<PAGE>
VONTOBEL U.S. VALUE FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, 1997, the fund's closing Net Asset Value stood at $16.51 and net
assets totaled $203,119,627, v. $69,551,657 at the end of 1996. For the year,
the fund produced a total return of 34.3%, vs. 33.4% for the S&P 500 with
income. On December 12 the fund paid a per share distribution of $0.67 in income
and short-term capital gains and $1.31 in long-term capital gains to
shareholders of record as of December 5.
The U.S. equity market experienced three significant corrections and recoveries
in 1997 during which we, in effect, put money on the table and took it off
again, trimming positions when prices were rising, and investing aggressively in
each correction, not, for the most part, by adding new names, but by increasing
holdings in the well-managed, predictable businesses that have been our mainstay
over the past several years.
We started the year about 70% invested. American Express, Coca-Cola and Hanmi
Bank (in Los Angeles' Koreatown) were sold early in the year as price targets
were met. In February, we began to build a position in a small insurance
company, Commerce Group, that sells auto policies in Massachusetts. Newspaper
publisher Knight-Ridder was added, as was Cleveland-Cliffs, an iron ore miner.
Insurers Torchmark and Unum were sold as they reached our price targets. In late
April, the market experienced its first hiccup of the year and we were able to
redeploy about 10% of our cash, principally by adding to existing positions in
the portfolio that had sold off in the market decline. Then we hit a dry spell.
As the market continued to rise, we found few new names, other than insurer
Provident Life, added in mid-July. Meanwhile, we were forced to continue to trim
some of our larger positions such as Disney, Gannett and Chubb because they had
done well and were more richly priced.
The second market correction occurred in August, during which time the fund
regained some ground vis-a-vis the market by falling less than general equities.
With our large cash position we added to many existing, now cheaper, names in
the portfolio, like American International Group, and revisited Unum, a name
sold earlier in the year, and Johnson & Johnson, an equity we had not owned
since the demise of the health care reform plan in 1994. However, the correction
was so brief that our fantasies of obtaining succulent prices for new positions
were shattered in about a week as the market resumed its course upward.
The third and final correction of the year began to unfold in late October as
deflationary developments in Asia sparked concerns about the global financial
system. During two tumultuous days while the U.S. equity market plummeted, we
finally found many of the prices we had been waiting for and began to buy in
size. Coca-Cola, for example, at $52, down from our sale earlier in the year at
$70, became a 4% position in the fund. Another old faithful from the days of the
health care reform scare, Baxter, was added. Easiest of all was using our cash
reserve to load up on many of our current favorite positions at attractive
prices, such as Fannie Mae, Disney, Orion Capital and Chubb.
During the final month, investors around the world seemed to gravitate toward
the apparent safety of the U.S. and, furthermore, exactly toward the kinds of
stocks we are predisposed to own in the fund -- the excellent business
franchises of Coca-Cola, Disney, etc. Partly due to the trimming of winners in
December and partly due to a significant inflow of new money, the fund ended the
year less than 60% invested; yet still managed to finish ahead of the market as
well as beat 94% of the 611 growth and income funds tracked by Lipper Analytical
Services for the year.
At times, 1997 felt like a wild ride, but we at Vontobel are lucky in that we
employ an investment approach that we sincerely believe in and that we have
consistently nurtured over many years. We know that, over time, our approach
works. It works because it makes sense. If not enough sensible investment ideas
can be found, cash is the residual, as it was in 1997. Simply stated, if the
market offers us enough Cokes, Disneys, Wrigleys and Chubbs at the right prices,
we'll be fully invested. If not, then we won't be.
Peering into 1998, we worry about the same things that all the other pundits do.
It's been an amazing three years on Wall Street, a fourth would be
unprecedented. We're aware that many of our stocks have benefited from a "flight
to safety" and that they are far more pricey today than they were a year ago.
But we know what we're looking for, and we are resigned to wait patiently for
price and opportunity, regardless of the surrounding environment.
