ANNUAL REPORT
TO SHAREHOLDERS
VONTOBEL
INTERNATIONAL BOND FUND
A SERIES of
Vontobel Funds, Inc.
a "Series" Investment Company
FOR THE YEAR ENDED
DECEMBER 31, 1996
<PAGE>
VONTOBEL INTERNATIONAL BOND FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, the fund's closing Net Asset Value stood at $10.93, and net
assets totaled $26,879,905, vs. $16,243,747 at the end of 1995. For the year,
the fund produced a total return of 7.6%, vs. the 5.3% return of the J.P. Morgan
Government Bond Index ex-US. On December 10 the fund paid a per share
distribution of $0.40 in income and $0.06 in long-term capital gains to
shareholders of record as of December 9.
Continued improvement in government housekeeping in the continental European
countries belonging to the European Union, combined with sluggish economic
growth and mostly dormant inflation, provided an excellent backdrop for bond
investors in those countries. Reawakening economic activity in the UK caused
bond yields to rise throughout most of the year, only to fall back to the
beginning of year level in the fourth quarter as inflationary expectations
subsided. The restated commitment of European governments to meet the economic
convergence criteria laid down in the Maastricht treaty gave renewed momentum to
the goal of a single European currency by January 1, 1999, and resulted in
further convergence of bond yields throughout the continent. Budget deficits and
public indebtedness are being slashed with renewed vigor. On the other side of
the globe, the Japanese bond market benefited from a slight fall in yields as
the country continues its struggle to pull out of a 6-year recession.
Among the large international bond markets, due to the effects of converging
bond yields in Europe, the high-yielding markets of Italy and Spain were the
clear winners, producing total returns in excess of 20% in local currency. The
runners-up were a group of continental European bond markets which produced
returns in local currency in a range between 18.6% for Sweden and 11% for
Belgium. The UK, Germany and the Netherlands generated only single-digit local
currency returns, as did the Japanese market.
In the dollar bloc both the Australian and Canadian markets saw their bonds
appreciate in excess of 10% in their currencies. With the exception of the
Australian dollar, the Italian lira and the British pound, the US dollar
appreciated against all the other trading currencies by between 7% and 10%.
In US dollar terms, the leading market was Italy with a 29.6% return followed by
Australia (19.8%), the UK (18.3%), Sweden (15.1%), Spain (14%), Ireland (11.4%)
and Canada (11.3%). The ECU bond market also did well with a US dollar total
return of 9.7%. By comparison, the US bond market (10-year maturities) saw a
rise of 2.9% for the year.
Our investment discipline with regard to currency and market allocation, the two
main determinants of international bond returns, caused us 1) to hold a
significant amount of US dollar
<PAGE>
cash through the first three quarters of the year in the face of persistent
strength in that currency, 2) to reduce continuously our exposure to the
underperforming German bond market and 3) to avoid the Japanese market which,
with a negative 5.9% US dollar return, was the world's worst-performing market.
In an environment of soft economic conditions and low inflation in most markets
in our investment universe, the shapes of the yield curves caused us to hold
short- to intermediate-term maturities throughout most of the year. Sector and
issue selection continued to focus almost exclusively on government,
governmental agency and supranational agency bonds, which enjoy the highest
credit ratings.
Low inflation expectations bode well for European bond markets. Forecasts of
moderate economic growth will lend additional support to the realization of the
European Monetary Union by boosting government revenues and soothing public
sentiment toward a unified Europe. We intend to maintain our overweight to those
markets which will be the most important beneficiaries of a single European
currency, i.e., the Irish punt, the Italian lira, the Spanish peseta and the
European Currency Unit.
