VONTOBEL EASTERN EUROPEAN EQUITY FUND
June 1996 Semi-Annual Report
Dear Shareholder:
We are extremely pleased at the enthusiastic response to our new fund from
both the investing public and the financial press. At June 28, 1996 net
assets totaled $15,012,850, an almost fivefold increase since the fund s
inception on February 15, 1996. The fund s closing NAV for this first
reporting period was $13.69, producing a return of 36.9%. For the same
period, the Nomura Research Inc. (NRI) Eastern European Index (ex-Russia)
gained 22.8%. For the second quarter, the fund s 25.9% return outpaced the
NRI Index s 13.9% and placed it first in the universe of emerging markets
equity funds tracked by Lipper Analytical Services.
While it is gratifying to be able to report such good performance over such
a short period, we reiterate that this fund is designed for investors who
already have exposure to international equity markets and who have a long-
term horizon. As the economies of Eastern Europe undergo a historic
transition to free-market principles, patient investors may potentially
realize substantial long-term gains from being in these markets early -- and
staying in them.
Russia is the riskiest of the five markets in this region represented in our
portfolio, and one in which we initially intended to delay our initial
investment. But first and foremost we are value-driven stockpickers, not
market timers. Our rule of thumb is that a company with the potential for a
real rate of return of 25%, by our calculation, is a strong buy candidate.
The plunge in the Russian market to absurdly low valuations presented a
unique opportunity for entry at bargain-basement prices. Russia represents
about 14% of portfolio assets, with Poland and Hungary, our core markets,
accounting for about half.
Despite the considerable risks of investing in this region, the two major
prerequisites for ongoing stock market appreciation are still in place.
First, valuation. These markets are trading at an estimated 1996 P/E of 10X,
and 7.5X for 1997. In comparison, the hot growth markets of Asia/Pacific,
even after the dramatic correction of 1994-95, sport multiples of P/E 18-20X.
They continue to be the fastest-growing economies in the world, but they are
no longer cheap. In our estimation a P/E of 14X would be a reasonable target
for the Eastern Europe markets. Even after the first half s stunning
performance, we are still far away from those levels.
Second, liquidity. Rising excess liquidity in the global financial system
will lead to increasing flows of capital into the region. From 1996 to 2000
foreign capital inflows to Eastern Europe will reach an estimated $64
billion, or double the amount invested in the preceding 5-year period.
Poland s debt has recently been rated investment-grade (BBB-) by Standard &
Poor s; the Czech Republic was given an A rating last year. Both countries
deficits are less than 3% of GDP, one of the Maastricht criteria for a single
European currency (and one which several EU members have not met). The
percentage of GDP generated by the private sector in Poland, Hungary and the
Czech Republic averaged 66% in 1995, and the admission of all three to the
OECD has further legitimized their status as developed, free-market
economies.
We believe that the investment opportunities presented by these markets are
comparable to those in Southeast Asia eight years ago. GDP in the region is
estimated to grow 4-6% up to the turn of the century, or twice the estimated
rate of growth for the European Union or the OECD. Trading at single-digit
multiples, Central and Eastern European markets offer a unique combination of
growth and value.
Arpad Pongracz
President
July 25, 1996
<PAGE>
Schedule of Portfolio Investments
June 30, 1996 (Unaudited)
Number
of Market
Shares Description Value
COMMON STOCKS: 75.81%
CROATIA: 1.69%
7,000 Pliva DD GDR (Miscellaneous) $ 278,250
CZECH REPUBLIC: 9.55%
4,500 Ceske Energeticke Zavody (Utility) 179,097
2,000 Ceske Radiokomunikace (Consumer Products)290,772
4,000 Cokoladovny Praha (Food Processor) 552,465
12,500 Komercni Banka AS GDR (Financial)337,500
1,200 Podnik Vypocetni Techniky (Technology) 209,356
1,569,190
HUNGARY: 27.32%
15,000 Borsodchem GDR (Chemicals) 292,500
12,100 Cofinec GDR (Miscellaneous) 577,775
13,000 Danubius Hotel & Spa (Construction & Property) 220,816
5,000 Egis RT (Chemicals) 298,918
150,462 Fotex First Hungarian-American Photo (Retail) 132,296
11,400 Graboplast Textile Mub (Manufacturing) 259,704
26,596 Human Olto Germ. Rt. (Pharmaceutical) 359,633
1,846 Inter Europa Bank (Banking) 448,819
30,000 Magyar Olaj ES Gas (Energy) 333,722
7,000 Pannoplast Muanuagipari Reg. S (Manufacturing)177,186
7,122 Pannoplast Muanuagipari (Manufacturing) 192,134