Edwin Walczak, Fund Manager
Mark Robertson, Associate Fund Manager
February 9, 1998
Vontobel U.S. Value Fund
<PAGE>
[GRAPH GOES HERE]
US VALUE S&P 500
3/30/90 $10,000.00 $10,000.00
12/31/90 $ 9,010.85 $ 9,714.00
12/13/91 $12,370.63 $12,270.00
12/31/92 $14,343.49 $12,817.00
12/31/93 $15,205.24 $13,722.00
12/31/94 $15,215.10 $13,510.78
12/31/95 $21,355.82 $18,588.13
12/31/96 $25,900.56 $22,857.66
12/31/97 $34,878.04 $30,482.98
<PAGE>
Schedule of Portfolio Investments
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Security Value
------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK: 57.69%
BANKING: 3.06%
56,772 California Center Bank* $ 958,028
15,500 Wells Fargo & Co. 5,261,281
------------
6,219,309
------------
BEVERAGES: 3.66%
111,500 Coca-Cola 7,428,688
------------
FOOD-PROCESSING: 3.65%
93,200 Wrigley Co. 7,415,225
------------
INDUSTRIAL: 1.11%
49,000 Cleveland Cliffs 2,244,813
------------
INSURANCE - DISABILITY: 5.38%
111,300 Provident Companies Inc. 4,298,962
122,000 UNUM Corp. 6,633,750
------------
10,932,712
------------
INSURANCE-DIVERSIFIED: 10.13%
137,000 American International 14,898,750
Group
38,000 Esg Re Limited* 893,000
68,200 Horace Mann Educators 1,939,437
Corp.
76,650 Old Republic 2,850,422
International Corp.
------------
20,581,609
------------
INSURANCE-PROPERTY/CASUALTY: 8.37%
137,200 Chubb Corp. 10,375,750
117,800 Commerce Group 3,843,225
60,050 Orion Capital 2,788,572
------------
17,007,547
------------
OTHER FINANCIAL: 8.14%
263,724 Federal National Mtg. 15,048,750
35,400 Federal Home Loan Mtg. 1,484,588
------------
16,533,338
------------
MEDICAL: 4.44%
75,000 Baxter International 3,782,813
79,500 Johnson & Johnson 5,237,062
------------
9,019,875
PUBLISHING AND BROADCAST: 6.01%
102,400 Gannett Co. 6,329,600
113,000 Knight Ridder 5,876,000
------------
12,205,600
------------
RESTAURANTS: 3.53%
150,100 McDonald's Corp. 7,167,275
------------
RETAIL: 0.21%
15,000 Sherwin Williams 416,250
------------
TOTAL COMMON STOCKS:
(Cost: $101,923,788) 117,172,241
------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal U.S. GOVT. SECURITIES: 24.37%
Amount
<S> <C> <C> <C> <C> <C> <C>
15,000,000 U.S. Treasury Bill 14,975,835
maturity date 01/15/98;
4.92%
15,000,000 U.S. Treasury Note 15,000,000
maturity date 01/31/98;
5.625%
4,000,000 U.S. Treasury Note 4,007,500
maturity date 02/15/98;
7.25%
3,500,000 U.S. Treasury Note 3,497,812
maturity date 03/31/98:
5.125%
4,000,000 U.S. Treasury Note 4,006,252
maturity date 03/31/98;
6.125%
4,000,000 U.S. Treasury Note 4,006,252
maturity date 04/30/98;
5.875%
4,000,000 U.S. Treasury Note 4,007,500
maturity date 05/31/98; ------------
6.00%
TOTAL U.S. GOVERNMENT
SECURITIES:
(Cost: $49,500,246)** 49,501,151
------------
TOTAL INVESTMENTS:
(Cost: $151,424,034) 82.06% 166,673,392
Other assets, net 17.94% 36,446,235
--------- ------------
NET ASSETS 100.00% $ 203,119,627
========= ============
</TABLE>
*Non-income producing
**Cost for Federal income tax purposes is $151,424,034 and consists of:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross unrealized appreciation $ 15,380,715
Gross unrealized depreciation (131,357)
------------
Net unrealized appreciation $ 15,249,358
============
See Notes to Financial Statements
</TABLE>
<PAGE>
Statement of Assets and Liabilities
December 31, 1997
- --------- --------- --------- --------- ------------ -------------- ---------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value(identified cost of $ 166,673,392
$151,424,034)
(Notes 1 & 3)
Cash 27,321,644
Receivables:
Dividend $ 712,162
and
interest
Capital 9,460,846
stock sold
--------------
10,173,008
Deferred organization costs 36,413
Other assets 6,199
--------------
TOTAL ASSETS 204,210,656
--------------
LIABILITIES
Payables:
564,321
Investments
purchased
Capital 356,205
stock
reaquired
128,208
Investment
management fees --------------
1,048,734
Accrued 42,295
expenses --------------
TOTAL 1,091,029
LIABILITIES
--------------
NET ASSETS $203,119,627
==============
NET ASSET
VALUE,
OFFERING
AND
REDEMPTION
PRICE
PER SHARE ($203,119,627/12,299,226 shares outstanding) $16.51
==============
</TABLE>
At December 31, 1997 there were 50,000,000 shares of $.01 par value stock
