ANNUAL REPORT
TO SHAREHOLDERS
VONTOBEL INTERNATIONAL EQUITY FUND
A SERIES of
Vontobel Funds, Inc.
a "Series" Investment Company
FOR THE YEAR ENDED
DECEMBER 31, 1996
<PAGE>
VONTOBEL INTERNATIONAL EQUITY FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, the fund's closing Net Asset Value stood at $18.22 and net
assets totaled $151,728,309, v. $130,504,890 at the end of 1995. For the year,
the fund produced a total return of 17.0%, vs. the 6.0% return of the MSCI EAFE
Index. On December 10 the fund paid a per share distribution of $0.60 in income
and $1.19 in long-term capital gains to shareholders of record as of December 9.
Again last year, global markets turned in strong performances as economic growth
ranged from moderate to tepid, and inflation remained tame. With the exception
of the UK, central banks remained accommodative, which was the major support for
the markets' multiple expansion during the year. The fund's performance
benefited primarily from our shift in country allocation in the first quarter,
when we increased the weighting in Europe at the expense of Japan and the
emerging markets. Our top-down country allocation model had indicated a positive
expected return for Japan; however, our investment process gives as much weight
to bottom-up analysis as to top-down valuation factors. Despite the structured
approach we employ in generating quantitative calculations, we manage the
process, the process does not manage us. Since, at the beginning of the year, we
could not find a great number of attractively valued companies in Japan, we
turned instead to Europe, which offered cheap valuations from both a top-down
and bottom-up standpoint. The interdependence of our top-down and bottom-up
analysis, we believe, provides an added element of safety in our investment
process.
EUROPE: The key factors in our valuation process are the comparison of bond
market vs. equity market valuations, and the rate of change in the direction of
interest rates, both of which pointed to double-digit-return expectations for
European markets based on their historical behavior. At the end of 1996 our
overweighting in Europe was 59.1%, vs. 49.7% at the end of 1995. The combination
of falling yields, the rising US dollar and productivity improvement contributed
to the strong rise in European equities in 1996 as most bourses posted new
highs. Central bank easing, a softer German mark and strong revenues from
exports offset the drag on growth of fiscal consolidation. The economic
environment was weakened by further reductions in overcapacity, which translated
into job cuts. The lack of job creation remains a critical issue which has been
overshadowed by the focus on meeting the convergence criteria for monetary
union. With unemployment levels reaching historic highs, social security
deficits are becoming more and more difficult to finance, in particular for
France, Italy, Spain and to a lesser extent Germany. As a result, European
corporations may have to pick up part of the bill in the form of higher taxes
which, in turn, may translate into a liquidity trap.
<PAGE>
JAPAN: During our visit to Japan in December we saw signs not only that the
bubble economy was finally petering out but also signs of deflationary
tendencies that are likely to keep interest rates low. The domestic economy
remains very weak, as reflected in low levels of consumer spending, still
falling construction orders and almost nonexistent domestic capital expenditure
projects. The majority of companies we talked to are continuing to reduce the
level of domestic overcapacity and build new capacity overseas, which clearly
will remain a drag on the domestic economy.
The lack of progress in addressing the issues in the financial sector remains a
big risk for Japan. The amount of unrealized securities losses by Japanese banks
rose by about 36% in the last quarter and now represent about 22% of the banks
Tier 2 capital adequacy ratios. The banks may have to postpone their write-offs
of bed debt, further delaying the clean-up of their balance sheets in
preparation for the deregulation of financial markets (Big-Bang) in 2001. This
is yet another negative for the sector and the stock market as a whole, at lease
in the short term. Another source of negativism was the reporting season in
November, which raised questions about the sustainability of earnings growth.