4,500 Primagaz Hungaria (Energy) 164,863
5,500 Richter Gedeon Vegyes Gyar Rt. (Chemicals) 280,266
4,000 Scala (Overseas) ECE Ltd. (Consumer Products) 526,999
1,700 Scala ECE New Shares (Consumer Products) 223,975
4,489,606
POLAND: 23.80%
12,000 Agros Holdings (Manufacturing) 309,119
8,000 Bank Przemyslowo-Handlowy SA (Financial) 577,021
7,000 Computerland Poland (Technology) 437,919
7,000 Debica (Manufacturing) 170,015
22,000 Exbud SA (Construction & Property) 234,783
7,505 Jutrzenka (Consumer Products) 147,758
73,570 Mostostal Zabrze (Construction & Property) 351,958
77,500 Polifarb Wroclaw (Chemicals) 390,723
4,925 Rolimpex (Consumer Products) 251,017
22,000 Stalexport (Resources) 416,943
20,000 Stomil-Olsztyn (Manufacturing) 278,943
5,500 Zakalady Metali Lekkich (Manufacturing) 346,103
3,912,302
RUSSIA: 13.45%
8,000 AO Mosenergo ADR (Utility) 212,000
6,000,000 Credit Suisse Fin. (Financial) 564,000
130,000 CSFP Certs (Financial) 273,000
14 Irkutsken Ergo RDC (Utility) 343,000
7,000 Lukoil Oil Co. ADR (Chemical Transport & Energy) 280,000
23,600 Sun Breweries GDR (Brewery) 265,500
15 Trading House Gum RDC (Retail) 273,750
2,211,250
TOTAL INVESTMENTS:
(Cost: $10,314,343)* 75.81% 12,460,599
Other assets, net 24.19% 3,975,452
NET ASSETS 100.00% $16,436,051
* Cost for Federal income tax purposes is $10,314,343 and consists of:
Gross unrealized appreciation $2,308,542
Gross unrealized depreciation (162,287)
Net unrealized appreciation $2,146,255
ADR- Security represented is held by the custodian bank in the form of
American Depository Receipts
GDR- Security represented is held by the custodian bank in the form of Global
Depository Receipts.
RDC- Security represented is held by the custodian bank in the form of
Russian Depository Certificates.
See Notes to Financial Statements
Statement of Assets and Liabilities
June 30, 1996 (Unaudited)
ASSETS
Investments at value (identified
cost of $10,314,343)(Notes 1 & 3) $12,460,598
Cash (including foreign currencies) 2,683,188
Receivables:
Capital stock sold $1,771,145
Dividends 34,503 1,805,648
Prepaid expenses 11,542
Deferred organizational expenses 64,898
TOTAL ASSETS 17,025,874
LIABILITIES
Payables:
Investment management fees 21,534
Securities purchased 568,290
TOTAL LIABILITIES 589,824
NET ASSETS $16,436,050
NET ASSET VALUE, OFFERING
AND REDEMPTION PRICE PER SHARE
($16,436,050 / 1,200,285 shares outstanding) $ 13.69
At June 30, 1996 there were 50,000,000 shares of $.01 par
value stock authorized and the components of net assets are:
Paid in capital $14,146,941
Net unrealized gain on investments
and currency transactions 2,146,311
Undistributed net realized
gains on investments and foreign currencies 156,214
Deficit in undistributed net investment income (13,416)
Net Assets $16,436,050
See Notes to Financial Statements
<PAGE>
Statement of Operations
February 16, * to June 30, 1996 (Unaudited)
INVESTMENT INCOME
Income:
Dividend (Net of foreign
tax withheld of $2,399) $37,878
Total income $ 37,878
Expenses:
Investment management fees (Note 2)31,834
Custodian and accounting fees 19,366
Transfer agent fees (Note 2) 4,258
Recordkeeping and administrative services (Note 2)5,983
Shareholder servicing and reports (Note 2) 3,265
Organizational 2,805 67,511
Custodian fee waiver (16,217)
Total expenses 51,294
Net investment income (13,416)
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on investments 175,943
Net realized loss on foreign currencies conversions (19,729)
Net increase in unrealized appreciation
on investments and foreign currencies 2,146,311
Net gain on investments 2,302,525
Net increase in net assets resulting from operations $2,289,109
* Commencement of operations
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
February 16,*
to
June 30, 1996
(Unaudited)
OPERATIONS
Net investment income $ (13,416)
Net realized gain on investments and foreign currencies 156,214
Net unrealized appreciation of investments and currencies 2,146,311
Net increase in net assets resulting from operations2,289,109
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from
capital share transactions** 14,146,941
Net increase in net assets 16,436,050
Net assets at beginning of period -0-
NET ASSETS at the end of the period $16,436,050
* Commencement of operations
** A summary of capital share transactions follows:
February 16,*
to June 30, 1996
Shares Value
Shares sold 1,204,332 $14,195,698
Shares redeemed (4,047) (48,757)
Net increase 1,200,285 $14,146,941
See Notes to Financial Statements
<PAGE>
Financial Highlights
For a Share Outstanding Throughout Each Period
February 16,*
to
June 30, 1996
(Unaudited)
Per Share Operating Performance
Net asset value, beginning of period $10.00
Income from investment operations-
Net investment income (.01)
Net realized and unrealized gain on investments 3.70