authorized and components of net assets are:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Paid in $187,870,269
capital
Net
unrealized
appreciation
of 15,249,358
investments
--------------
Net Assets $203,119,627
==============
</TABLE>
See Notes to Financial Statements
<PAGE>
Statement of Operations
Year ended December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT
INCOME
Income:
Interest $1,412,979
Dividend 895,629
------------
Total $2,308,608
income ------------
Expenses:
Investment
management
fees 986,164
(Note 2)
Transfer 133,220
agent fees
(Note 2)
Recordkeeping
and
administrative
services 255,478
(Note 2)
Legal and 54,826
audit fees
Filing fees
and
31,885
registration
(Note 2)
Shareholder
servicing
and 90,863
reports
(Note 2)
Custodian 34,457
fees (Note 3)
25,765
Amortization
of
organization
cost
Other 27,209
------------
1,639,867
Custodian (32,735)
fee waiver
Management 2,025,500
fee waiver
------------
Total 1,584,632
expenses
------------
Net 723,976
investment
income
------------
REALIZED AND
UNREALIZED
GAIN ON
INVESTMENTS
Net 20,634,950
realized
gain on
investments
Net change
in
unrealized
8,708,910
appreciation
on
investments
------------
Net gain 29,343,860
on
investments
------------
Net
increase in
net assets
$30,067,836
resulting
from
operations
============
</TABLE>
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
<S> <C> <C> <C> <C> <C> <C>
------------ ------------
OPERATIONS
Net investment $ 723,976 $ 396,316
income
Net realized gain
on investments 20,634,950 11,188,744
Change in
unrealized
appreciation
(depreciation)
of investments 8,708,910 158,072
Net increase ------------ ------------
in net assets
resulting
from operations 30,067,836 11,743,132
DISTRIBUTION TO
SHAREHOLDERS FROM:
Net investment
income ($.10 and
$.19 per (687,957) (468,857)
share)
Net realized gain
from
investment
transactions ($1.88
and
$2.10 per share) (12,944,667) (5,158,503)
CAPITAL SHARE
TRANSACTIONS
Net increase in
net assets
resulting
from capital
share
transactions* 117,132,758 8,332,548
Net increase ------------ ------------
in net assets 133,567,970 14,448,320
Net assets at
beginning of the 69,551,657 55,103,337
year
------------ ------------
NET ASSETS at the
end
of the year $203,119,627 $69,551,657
============ ============
</TABLE>
*A summary of capital share transactions follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
---------- -- ------------ ------------ -- ------------
Shares Value Shares Value
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 12,326,479 $203,031,416 5,091,561 $70,799,337
Shares
reinvested
from dividend 703,536 11,509,842 397,818 5,485,919
Shares
redeemed (5,777,581) (97,408,500) (4,602,188) (67,952,708)
---------- ------------ ------------ ------------
Net increase 7,252,434 $117,132,758 887,191 $8,332,548
========== ============ ============ ============
</TABLE>
See Notes to
Financial Statements
<PAGE>
Financial Highlights
For a Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value,
beginning of year $13.78 $13.25 $10.26 $12.64 $12.00
Income from investment
operations-
Net investment income 0.10 0.17 0.05 0.09 0.16
Net realized and unrealized
gain (loss) on investments 4.61 2.65 4.09 1.97 0.56
Total from investment
operations 4.71 2.82 4.14 2.06 0.72
Less distributions-
Distributions from net
investment income 1.95 1.86 0.16 1.82 0.18
Distributions from realized
gains on investments 18.60 18.38 19.37 18.32 0.14
Total distributions (1.98) (2.29) (1.15) (2.39) (0.08)
Net asset value, end of year $16.51 $13.78 $13.25 $10.26 $12.64
Total Return 34.31% 21.28% 40.36% 0.02% 6.00%
Ratios/Supplemental Data
Net assets, end of year (000) $203,120 $69,552 $55,103 $29,852 $34,720
Ratio to average net assets-(A)
Expenses (B) 1.61% 1.48% 1.65% 1.62% 1.82%
Expenses-net (C) 1.58% 1.43% 1.50% 1.62% 1.82%
Net investment income 0.72% 0.63% 0.38% 0.76% 1.23%
Portfolio turnover rate 89.76% 108.36% 95.93% 98.90% 137.32%
Average brokerage
commissions per share $0.0810 $0.0883 - - -
</TABLE>
(A) Management fee waivers reduced the expense ratios and increased
net investment income ratios by .02% in 1997, 0.04% in
1996 and 0.06% in 1995.