Sven Rump, CFA
President
January 31, 1997
2
<PAGE>
[GRAPH GOES HERE]
International Fund JP Morgan
03/01/94 $10,000.00 $10,000.00
12/31/94 $10,200.00 $10,418.00
12/31/95 $11,951.00 $12,618.00
12/31/96 $12,848.52 $13,282.97
3
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- -------------- --------------------------------------------------------------------------- -----------
<S> <C>
BONDS: 94.82%
AUSTRALIAN DOLLAR 6.45%
2,100,000 Queensland Treasury Corp. 8% 14 Aug 2001
Corporate Bond $ 1,734,750
-----------
BRITISH POUND 4.73%
460,000 DSL Bank 9.25% 19 Aug 2002
Corporate Bond 841,710
-----------
250,000 Tokyo Electric Power 7.125% 13 May 1998
Corporate Bond 428,810
-----------
1,270,520
-----------
CANADIAN DOLLAR 7.22%
1,000,000 Government of Canada 5.75% 1 Mar 1999
Government Bond 749,567
1,600,000 Government of Canada 6.5% 1 June 2004
Government Bond 1,192,318
-----------
1,941,885
-----------
DANISH KRONE 7.56%
6,200,000 Kingdom of Denmark 9% 15 Nov 1998
Government Bond 1,145,308
5,000,000 Kingdom of Denmark 7% 15 Dec 2004
Government Bond 885,671
-----------
2,030,979
-----------
DEUTSCHE MARK 16.99%
900,000 Republic of Finland 7.5% 27 Jan 2000
Government Bond 639,732
1,400,000 United Kingdom 7.125% 28 Oct 1997
Government Bond 937,731
2,000,000 Republic of Germany 6.5% 14 Oct 2005
Government Bond 1,364,700
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- -------------- --------------------------------------------------------------------------- -----------
<S> <C>
1,000,000 Republic of Germany 7.125% 20 Dec 2002
Government Bond 714,388
1,250,000 KFW International Finance 7.75% 6 Oct 2004
Corporate Bond 909,800
-----------
4,566,351
-----------
EUROPEAN CURRENCY 11.35%
1,000,000 EuroFima 8.5% 4 Jun 2007
Supranational Entities 1,442,977
500,000 France O.A.T. 10% 26 Feb 2001
Government Bond 741,446
600,000 United Kingdom 9.125% 21 Feb 2001
Government Bond 865,108
-----------
3,049,531
-----------
FRENCH FRANC 10.86%
6,400,000 France Telecom 7.875% 3 Mar 2003
Corporate Bond 1,399,900
5,000,000 France O.A.T. 7.25% 25 Apr 2006
Government Bond 1,063,602
2,000,000 Republic of Finland 9.25% 24 Sept 2001
Government Bond 456,102
-----------
2,919,604
-----------
IRISH PUNT 4.98%
800,000 Republic of Ireland 6.25% 18 Oct 2004
Government Bond 1,338,595
-----------
ITALIAN LIRA 11.48%
1,300,000,000 LKB Bad-Wurt FIN 10.75% 14 Apr 2003
Corporate Bond 1,005,292
2,000,000,000 American Int'l Group 11.7% 4 Dec 2001
Corporate Bond 1,567,040
700,000,000 General Electric Capital Corp 10.375% 14 June 2000
Corporate Bond 512,007
-----------
3,084,339
-----------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- -------------- --------------------------------------------------------------------------- -----------
<S> <C>
NETHERLAND GUILDER 5.93%
2,400,000 Government of Netherlands 9% 15 May 2000
Government Bond 1,595,234
-----------
SPANISH PESETA 7.27%
190,000,000 Spanish Government 11.3% 15 Jan 2002
Government Bond 1,787,540
20,000,000 Spanish Government 11.45% 30 Aug 1998
Government Bond 167,704
-----------
1,955,244
-----------
Total Bonds:
(Cost: $24,245,734) 25,487,032
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- --------------
<S> <C>
SHORT TERM INVESTMENTS: 0.37%
$ 100,000 Bank of Toyko-Mitsubishi, Ltd.
