733,338
PG&E Corp........................................ 106,100 2,751,969
Pinnacle West Capital Corp....................... 27,600 986,700
PPL Corp......................................... 53,100 1,254,488
TXU Corp......................................... 84,900 3,035,175
USEC, Inc........................................ 6,600 30,525
Wisconsin Energy Corp............................ 38,900 821,763
--------------
29,923,015
--------------
GAS-PIPELINES (0.0%)
Enron Corp....................................... 2,800 204,050
--------------
NATURAL GAS (0.4%)
Columbia Energy Group............................ 25,600 1,656,000
El Paso Energy Corp.............................. 45,000 2,317,500
Williams Companies, Inc.......................... 73,600 3,059,000
--------------
7,032,500
--------------
TELEPHONE (4.2%)
Global Crossing, Ltd.(i)+........................ 209,400 5,248,088
ALLTEL Corp...................................... 52,200 3,415,838
AT&T Corp........................................ 334,200 11,592,563
Bell Atlantic Corp............................... 147,900 7,820,213
GTE Corp......................................... 204,700 12,947,275
Level 3 Communications, Inc.+.................... 7,200 549,450
SBC Communications, Inc.......................... 632,100 27,614,869
--------------
69,188,296
--------------
TOTAL UTILITIES................................ 106,347,861
--------------
TOTAL COMMON STOCKS
(COST $1,428,543,392)......................... 1,587,314,256
--------------
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- ------------------------------------------------ ------------- ---------------
FIXED INCOME SECURITIES (0.2%)
U.S. TREASURY OBLIGATIONS (0.2%)
US Treasury Note, 5.38%
due 07/31/00(s) (cost $3,838,665).............. $ 3,840,000 $ 3,838,195
--------------
SHORT-TERM INVESTMENTS (2.3%)
OTHER INVESTMENT COMPANIES (2.3%)
J.P. Morgan Institutional
Prime Money Market
Fund (cost $36,831,844)*....................... 36,831,844 36,831,844
--------------
TOTAL INVESTMENTS
(COST $1,469,213,901) (99.7%)................................. 1,627,984,295
OTHER ASSETS IN EXCESS OF LIABILITIES (0.3%)....................
4,850,997
--------------
NET ASSETS (100.0%)............................................. $1,632,835,292
==============
- -----------------------------
Note: Based on the cost of investments of $1,472,709,539 for federal income tax
purposes at May 31, 2000 the aggregate gross unrealized appreciation and
depreciation was $266,871,008 and $111,596,253, respectively, resulting in net
unrealized appreciation of $155,274,755.
+ - Non-income producing security.
(i) - Foreign security.
(s) - Security is fully or partially segregated with custodian as collateral for
futures contracts or with brokers as initial margin for futures contracts. Total
market value of securities segregated is $79,679,018.
* - Money market mutual fund registered under the Investment Company Act of
1940, as amended, and advised by J.P. Morgan Investment Management, Inc.
ADR - American Depository Receipt.
The Accompanying Notes are an Integral Part of the Financial Statements.
25
THE DISCIPLINED EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2000
- -------------------------------------------------------------------------------
ASSETS
Investments at Value (Cost $1,469,213,901 ) $1,627,984,295
Cash 1,349,989
Receivable for Investments Sold 12,378,250
Dividends Receivable 2,058,185
Interest Receivable 305,700
Deferred Organization Expenses 2,749
Prepaid Expenses and Other Assets 10,049
--------------
Total Assets 1,644,089,217
--------------
LIABILITIES
Payable for Investments Purchased 10,426,909
Advisory Fee Payable 477,746
Variation Margin Payable 150,466
Custody Fee Payable 130,279
Administrative Services Fee Payable 33,271
Administration Fee Payable 2,075
Fund Services Fee Payable 888
Accrued Trustees' Fees and Expenses 5,018
Accrued Expenses 27,273
--------------
Total Liabilities 11,253,925
--------------
NET ASSETS
Applicable to Investors' Beneficial Interests $1,632,835,292
==============
The Accompanying Notes are an Integral Part of the Financial Statements.