Nonetheless, several stocks we own came through with surprisingly good sales and
profit growth, in particular, Fuji Photo Film, which has not only delivered
reliable profits but is using its excess cash to expand overseas distribution
for its products. The average price to earnings multiple of our Japanese
holdings is about 25X and the price sales ratio is 2.3, which represents not
only a large discount to the domestic equity markets but is comparable with
international markets. Another element of comfort is that the majority of
companies we visited are following a clear strategy of cost reduction and
re-engineering of their manufacturing process. At year end our weighting was
22.9%, vs. 29.7% at the end of 1995. After revisiting more than 28 companies, we
are open to committing another 2-3% to this market, at the right price.
EMERGING MARKETS: We were very cautious throughout 1996 but, after two years
of consolidation, we feel it's time to be more constructive on these markets.
The business cycle is improving, as well as profitability, and the supply/demand
side is not negative, as it was in 1995 when a flood of new issues was a drag on
local markets. Their absolute valuations relative to 12 and 24 months ago have
definitely improved. With the economic cycle turning increasingly positive, we
would not be surprised to see better profit growth. The main risk, of course, is
the direction of US interest rates, which remains a trigger for capital flows
into these markets; as you know, we do not take a prospective view on the
direction of interest rates.
CURRENCIES: To protect the value of the portfolio against the adverse effects
of an appreciating US dollar, we had hedge contracts covering approximately 65%
of the portfolio's exposure to the DM bloc, the French franc, the Swiss franc
and the Japanese yen. We had no hedges
2
<PAGE>
against our holdings in pound sterling, which turned out to be a good call since
the British pound was one of the few currencies to appreciate against the dollar
during the year.
OUTLOOK: Overall expected returns for international markets remain positive
from a top-down perspective. On the bottom-up side, we continue to find good
value throughout Europe but the relative attractiveness of the region has
diminished. At this point, having been largely underweight in Japan for a year,
we foresee increasing our investment there cautiously; this will depend on our
finding undervalued companies that do not depend solely on the domestic economy
but derive a large portion of sales revenues from abroad. We are also
intensifying our efforts on selective emerging markets.
Fabrizio Pierallini
President
January 31, 1997
3
<PAGE>
[GRAPH GOES HERE]
EUROPACIFIC FUND EAFE
07/06/90 $10,000.00 $10,000.00
12/31/90 $ 8,708.79 $ 8,564.00
12/31/91 $10,343.09 $ 9,401.00
12/31/92 $10,096.62 $ 8,096.00
12/31/93 $14,216.18 $10,570.00
12/31/94 $13,460.83 $11,395.53
12/31/95 $14,927.15 $12,672.97
12/31/96 $17,461.60 $13,438.45
4
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
COMMON STOCKS AND WARRANTS: 92.29%
BELGIUM: 0.76%
6,700 Barco NV NPV* $ 1,158,175
------------
FINLAND: 0.68%
20,000 Cultor Oy Ser '2' 1,031,070
------------
FRANCE: 8.44%
30,000 AXA S A 1,908,066
10,000 Bic 1,499,470
3,300 Carrefour 2,147,210
26,300 Compagnie De Suez 1,118,200
30,000 Dassault Systemes SA* 1,383,637
4,550 Grandoptical Photo Service 737,506
6,000 LVMH Moet Hennessy Louis 1,675,629
17,315 Total SA Cl B 1,408,293
15,135 Valeo 933,449
------------
12,811,460
------------
GERMANY: 7.23%
18,000 Adidas AG 1,555,758
500 Allianz AG Holdings Reg 909,800
50,000 Bayer AG 2,040,551
1,400 Bayer Motoren Werk 976,215
7,900 CKAG Colonia Konzern AG 652,002
8,500 Fresenius Med Care Spon ADR* 219,938
25,000 Fresenius Medical Care ADR* 703,125