Time Deposit
matures 01/02/97; 4.75% 100,000
-----------
SHORT TERM INVESTMENTS:
(Cost: $100,000) 100,000
-----------
(Cost: $24,345,734)** 95.19% 25,587,032
Other Assets, net 4.81% 1,291,537
-------- -----------
NET ASSETS 100.00% $26,878,569
-------- -----------
-------- -----------
</TABLE>
* Stated in local currencies
** Cost for Federal income tax purposes is $24,345,734 and net unrealized
appreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 1,423,241
Gross unrealized depreciation (181,943)
-----------
Net unrealized appreciation $ 1,241,298
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
_______________________________________________________________
<TABLE>
<S> <C>
ASSETS
Investments at value (Identified cost of $24,345,734)(Notes 1 & 3) $ 25,587,032
Cash (including foreign currencies) 385,245
Receivables:
Interest 893,805
Capital stock sold 1,228 895,033
----------
Other assets 1,765
Organization expense 34,780
------------
TOTAL ASSETS 26,903,855
------------
LIABILITIES
Capital stock redeemed payable 167
Accrued expenses 25,119
----------
TOTAL LIABILITIES 25,286
------------
NET ASSETS $ 26,878,569
------------
------------
NET ASSET VALUE OFFERING AND REDEMPTION
PRICE PER SHARE
($26,878,569/2,459,630 shares outstanding) $ 10.93
------------
------------
At December 31, 1996 there were 50,000,000 shares of $.01 par value
stock authorized and components of net assets are:
Paid in capital $ 25,294,547
Accumulated gain on investments and foreign currencies 25,387
Undistributed net investment income 320,489
Net unrealized appreciation of investments and foreign currencies 1,238,146
------------
NET ASSETS $ 26,878,569
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
STATEMENT OF OPERATIONS
Year ended December 31, 1996
____________________________________________________
<TABLE>
<S> <C>
INVESTMENT INCOME
Income:
Interest $1,544,426
Total income 1,544,426
----------
Expenses:
Investment management fees (Note 2) 248,402
Organization 18,332
Custodian fees (Note 3) 77,820
Transfer agent fees (Note 2) 28,385
Recordkeeping and administrative services (Note 2) 52,748
Legal and audit fees 14,366
Filing and registration fees (Note 2) 16,187
Shareholder servicing and reports (Note 2) 13,268
Other 28,992
----------
498,500
Custodian fee waiver (77,820)
Management fee waiver (48,630)
----------
Total expenses 372,050
----------
Net investment income 1,172,376
----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on investments 237,036
Net realized gain on currencies 90,641
Net change in unrealized appreciation on investments and foreign
currencies 190,375
----------
Net gain on investments 518,052
----------
Net increase in net assets resulting from operations $1,690,428
----------
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
______________________________________________
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
---------------- ----------------
<S> <C>
OPERATIONS
Net investment income $ 1,172,376 $ 693,927
Net realized gain on investments and foreign currencies 327,677 77,266
Change in unrealized appreciation of investments and currencies 190,375 1,199,649
---------------- ----------------
Net increase in net assets resulting from operations 1,690,428 1,970,842
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (944,308) (817,314)
($.40 and $.55 per share, respectively)
Realized gains on investments ($.06 per share) (141,645) --
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from capital share transactions* 10,030,347 4,855,108
---------------- ----------------
Net increase in net assets 10,634,822 6,008,636
Net asset at beginning of period 16,243,747 10,235,111
---------------- ----------------
NET ASSETS at the end of the period (including undistributed net
investment income of $320,489 and $92,421, respectively) $ 26,878,569 $ 16,243,747
---------------- ----------------
---------------- ----------------
</TABLE>
*A summary of capital share transactions follows:
<TABLE>
<CAPTION>
JANUARY 1, TO JANUARY 1, TO
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- ---------------------------
SHARES VALUE SHARES VALUE
---------- ----------- ----------- -----------
<S> <C>
Shares sold 1,869,911 $20,499,176 652,031 $ 6,844,265
Shares reinvested from
distributions 94,981 1,024,842 45,939 487,867
Shares redeemed (1,037,455) (11,493,671) (244,864) (2,477,024)
---------- ----------- ----------- -----------
Net increase 927,437 $10,030,347 453,106 $ 4,855,108
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
See Notes to Financial Statements
9
<PAGE>
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout the Period
___________________________________
<TABLE>
<CAPTION>
JANUARY 1 TO JANUARY 1 TO MARCH 1* TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C>
Per Share Operating Performance
Net asset value beginning of period $ 10.60 $ 9.48 $ 10.00