(B) Expense ratio has been increased to include additional custodian fees
in 1997, 1996 and 1995 which were offset by custodian fee credits;
prior to 1995 custodian fee credits reduced expense ratios.
(C) 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
December 31, 1997
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--Vontobel U.S. Value 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 March 30, 1990 as a series of VFI
which has allocated to the Fund 50,000,000 shares 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.
The investment objective of the fund is to achieve long-term capital returns in
excess of the broad market by investing in a continuously managed portfolio of
U.S. equity securities.
A. Security Valuation. Investments in securities traded on a national securities
exchange or included in the NASDAQ National Market System are valued at the last
reported sales price; other securities traded in the over-the-counter market and
listed securities for which no sale is reported on that date are valued at the
last reported bid price. Short-term investments (securities with a remaining
maturity of sixty days or less) are valued at cost which, when combined with
accrued interest, approximates market value.
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. As is common in the industry, security
transactions are accounted for on the trade date. Dividend income is recorded on
the ex-dividend date.
D. Deferred Organizational Expenses. Reorganization costs assumed in the
acquisition of Centurion Growth Fund on December 24, 1994 amounted to $90,899
and are being amortized over a period of five (5) years.
E. 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% of 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 advisory fee, to limit the
Fund's aggregate annual operating expenses (excluding taxes, brokerage
commissions and amortization of organization expenses), to the lowest applicable
percentage limitation prescribed by any state in which the Fund's shares are
qualified for sale. VUSA has agreed to reduce its management fee by $22,500 per
year for four years commencing January 1, 1995.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its Administrative Agent, $318,571 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky filings and certain
shareholder servicing on an hourly rate basis. For other administrative
services, CSS receives .20% of average daily net assets.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend
Disbursing Agent. FSI received $96,132 for its services for
the year ended December 31, 1997.
Certain officers and/or directors of the Fund are also officers and/or directors
of CSS and FSI.
NOTE 3-PURCHASES AND SALES OF SECURITIES--Purchases and sales of securities
other than short-term notes aggregated $122,658,332 and $80,694,141,
respectively. The Custodian has provided credits in the amount of $32,735
against custodian and accounting charges based on credits on uninvested cash
balances
of the Fund.
NOTE 4-DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net 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 distribution differences are primarily due to differing
treatments for equalization and post-October capital losses.
<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
U.S. Value Fund, a series of Vontobel Funds, Incorporated, including the
schedule of portfolio investments as of December 31, 1997, 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 confirmations of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. 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 U.S. Value Fund as of December 31, 1997, 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 23, 1998
<PAGE>
VONTOBEL INTERNATIONAL EQUITY FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, 1997 the fund's closing Net Asset Value stood at $18.15 and net
assets totaled $160,820,998, vs. $151,709,751 at the end of 1996. For the year,
the fund produced a total return of 9.2%, vs. the 1.8% total return of the MSCI
EAFE Index and the 5.4% average total return of the 421 international equity
funds tracked by Lipper Analytical Services. On December 12 the fund paid a per
share distribution of $0.73 in short-term capital gains and $1.05 in long-term
capital gains to shareholders of record as of December 5.