16,500 GEHE AG 1,056,180
13,500 SGL Carbon AG 1,701,976
20,000 Veba AG 1,156,746
------------
10,972,291
------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
GREAT BRITAIN: 17.51%
1,198 BAA Ord 9,933
5,134 British Petroleum PLC Spons ADR 725,819
131,706 CRH ORD 1,367,291
253,412 Dixons Group PLC 2,357,272
51,004 Emi Group PLC 1,210,143
190,000 General Accident Ord 2,486,736
200,604 GKN ORD 3,439,984
78,833 HSBC Holdings ORD 1,762,387
250,000 Mirror Group PLC 920,791
50,000 Misys Plc 951,627
150,000 Powerscreen Intl 1,451,852
131,780 Provident Financial PLC 1,131,019
120,000 Rentokil Initial PLC 904,517
110,000 Reuters Holdings 1,418,019
130,000 Shell Transport & Trading Regd 2,253,754
135,990 Siebe 2,525,335
120,000 Smiths Industries Ord 1,648,687
------------
26,565,166
------------
IRELAND: 2.94%
200,933 Allied Irish Banks PLC 1,349,336
46,600 Elan Corp ADR* 1,549,450
238,899 Greencore Group 1,555,180
------------
4,453,966
------------
ITALY: 0.69%
250,000 Danieli & C Di Risp Savings 1,046,562
------------
NETHERLANDS: 6.37%
17,954 Aegon NV ADR 1,135,591
14,274 Aegon NV 909,130
100,000 Elsevier NV 1,689,180
20,000 Hagemeyer 1,597,779
18,086 Oce-Van Der Grinten NV 1,962,766
55,447 Vendex Int NV 2,370,367
------------
9,664,813
------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
NORWAY: 0.46%
35,000 Smedvig As Sponsored ADR B* 704,375
------------
SPAIN: 0.65%
5,000 BCO Popular ESP REG 982,822
------------
SWEDEN: 7.18%
77,000 Assa Abloy Series 'B' 1,400,166
55,000 Astra Ab Ser B Free 2,653,540
18,000 Autoliv Ab Free 789,243
40,000 Ericsson (LM) Tele Series B Free 1,237,683
9,000 Hennes & Mauritz 'B' Free 1,245,895
34,000 Kinnevik Investment Ser 'B' Free 937,354
24,000 Om Gruppen AB 721,493
4,200 Pharma Vision* 1,882,705
600 Roche Holding AG Wts 5/05/98* 19,499
------------
10,887,578
------------
SWITZERLAND: 6.16%
30,000 BZ Bank Vision 1/15/97 56,033
1,300 Nestle AG Reg 1,395,667
600 Roche Holdings Genusscheine DRC 4,668,659
200,000 Union Bank of Switzerland Wts 12/18/98* 1,285,021
2,214 Union Bank of Switzerland Bearer 1,940,248
------------
9,345,628
------------
AUSTRALIA: 0.97%
103,037 Broken Hill Proprietary Ltd 1,467,629
------------
HONG KONG: 3.14%
200,000 Cheung Kong Holdings 1,777,749
345,000 Dah Sing FCL Services 1,400,608
130,000 Sun Hung Kai Properties 1,592,540
------------
4,770,897
------------
JAPAN: 22.87%
500 Bank Of Tokyo-Mitsubishi 9,282
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
130,000 Bridgestone Corporation 2,469,562
65,000 Canon Inc 1,436,836
120,000 Eisai Co Ltd 2,362,490
114,000 Ezaki Glico Co 984,371
48,000 Fuji Photo Film Co. 1,583,283
35,000 Hitachi Maxell 773,681
24,000 Ito-Yokado 1,044,469
65,000 Jusco Co 2,205,768
110,000 Komatsu Ltd 902,340
17,000 Kyocera Corp. 1,059,839
175,000 Mitsubishi Electronics Corp 1,042,656
380,000 Mitsubishi Heavy Industries 3,018,738
200,000 Mitsui & Co 1,623,349
32,500 Murata Manufacturing Co. 1,080,433
90,000 Nikko Securities 671,445
520,000 Nippon Steel Corp 1,535,619
26 Ntt Data Corp 761,074
88,000 Omron Corp 1,656,506
28,000 Rohm Co 1,837,492
18,000 SMC 1,210,776
90,000 Taisho Pharmaceutical 2,121,578
60,000 Tokyo Broadcasting 917,019
120,000 Yamato Transport 1,243,415
220,000 Yasuda Fire & Marine Insurance 1,143,596
------------
34,695,617
------------
MALAYSIA: 2.87%
150,000 Malayan Banking BHD 1,663,037
228,000 Sime Darby Berhad 898,278
100,000 Telekom Malaysia 890,913
100,000 United Engineers 902,792
------------
4,355,020
------------
PHILIPPINES: 0.74%
136,500 Manila Electric 'B' 1,115,875
------------
SINGAPORE: 1.84%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
100,000 City Developments 900,450
100,000 Cycle & Carriage Ltd 1,222,040
85,000 Keppel Corp 662,117
------------
2,784,607
------------
THAILAND: 0.34%