26
THE DISCIPLINED EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MAY 31, 2000
- -------------------------------------------------------------------------------
INVESTMENT INCOME
Dividend Income (Net of Foreign Withholding Tax
of $144,421) $19,379,620
Interest Income 2,212,424
-----------
Investment Income 21,592,044
EXPENSES
Advisory Fee $ 5,016,217
Administrative Services Fee 359,899
Custodian Fees and Expenses 328,573
Professional Fees and Expenses 47,786
Fund Services Fee 24,487
Trustees' Fees and Expenses 20,190
Administration Fee 13,826
Printing Expenses 8,995
Amortization of Organization Expense 1,737
Miscellaneous 1,186
-----------
Total Expenses 5,822,896
-----------
NET INVESTMENT INCOME 15,769,148
NET REALIZED GAIN ON
Investments 29,397,119
Futures Contracts (3,704,983)
-----------
Net Realized Gain 25,692,136
NET CHANGE IN UNREALIZED APPRECIATION OF
Investments 25,636,155
Futures Contracts 296,765
-----------
Net Change in Unrealized Appreciation 25,932,920
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $67,394,204
===========
The Accompanying Notes are an Integral Part of the Financial Statements.
27
THE DISCIPLINED EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
MAY 31, 2000 MAY 31, 1999
-------------- --------------
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 15,769,148 $ 7,760,571
Net Realized Gain on Investments and Futures
Contracts 25,692,136 34,862,292
Net Change in Unrealized Appreciation of
Investments and Futures Contracts 25,932,920 97,213,895
-------------- --------------
Net Increase in Net Assets Resulting from
Operations 67,394,204 139,836,758
-------------- --------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 923,551,550 796,144,084
Withdrawals (486,793,918) (121,433,323)
-------------- --------------
Net Increase from Investors' Transactions 436,757,632 674,710,761
-------------- --------------
Total Increase in Net Assets 504,151,836 814,547,519
NET ASSETS
Beginning of Fiscal Year 1,128,683,456 314,135,937
-------------- --------------
End of Fiscal Year $1,632,835,292 $1,128,683,456
============== ==============
- -------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- -------------------------------------------------------------------------------
FOR THE PERIOD
DECEMBER 30, 1996
FOR THE FISCAL YEAR ENDED MAY 31, (COMMENCEMENT OF
---------------------------------- OPERATIONS) THROUGH
2000 1999 1998 MAY 31, 1997
---------- ---------- ---------- -------------------
RATIOS TO AVERAGE NET ASSETS
Net Expenses 0.40% 0.42% 0.45% 0.45%(a)
Net Investment Income 1.09% 1.18% 1.27% 1.54%(a)
Expenses without Reimbursement 0.40% 0.42% 0.51% 0.78%(a)
Portfolio Turnover 56.05% 50.64% 60.59% 20.47%(b)
- -----------------------
(a) Annualized.
(b) Not Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
28
THE DISCIPLINED EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Disciplined Equity Portfolio (the "portfolio") is one of five subtrusts
(portfolios) comprising The Series Portfolio (the "series portfolio"). The
series portfolio is registered under the Investment Company Act of 1940, as
amended, as a no-load, diversified, open-end management investment company which
was organized as a trust under the laws of the State of New York on June 24,
1994. The portfolio commenced operations on December 30, 1996. The portfolio's
investment objective is to provide a high total return from a broadly
diversified portfolio of equity securities. 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:
a) The portfolio values securities that are listed on an exchange using
prices supplied daily by an independent pricing service that are based on
the last traded price on a national securities exchange or in the absence
of recorded trades, at the readily available mean of the bid and asked
prices on such exchange, if such exchange or market constitutes the
broadest and most representative market for the security. Securities
listed on a foreign exchange are valued at the last traded price or in the
absence of recorded trades, at the readily available mean of the bid and
asked prices on such exchange available before the time when net assets
are valued. Independent pricing service procedures may also include the
use of prices based on yields or prices of securities of comparable
quality, coupon, maturity and type, indications as to values from dealers,
operating data, and general market conditions. Unlisted securities are
valued at the average of the quoted bid and asked prices in the
over-the-counter market provided by a principal market maker or dealer. If
prices are not supplied by the portfolio's independent pricing service or
principal market maker or dealer, such securities are priced using fair
values in accordance with procedures adopted by the portoflio's Trustees.