In 1997 excessive valuations throughout Asia translated into a bear market,
which to a large extent we were able to avoid due to our earlier recognition of
overvaluation in that region. Our sole position in Latin America, Brazil's
Brahma, was sold for profit in the fourth quarter. In the developed Asian
markets, we further reduced our underweight in Hong Kong throughout the year,
while adding to our stake in Australia (National Australia Bank), and cut back
our weighting in Japan by 20% in the second half. At year end the fund's
regional allocation was as follows: Europe 64.7%, Japan 23.5%, Asia/Pacific
3.5%, and cash 8.3%.
After another year of double-digit gains in local currency in most markets,
Europe remains an attractive place to invest. Not only is growth picking up but,
like U.S. companies in 1995-96, European corporations are vigorously pursuing
the goals of stronger balance sheets, creation of shareholder value, improving
ROE's and better corporate governance. Two ongoing trends bode well for the
continued good performance of European equity markets. Low inflation has led to
falling interest rates, which makes funding of balance sheet debt cheaper than
equity for some companies. As a result, share repurchases, common in the
Anglo-Saxon world, are gaining ground in continental Europe. Among our portfolio
holdings, good examples of companies undertaking share buybacks are Compass,
Rentokil, SGL and Vendex, all of which have low P/B ratios, moderate debt and
strong free cash flow. The second major trend of the `90's is the accelerated
level of mergers and acquisitions throughout Europe. Since companies lack
pricing power, acquiring competitors has become a key strategy, which, along
with continued cost cutting, will result in an expansion of P/E multiples.
Against a backdrop of uncertainty in Asia, the Japanese market has derated
substantially. With a P/E of 29X and P/CF of 11X, it no longer seems
outrageously overvalued. Consolidated net profits are expected to rise 18% vs.
38% in the fiscal year ending March 31st, taking into account substantial
downward revisions due to the "Asian contagion". Economic data point to gradual
expansion, not a return to recession. Companies have strengthened their balance
sheets. Banks have started to sell some of their riskiest assets. In the fourth
quarter we took the precaution of selling companies that could experience
competitive pressures from Korea, like Nippon Steel and Mitsui, a trading
company. On the other hand, we increased Nintendo, which has a great franchise
in the PC home game market and is trading at a 26% discount to its growth rate.
The total return of our investments in Japanese companies was positive despite
the market's 30% drop. For this we credit our investment approach, which focuses
not purely on top-down factors but also involves rigorous stock-by-stock
analysis, with a focus on reliable companies with good track records and leading
positions in their industries.
We were for the most part hedged against a rallying US dollar, which exhibited
strength against virtually all the major trading currencies of continental
Europe and, in the second half, the Japanese yen. Last year again favorable
interest differentials made the forward carry points of our hedges very
attractive against the spot price. Looking out over the next 12 months, we are
cautious in terms of further double-digit appreciation of the U.S. dollar. We
are maintaining our hedged position in Japan, and may reverse our currently
unhedged position in Europe.
We've been bullish for more than three years and strongly believe that, just as
they did last year, good-quality companies with sustainable growth rates will
continue to perform well. Earnings are still growing in Europe and Japan, and
declining interest rates and strong bond markets provide a buffer for the
markets in terms of earnings yield. Nevertheless, at this stage in the cycle of
P/E expansion, prudence is our byword. Where there is no margin of safety, we
will not invest. On the basis of fundamentals, we believe our stocks should be
relatively resilient to an economic downturn in Asia since they do not depend on
the elasticity of the economy but are mostly in constant demand, for example,
Vendex (temp agency), Elsevier (scientific publishing), Fuji Photo (color film
paper), Takeda Chemical (pharmaceuticals), Provident (personal finance), BIC
(razors), Aegon (life insurance). Companies like these constitute the core of
the fund. They have 15-20 year track records of sticking to their core business,
which is reflected in the reliability of their revenues and operating profits
year after year. We expect them to continue to generate strong sales and
double-digit earnings growth. What's also relevant is that they can be purchased
without having to pay a high premium on their underlying valuations.