54,000 Bangkok Bank PLC (Foreign) 522,187
------------
BRAZIL: 0.45%
1,250,000 Brahma PN 683,284
------------
TOTAL COMMON STOCKS AND WARRANTS: 140,019,022
(Cost: $109,640,553)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<S> <C>
SHORT TERM INVESTMENTS: 6.59%
$5,000,000 Bank of Tokyo-Mitsubishi; 4.75%; 01/02/97 5,000,000
5,000,000 Republic NY Gc Time Deposit; 4.75%; 01/02/97 5,000,000
------------
TOTAL SHORT TERM INVESTMENTS:
(Cost: $10,000,000) 10,000,000
------------
TOTAL INVESTMENTS:
(Cost: $119,640,553)** 98.88% 150,019,022
Other assets, net 1.12% 1,690,729
-------- ------------
NET ASSETS 100.00% $151,709,751
-------- ------------
-------- ------------
</TABLE>
*Non-income producing
**Cost for Federal income tax purposes is $119,640,553 and consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 33,448,491
Gross unrealized depreciation (3,056,010)
------------
Net unrealized appreciation $ 30,392,481
------------
------------
</TABLE>
ADR -- Security represented is held by the custodian bank in the form of
American Depository Receipts.
9
<PAGE>
FORWARD CURRENCY CONTRACTS OUTSTANDING
December 31, 1996
<TABLE>
<CAPTION>
FACE VALUE CONTRACT DELIVERY APPRECIATION/
(U.S. DOLLAR) PRICE DATE (DEPRECIATION)
------------- -------- -------- --------------
<S> <C>
Swiss Franc (Sell) 7,587,253 1.3180 03/12/97 $ 61,156
Deutsche Mark (Sell) 16,175,995 1.5455 03/12/97 (147,920)
French Franc (Sell) 5,352,910 5.2308 03/12/97 (66,683)
Japanese Yen (Sell) 23,235,031 111.9000 03/12/97 558,998
--------------
$ 405,551
--------------
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
_______________________________________________________________
<TABLE>
<S> <C>
ASSETS
Investments at value (identified cost of $119,640,553)
(Notes 1 & 3) $ 150,019,022
Cash 89,125
Receivables
Capital stock sold 30,638
Dividends and interest 259,437
Receivable for forward currency contracts 52,351,189
Investments sold 1,066,884 53,708,148
----------
Other assets 27,887
-----------------
TOTAL ASSETS 203,844,182
-----------------
LIABILITIES
Payables 51,945,638
Forward currency contracts payable at market
value-proceeds $52,351,189
Investment management fees 115,166
Capital stock redeemed 24,903 52,085,707
----------
Accrued expenses 48,724
-----------------
TOTAL LIABILITIES 52,134,431
-----------------
NET ASSETS $ 151,709,751
-----------------
-----------------
NET ASSET VALUE, OFFERING
AND REDEMPTION PRICE PER SHARE
($151,709,751 / 8,326,006 shares outstanding) $ 18.22
-----------------
-----------------
At December 31, 1996 there were 50,000,000 shares of $.01 par value stock
authorized and the components of net assets are:
Paid in capital $ 116,310,818
Net unrealized gain on investments and currency transactions 30,795,911
Undistributed net realized gains on investments and foreign currencies
4,603,022
-----------------
Net Assets $ 151,709,751
-----------------
-----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
STATEMENT OF OPERATIONS
Year ended December 31, 1996
____________________________________________________
<TABLE>
<S> <C>
INVESTMENT INCOME
Income:
Interest $ 5,118
Dividend (Net of foreign
tax withheld of $286,821) 2,142,026
----------
Total income $ 2,147,144
-----------
Expenses:
Investment management fees (Note 2) 1,280,135
Custodian and accounting fees (Note 3) 291,295
Transfer agent fees (Note 2) 68,948
Recordkeeping and administrative services (Note 2) 277,840
Legal and audit fees 62,684
Filing fees and registration (Note 2) 27,704
Shareholder servicing and reports (Note 2) 44,299
Other 178,782
----------
Total expenses 2,231,687
Custodian fee waiver (291,295)
-----------
Expenses, net 1,940,392
-----------
Net investment income 206,752
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on investments 12,528,935