Total from investment operations 3.69
Net asset value, end of period $13.69
Total Return 36.90%
Ratios/Supplemental Data
Net assets, end of period (000's) $16,436
Ratio to average net assets-
Expenses (A) 2.13%**
Expenses-net (B) 1.82%**
Net investment income (.48)**
Portfolio turnover rate 15.03%
* Commencement of operations
** Annualized
(A) Expense ratio has been increased to include additional custodian fees in
1996 which were offset by custodian fee credits.
(B) Expense ratio-net reflects the effect of the custodian fee credits the
fund received.
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
June 30, 1996 (Unaudited)
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel Eastern European Equity
Fund (the"Fund") is a series of The World Funds, Inc. ("TWF") which is
registered under The Investment Company Act of 1940, as amended, as a
diversified open-end management company. The Fund was established in January,
1996 as a series of TWF which has allocated to the Fund 50,000,000 of its
500,000,000 shares of $.01 par value common stock.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Investments traded on stock exchanges are valued at
the last quoted sales price on the exchange on which the securities are
traded as of the close of business on the last day of the period or,
lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are
valued on the exchange designated by or under the authority of the Fund's
Board of Directors. Securities traded in the over-the-counter market are
valued at the last available sale price in the over-the-counter market
prior to time of valuation. Temporary investments in U.S. dollar
denominated short-term investments are valued at amortized cost, which
approximates market. Portfolio securities which are primarily traded on
foreign exchanges are generally valued at the closing price on the
exchange on which they are traded, and those values are then translated
into U.S. dollars at the current exchange rate.
B. Federal Income Taxes. The Fund intends to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies
and to distribute all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
C. Security Transactions and Dividends. Security transactions are accounted
for on the trade date. The cost of securities sold is determined
generally on a first-in, first-out basis. Dividends are recorded on the
ex-dividend date, except that certain dividends from foreign securities
are recorded as soon as the information is available to the Fund.
D. Currency Translation. The market values of foreign securities, currency
holdings, other assets and liabilities initially expressed in foreign
currencies are recorded in the financial statements after translation to
U.S. dollars based on the exchange rates at the end of the period. The
cost of such holdings is determined using historical exchange rates.
Income and expenses are translated at approximate rates prevailing when
accrued or incurred. Foreign securities and currency transactions may
involve certain considerations and risks not typically associated with
those of domestic origin.
E. Distribution to Shareholders. Distribution from investment income and
realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS--Pursuant to an
Investment Advisory Agreement, the Advisor, Vontobel USA, Inc. ("VUSA")
provides investment services for an annual fee of 1.25% on the first $500
million of average daily net assets and 1% on average daily net assets over
$500 million.
VUSA will reimburse the Fund to the extent of its management fee to limit the
Fund's aggregate annual operating expenses (excluding taxes, brokerage
commissions and extraordinary expenses), to the lowest applicable percentage
limitation prescribed by any state in which the Fund's shares are qualified
for sale. The current expense limit is 2.5% on the first $30 million of
average net assets; 2% on the next $70 million; and, 1.5% on average net
assets exceeding $100 million.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $14,059 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky and certain
shareholder servicing on an hourly rate basis. For other administrative
services, CSS receives 0.20% of average daily net assets with a minimum fee
of $45,000.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $5,063 for its services for the period February 16, 1996
to June 30, 1996.
Certain officers and/or directors of the Fund are also officers and/or
directors of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY--Purchases and sales of securities other than
short-term notes aggregated $10,576,532 and $662,196 respectively. The
custodian has provided credits in the amount of $16,217 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund.