All short-term securities with a remaining maturity of sixty days or less
are valued using the amortized cost method.
b) 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 to the repurchase price plus 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
satisfaction 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.
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 become known. Interest income, which
includes the amortization of premiums and discounts, if any, is recorded
on an accrual basis. For financial and tax reporting purposes, realized
gains and losses are determined on the basis of specific lot
identification.
29
THE DISCIPLINED EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2000
- -------------------------------------------------------------------------------
d) The portfolio incurred organization expenses in the amount of $9,049 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 portfolio.
e) Expenses incurred by the series portfolio with respect to any two or more
portfolios in the series portfolio are allocated in proportion to the net
assets of each portfolio in the series portfolio, except where allocations
of direct expenses to each portfolio can otherwise be made fairly.
Expenses directly attributable to a portfolio are charged to that
portfolio.
f) Futures -- A futures contract is an agreement to purchase/sell a specified
quantity of an underlying instrument at a specified future date or to
make/receive a cash payment based on the value of a securities index. The
price at which the purchase and sale will take place is fixed when the
portfolio enters into the contract. Upon entering into such a contract,
the portfolio is required to pledge to the broker an amount of cash and/or
liquid securities equal to the minimum "initial margin" requirements of
the exchange. Pursuant to the contract, the portfolio agrees to receive
from, or pay to, the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as "variation margin" and are recorded by the portfolio as unrealized
gains or losses. When the contract is closed, the portfolio records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time when it was
closed. The portfolio invests in futures contracts for the purpose of
hedging its existing portfolio securities, or securities the portfolio
intends to purchase, against fluctuations in value caused by changes in
prevailing market interest rates or securities movements. The use of
futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the
underlying hedged assets.
g) The portfolio intends to be treated as a partnership for federal income
tax purposes. As such, each investor in the portfolio will be taxed on its
share of the portfolio's ordinary income and capital gains. It is intended
that the portfolio's assets will be managed in such a way that an investor
in the portfolio will be able to satisfy the requirements of Subchapter M
of the Internal Revenue Code.
2. TRANSACTIONS WITH AFFILIATES
a) Prior to October 1, 1998, the portfolio had an Investment Advisory
Agreement with Morgan Guaranty Trust Company of New York ("Morgan"). Under
the terms of the agreement, the portfolio paid Morgan at an annual rate of
0.35% 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 May 31, 2000, such fees amounted to
$5,067,613.
The fund 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 fund in an
amount to offset any doubling of investment advisory and shareholder
servicing fees. For the fiscal year ended May 31, 2000, J.P.
30
THE DISCIPLINED EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2000
- -------------------------------------------------------------------------------
Morgan has agreed to reimburse the fund $51,396 under this agreement.