Fabrizio Pierallini, Fund Manager
Rajiv Jain, Associate Fund Manager
February 9, 1998
<PAGE>
[GRAPH GOES HERE]
INTERNATIONAL
EQUITY 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
12/31/97 $19,066.32 $13,677.79
<PAGE>
VONTOBEL INTERNATIONAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares Description Value
- ----------- ---------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS 91.80%
Belgium 0.76%
6,700 Barco NV NPV (Engineering) $1,227,798
---------------
Finland 0.66%
20,000 Cultor Oy Ser '2' (Food-Process) 1,075,393
---------------
France 9.29%
26,000 Axa S A (Insurance) 2,011,830
34,666 Bic (Consumer Goods) 2,530,327
3,200 Carrefour (Merchandising) 1,669,519
48,000 Dassault Systemes SA (Aerospace & 1,463,488
Military Technology)
6,500 Generale des Eaux Wts 5/2/2001 * 4,417
(Utility-Water)
3,200 L'Oreal (Consumer Goods) 1,252,139
19,000 Rhone Poulenc SA Ser A (Chemicals) 851,109
19,000 Rhone Poulenc SA Wts. * 65,349
(Chemicals)
40,000 Scor (Reinsurance) 1,912,769
1,738 LDC SA (Food) 264,230
17,315 Total SA Cl B (Oil) 1,884,411
15,135 Valeo (Automotive) 1,026,519
---------------
14,936,107
---------------
Germany 7.82%
13,500 Adidas AG (Consumer Goods) 1,785,992
50,000 Bayer AG (Chemicals) 1,855,197
1,400 Bayerische Motoren Werk 1,046,693
(Automobile)
12,000 CKAG Colonia Konzern AG (Insurance) 1,147,304
110,000 Deutsche Lufthansa Regd (Airline) 2,066,704
16,500 GEHE AG (Pharmaceutical) 834,630
6,500 SAP AG Pfd. (Computer Software) 2,110,784
13,500 SGL Carbon AG (Chemicals) 1,725,959
---------------
12,573,263
---------------
Great Britain 19.22%
1,198 BAA ORD 9,798
(Transportation-Miscellaneous)
25,726 British Petroleum PLC Spons ADR 2,050,041
(Petroleum)
130,000 Compass Group (Food-Catering) 1,599,156
110,149 CRH Ord (Construction) 1,280,608
210,000 Dixons Group PLC (Retail) 2,107,299
92,347 Emi Group PLC (Leisure & Rec. 770,464
Products)
95,000 General Accident ORD (Insurance) 1,708,455
55,000 HSBC Holdings ORD (Banking) 1,427,202
191,348 Lloyds TSB Group ORD 2,489,131
(Finance-Consumer Loans)
76,798 Misys PLC (Computer Services) 2,320,777
115,000 Norwich Union PLC * (Insurance) 689,376
120,000 Norwich Union PLC 144A (Insurance) 719,349
151,410 Powerscreen International 1,529,280
(Industrial Components)
134,013 Provident Financial PLC (Financial) 1,760,770
440,000 Rentokil Initial PLC (Diversified) 1,946,986
110,000 Reuters Holdings (Publishing) 1,201,379
330,000 Shell Transport & Trading Regd 2,314,235
(Oil)
91,640 Siebe (Multi-Industry) 1,798,534
121,543 Smiths Industries ORD (Machinery & 1,692,745
Engineering)
42,000 Zeneca Group PLC ORD * 1,487,560
(Medical-Drugs)
---------------
30,903,145
---------------
Ireland 3.36%
200,306 Allied Irish Banks PLC (Banking) 1,910,370
36,600 Elan Corp. ADR * (Medical Products) 1,873,463
261,812 Greencore Group (Food-Process) 1,234,063
45,000 Northern Ireland Electricity PLC 392,134
(Utility-Electric)
---------------
5,410,030
---------------
Netherlands 7.16%
20,322 Aegon N V ADR (Insurance) 1,821,359
18,554 Aegon NV (Insurance) 1,651,589
140,000 Elsevier NN (Publishing) 2,264,587
32,290 Hagemeyer NV (Wholesale & 1,348,772
International Trade)
38,340 Ing Groep NV (Financial Services) 1,614,720
50,914 Vendex International NV 2,809,664
(Merchandising)
---------------
11,510,691
---------------
Norway 0.46%
35,000 Smedvig As Sponsored ADR B (Oil) 735,000
---------------
Spain 0.87%
20,000 BCO Popular ESP REG (Banking) 1,397,534