-------- -------- --------
Income from investment operations-
Net investment income 0.47 0.61 0.70
Net realized and unrealized gain (loss)
on investments 0.32 1.06 (0.50)
-------- -------- --------
Total from investment operations 0.79 1.67 0.20
-------- -------- --------
Less distributions-
Distributions from net investment income (0.40) (0.55) (0.70)
Distributions from realized gains on
investments (0.06)
Distributions in excess of net investment
income -- (0.02)
-------- -------- --------
Total distributions (0.46) (0.55) (0.72)
-------- -------- --------
Net asset value, end of period $ 10.93 $ 10.60 $ 9.48
-------- -------- --------
-------- -------- --------
Total Return 7.51% 17.60% 1.98%
-------- -------- --------
-------- -------- --------
Ratios/Supplemental Data
Net assets, end of period(000) $26,879 $16,253 $10,235
Ratio to average net assets-(A)
Expenses (B) 1.84% 1.76% 1.35%**
Expense ratio-net (C) 1.52% 1.35% 1.35%**
Net investment income 4.78% 5.38% 3.99%**
Portfolio turnover rate 19.89% 18.63% 19.00%
</TABLE>
(A) Management fee waivers reduced the expense ratios and increased the ratios
of net investment income by 0.20% in 1996, 1.00% in 1995 and 0.19% in 1994.
(B) Expense ratio has been increased to include additional custodian fees that
were offset by custodian fee credits, prior to 1995 custodian fee credits
reduced the expense ratio.
(C) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
* Commencement of Operations was March 1, 1994, ratios are annualized
** Annualized
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996
_______________________________________________________________
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES -- The Vontobel International Bond 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 non-diversified
open-end management company. The Fund was established in February, 1994 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 maximize total return from capital
growth and income by investing in a continuously managed portfolio consisting
primarily of high-grade international bonds.
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. Money market investments with a remaining maturity of
less than sixty days are valued using the amortized cost method; debt securities
are valued by appraising them at prices supplied by a pricing agent approved by
the Fund, which prices may reflect broker-dealer supplied valuations and
electronic data processing techniques. 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. Security transactions are accounted for on the trade
date. The cost of securities sold is determined on a first-in, first-out basis.
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.
11
<PAGE>
E. 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. DEFERRED ORGANIZATIONAL EXPENSES. All of the expenses of the Fund incurred in
connection with its organization and the public offering of its shares have been
assumed by the Fund. The organization expenses allocable to the Fund are being
amortized over a period of fifty-seven (57) months.
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, equalization, forwards and post-October capital
and currency losses.
H. ACCOUNTING ESTIMATES. 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.
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.
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, a reimbursement of $48,630 was made. The manager had agreed
to reimburse the Fund for any expense in excess of 1.35% for the first two years
of operation, which began March 1, 1994.
12
<PAGE>
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $58,468 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 annual fee of $42,500.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $28,385 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 $16,743,090 and $3,965,700 respectively. The
Custodian has provided credits in the amount of $77,820 against custodian and
accounting charges based on credits on cash balances of the Fund.
13
<PAGE>
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 Bond Fund, a series of Vontobel Funds, Inc., including the
schedule of portfolio investments as of December 31, 1996, the related statement
of operations for the year then ended, 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 two years in the period then ended and for the period March 1, 1994
(commencement of operations) to December 31, 1994. 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 Bond 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 two years in the period then ended and the period March 1, 1994
(commencement of operations) to December 31, 1994, in conformity with generally
accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 17, 1997
14
<PAGE>
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: VIBDX