Interest income included in the Statement of Operations for the year ended
May 31, 2000 includes $1,209,254 of interest income from investment in
affiliated Money Market Funds.
b) The portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as the co-administrator and exclusive placement
agent. Under a Co-Administration Agreement between FDI and the portfolio,
FDI provides administrative services necessary for the operations of the
portfolio, furnishes office space and facilities required for conducting
the business of the portfolio and pays the compensation of the officers
affiliated with FDI. The portfolio has agreed to pay FDI fees equal to its
allocable share of an annual complex-wide charge of $425,000 plus FDI's
out-of-pocket expenses. The amount allocable to the portfolio is based on
the ratio of the portfolio's net assets to the aggregate net assets of the
portfolio and certain other investment companies subject to similar
agreements with FDI. For the fiscal year ended May 31, 2000, the fee for
these services amounted to $13,826.
c) The portfolio has an Administrative Services Agreement (the "Services
Agreement") with Morgan, under which Morgan is responsible for certain
aspects of the administration and operation of the portfolio. Under the
Services Agreement, the portfolio has agreed to pay Morgan a fee equal to
its allocable share of an annual complex-wide charge. This charge is
calculated based on the aggregate average daily net assets of the
portfolio and other portfolios for which JPMIM acts as investment advisor
(the "master portfolios") and J.P. Morgan Series Trust in accordance with
the following annual schedule: 0.09 % on the first $7 billion of their
aggregate average daily net assets and 0.04% of their aggregate average
daily net assets in excess of $7 billion, less the complex-wide fees
payable to FDI. The portion of this charge payable by the portfolio is
determined by the proportionate share that its net assets bear to the net
assets of the master portfolios, other investors in the master portfolios
for which Morgan provides similar services, and J.P. Morgan Series Trust.
For the fiscal year ended May 31, 2000, the fee for these services
amounted to $359,899.
In addition, J.P. Morgan has agreed to reimburse the portfolio to the
extent necessary to maintain the total operating expenses of the portfolio
at no more than 0.45% of the average daily net assets of the portfolio
through September 30, 2000. This arrangement can be changed or terminated
at any time at the option of J.P. Morgan. For the fiscal year ended May
31, 2000, J.P. Morgan did not reimburse expenses under this agreement.
d) The portfolio has a Fund Services Agreement with Pierpont Group, Inc.
("Group") to assist the trustees in exercising their overall supervisory
responsibilities for the portfolio's affairs. The trustees of the
portfolio represent all the existing shareholders of Group. The
portfolio's allocated portion of Group's costs in performing its services
amounted to $24,487 for the fiscal year ended May 31, 2000.
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 represents the portfolio's
allocated portion of the total fees and expenses. The portfolio's Chairman
and Chief Executive Officer also serves
31
THE DISCIPLINED EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2000
- -------------------------------------------------------------------------------
as Chairman of Group and received compensation and employee benefits from
Group in his role as Group's Chairman. The allocated portion of such
compensation and benefits included in the Fund Services Fee shown in the
financial statements was $4,700.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended May 31, 2000, were as follows:
COST OF PROCEEDS
PURCHASES FROM SALES
- ------------- ------------
$1,239,716,804 $799,827,350
Futures Transactions as of May 31, 2000 are summarized as follows:
SUMMARY OF OPEN CONTRACTS AT MAY 31, 2000
NET UNREALIZED
APPRECIATION/ MARKET VALUE
CONTRACTS LONG (DEPRECIATION) OF CONTRACTS
-------------- -------------- ------------
S & P 500, expiring June 2000.................... 126 $ (410,793) $44,799,300
4. CREDIT AGREEMENT
The portfolio is party to a revolving line of credit agreement (the "Agreement")
as discussed more fully in Note 4 of the fund's Notes to the Financial
Statements which are included elsewhere in the report.
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The Disciplined 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 Disciplined Equity Portfolio (the
"portfolio") at May 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 three years in the period
then ended, and for the period December 30, 1996 (commencement of operations)
through May 31, 1997, in conformity with accounting principles generally
accepted in the United States. 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, 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 May 31, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
July 14, 2000
33
J.P. MORGAN FUNDS
PRIME MONEY MARKET FUND
FEDERAL MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
TAX AWARE ENHANCED INCOME FUND: SELECT SHARES
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.
IMAR216
J.P. MORGAN DISCIPLINED EQUITY FUND
ANNUAL REPORT
MAY 31, 2000