---------------
Sweden 5.78%
84,700 Assa Abloy Series 'B' (Metal 2,242,240
Processors & Fabrication)
106,666 Astra Ab Ser B Free 1,795,092
(Pharmaceutical)
35,000 Autoliv Inc (Automotive) 1,146,250
45,000 Hennes & Mauritz B Free 1,985,455
(Merchandising)
22,000 Om Gruppen AB (Financial Services) 801,493
28,000 Skandia Forsakrings Ab Free 1,321,872
(Multi-line Insurance)
---------------
9,292,402
---------------
Switzerland 9.39%
125,000 Credit Suisse UBS Wts 4/17/98 966,671
(Financial)
14,000 Credit Suisse Group REG (Financial) 2,165,344
1,500 Nestle AG REG (Food) 2,247,126
2,800 Pharma Vision * (Pharmaceutical) 1,738,024
600 Roche Holding AG Wts 5/05/98 * 62,825
(Pharmaceutical)
410 Roche Holdings Genusscheine DRC 4,069,977
(Pharmaceutical)
2,664 Union Bank of Switzerland Bearer 3,850,512
(Banking)
---------------
15,100,479
---------------
Australia 1.75%
201,499 National Australia Bank Ltd 2,814,337
(Banking)
---------------
Hong Kong 1.12%
225,000 Dah Sing FCL Services (Financial 541,521
Services)
180,000 Sun Hung Kai Properties (Real 1,260,163
Estate)
---------------
1,801,684
---------------
Japan 23.48%
100,500 Bank of Tokyo-Mitsubishi (Banking) 1,385,145
115,000 Bridgestone Corporation (Tire & 2,491,960
Rubber)
65,000 Canon, Inc. (Office Equipment) 1,513,017
102,750 Credit Saison Co. (Finance) 2,533,346
125,400 Ezaki Glico Co (Food & Household 809,435
Products)
78,000 Fuji Photo Film Co. (Consumer 2,986,217
Goods)
45,000 Hitachi Maxell (Audio/Video 792,496
Products)
39,000 Hoya Co. (Glass Products & 1,224,349
Electronics)
110,000 Industrial Bank of Japan * 783,308
(Banking)
24,000 Ito-Yokado * (Retail) 1,222,052
75,000 Jusco Co. (Retail) 1,056,662
195,000 Komatsu Lt. (Machinery & 977,986
Engineering)
32,500 Murata Manufacturing Co. 816,233
(Manufacturing)
25,000 Nintendo Co. (Consumer Goods) 2,450,230
30 NTT Data Corp. (Telecommunications) 1,614,855
113,000 Omron Corp. (Machinery) 1,765,084
25,000 Rohm Co. (Electronics) 2,545,942
18,000 SMC (Machines) 1,584,992
23,000 Sony Corp. (Electronics) 2,042,879
77,000 Taisho Pharmaceutical 1,963,323
(Pharmaceutical)
123,000 Takeda Chemical Industries 3,503,522
(Medical-Drugs)
60,000 Tokyo Broadcasting (Broadcasting) 758,040
220,000 Yasuda Fire & Marine Insurance 939,969
(Insurance)
---------------
37,761,042
---------------
Malaysia 0.39%
150,000 Malayan Banking BHD (Banking) 435,788
67,500 Telekom Malaysia 199,576
(Telecommunications)
---------------
635,364
---------------
Singapore 0.29%
100,000 City Developments (Real Estate) 462,771
---------------
TOTAL COMMON STOCKS AND WARRANTS:
(COST: $115,062,317) 147,637,040
---------------
CONVERTIBLE BONDS: 0.65%
Switzerland
875,000 Union Bk Switz 2.75% 6/16/02 1,041,250
(Banking)
---------------
TOTAL CONVERTIBLE BONDS:
(Cost: $1,074,063) 1,041,250
---------------
TOTAL INVESTMENTS
(Cost: $116,136,380)** 92.45% 148,678,290
Other assets, net 7.55% 12,142,708
------------ ---------------
NET ASSETS 100.00% $160,820,998
============ ===============
</TABLE>
* Non-income producing
** Cost for Federal income tax purposes is $116,136,380 and
consists of:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross unrealized appreciation $38,770,427
Gross unrealized depreciation (6,228,517)
---------------
Net unrealized appreciation $32,541,910
===============
</TABLE>
ADR-Security represented is held by the custodian bank in the form of American
Depository Receipts.