Net realized gain on foreign currency conversions and forward
currency contracts 5,833,337
Net increase in unrealized appreciation on investments and foreign
currencies 3,375,302
-----------
Net gain on investments 21,737,574
-----------
Net increase in net assets resulting from operations $21,944,326
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Years ended December 31
_________________________________________________________
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C>
OPERATIONS
Net investment income $ 206,752 $ 612,578
Net realized gain on investments and foreign currencies 18,362,272 6,186,774
Net realized loss on futures 0 (356,414)
Net unrealized appreciation of investments and currencies 3,375,302 4,814,821
Net appreciation of futures contracts 0 169,100
------------ ------------
Net increase in net assets resulting from operations 21,944,326 11,426,859
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ($.03 and $.17 per share, respectively) (206,752) (1,228,470)
Net realized gain from investment transactions ($1.76 and $.70 per
share, respectively) (13,391,354) (5,058,407)
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from capital share transactions* 12,858,641 (12,808,764)
------------ ------------
Net increase in net assets 21,204,861 (7,668,782)
Net assets at beginning of period 130,504,890 138,173,672
------------ ------------
NET ASSETS at the end of the period (Includes undistributed net
investment income of $0 and $0 respectively.) $151,709,751 $130,504,890
------------ ------------
------------ ------------
</TABLE>
*A summary of capital share transactions follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ -------------------------
SHARES VALUE SHARES VALUE
---------- ----------- ---------- ------------
<S> <C>
Shares sold 2,028,975 $36,708,062 3,178,461 $ 51,928,675
Shares reinvested from distributions 699,320 12,545,808 268,820 4,615,632
Shares redeemed (2,020,237) (36,395,229) (4,342,318) (69,353,071)
---------- ----------- ---------- ------------
Net increase (decrease) 708,058 $12,858,641 (895,037) ($12,808,764)
---------- ----------- ---------- ------------
---------- ----------- ---------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout Each Period
______________________________________________
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $17.13 $16.23 $17.22 $12.23 $12.67
------ ------ ------ ------ ------
Income from investment operations-
Net investment income 0.03 0.16 0.01 0.08 0.08
Net realized and unrealized gain (loss) on
investments 2.85 1.61 (0.92) 4.91 (0.38)
------ ------ ------ ------ ------
Total from investment operations 2.88 1.77 (0.91) 4.99 (0.30)
------ ------ ------ ------ ------
Less distributions-
Distributions from net investment income (0.03) (0.17) (0.08) 0 (0.08)
Distributions from realized gains (1.76) (0.70) 0 0 0
Distributions in excess of realized gains 0 0 0 0 (0.06)
------ ------ ------ ------ ------
Total distributions (1.79) (0.87) (0.08) -- (0.14)
------ ------ ------ ------ ------
Net asset value, end of period $18.22 $17.13 $16.23 $17.22 $12.23
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return 16.98% 10.91% (5.28%) 40.80% (2.37%)
Ratios/Supplemental Data
Net assets, end of period (000's) $151,710 $130,505 $138,174 $136,932 $47,761
Ratio to average net assets-
Expenses (A) 1.60% 1.63% 1.54% 1.77% 1.98%
Expenses-net (B) 1.39% 1.53% 1.54% 1.77% 1.98%
Net investment income 0.15% 0.41% 0.08% 0.85% 0.79%
Portfolio turnover rate 54.58% 68.43% 34.04% 10.66% 27.42%
Average commission rate paid per share $0.0279 -- -- -- --
</TABLE>
(A) Expense ratio has been increased to include additional custodian fees in
1996 and 1995 which were offset by custodian fee credits. Prior to 1995,
custodian fee credits reduced expense ratios.
(B) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996
_______________________________________________________________
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES -- The Vontobel International Equity Fund
(the "Fund") is a series of Vontobel Funds, Inc. ("VFI") which is registered
under The Investment Company Act of 1940, as amended, as a diversified open-end
management company. The Fund was established in December, 1984 as a series of
VFI which has allocated to the Fund 50,000,000 of its 500,000,000 shares of $.01
par value common stock.
The investment objective of the Fund is to achieve capital appreciation by
investing in a continuously managed diversified portfolio of equity securities.
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.
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
15
<PAGE>
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. FORWARD CURRENCY CONTRACTS. Forward sales of currencies are undertaken to
hedge certain assets denominated in currencies that Vontobel USA, Inc.("VUSA"),
the Fund's investment advisor, expects to decline in value in relation to other
currencies. A forward currency contract is an agreement between two parties to
buy or sell a currency at a set price on a future date. Forward contracts are
marked to market daily and the change in market value is recorded by the Fund as
an unrealized gain or loss. When a contract is closed, the Fund 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 it was closed. The Fund
could be at risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably.
F. FUTURES CONTRACTS. Initial margin deposits required upon entering into
futures contracts are satisfied by the segregation of specific securities or
cash, as collateral, for the account of the broker (the Fund's agent in
acquiring the futures position). During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received depending upon whether unrealized gains or losses are incurred.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and the Fund's basis in the contract. Risks include the possibility of an
illiquid market and that a change in the value of the contract may not correlate
with changes in the securities being hedged.
G. 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 and futures, equalization and post-October capital
and currency losses.
H. In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
16
<PAGE>
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 1.0% on the first $100 million of
average daily net assets and .75% on average daily net assets over $100 million.
VUSA will reimburse the Fund to the extent of its management fee to limit the
Fund's aggregate annual operating expenses (excluding taxes and brokerage
commissions), to the lowest applicable percentage limitation prescribed by any
state in which the Fund's shares are qualified for sale. For the year ended
December 31, 1996, no reimbursement was necessary.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $297,410 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 $42,500.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $68,948 for its services for the year ended December 31,
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 $72,331,271 and $77,630,591 respectively. The
Custodian has provided credits in the amount of $291,295 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund.
17
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Vontobel Funds, Incorporated
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of Vontobel
International Equity Fund including the schedule of portfolio investments as of
December 31, 1996, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Vontobel International Equity Fund as of December 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 17, 1997
18
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INVESTMENT ADVISOR:
Vontobel USA Inc.
450 Park Avenue
New York, New York 10022
DISTRIBUTOR:
First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
INDEPENDENT AUDITORS:
Tait, Weller and Baker
Two Penn Center, Suite 700
Philadelphia, Pennsylvania 19102-1707
TRANSFER AGENT:
For account information, wire purchase or redemptions, call or write to
Vontobel's Transfer Agent:
Fund Services, Inc.
Post Office Box 26305
Richmond, Virginia 23260
(800) 628-4077 Toll Free
MORE INFORMATION:
For 24 hour, 7 days a week price information, and for information on any series
of Vontobel Funds, Inc., investment plans, and other shareholder services, call
Commonwealth Shareholder Services at (800) 527-9500 Toll Free
NASDAQ SYMBOL: VNEPX