<TABLE>
<CAPTION>
Forward Currency Contracts Outstanding December 31, 1997
Face Value Contract Delivery Appreciation/
(U.S. Dollar) Price Date Depreciation
---------------------------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Japanese Yen 19,281,755 124.47 02/17/98 $775,730
=========
</TABLE>
See Notes to Financial Statements
<PAGE>
Statement of assets and Liabilities
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(identified cost of
$116,136,380)(Notes 1 & 3) $148,678,290
Cash (including foreign currencies) 12,322,742
Receivables
Capital stock sold 302,818
Dividends and interest 159,269
Receivable for forward currency contracts 19,281,755 19,743,842
-----------
Other assets 23,322
------
TOTAL ASSETS 180,768,196
-----------
LIABILITIES
Payables
Forward currency contracts
payable at market 18,506,024
value-proceeds
$19,281,755
Forward currency contracts closed 896,911
Investment management fees 122,236
Capital stock redeemed 75,335
-----------
19,600,506
Accrued expenses 346,692
-------
TOTAL LIABILITIES 19,947,198
----------
NET ASSETS $160,820,998
============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($160,820,998/8,860,684 shares outstanding) $18.15
======
</TABLE>
At December 31, 1997 there were 50,000,000 shares of $.01 par value stock
authorized and the components of net assets are:
Paid in capital $129,597,225
Net unrealized gain on investments
and currency transactions 33,314,540
Accumulated net realized loss
on investments and foreign currencies (2,090,767)
----------
Net Assets $160,820,998
============
See Notes to Financial Statements
<PAGE>
Statement of Operations
Year ended December 31, 1997
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C> <C> <C> <C> <C> <C>
Income:
Interest $2,566
Dividend (Net of foreign tax withheld of 2,110,785
$243,782)
------------
Total income $2,113,351
Expenses:
Investment management fees (Note 2) 1,443,062
Custodian and accounting fees (Note 3) 300,000
Transfer agent fees (Note 2) 72,082
Recordkeeping and administrative services 388,955
(Note 2)
Legal and audit fees 66,986
Filing fees and registration (Note 2) 30,640
Shareholder servicing and reports (Note 2) 47,580
Other 133,705
------------
Total expenses 2,483,010
Custodian fee waiver 1,948,000
------------
Expenses, net 2,383,010
------------
Net investment loss (269,659)
------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on investments 8,671,535
Net realized gain on foreign currency
conversions and forward currency 2,616,812
contracts
Net increase in unrealized appreciation
on investments and foreign currencies 2,518,629
------------
Net gain on investments 13,806,976
------------
Net increase in net assets
resulting from operations $13,537,317
============
</TABLE>
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net ($269,659) $206,752
investment
income
Net
realized
gain
on
investments
and
11,288,347 18,362,272
foreign
currencies
Net
unrealized
appreciation
of 2,518,629 3,375,302
investments
and
currencies
---------------- ----------------
Net
increase in
net assets
resulting
from 13,537,317 21,944,326
operations
DISTRIBUTIONS
TO
SHAREHOLDERS
FROM:
Net
investment
income
($.00 0 (206,752)
and $.03
per share,
respectively)
Net
realized
gain from
investment
transactions
($1.78 (14,484,891) (13,391,354)
and $1.76
per share,
respectively)
CAPITAL
SHARE
TRANSACTIONS
Net
increase in
net assets
resulting
from capital
share 10,058,821 12,858,641
transactions*
---------------- ----------------
Net 9,111,247 21,204,861
increase in
net assets
Net assets 151,709,751 130,504,890
at
beginning
of year
---------------- ----------------
NET ASSETS $160,820,998 $151,709,751
at the end
of the year
================ ================
</TABLE>
*A summary of capital share transactions follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
<S> <C> <C> <C> <C> <C> <C>
Shares Value Shares Value
---------- ---------------- ---------------- -----------
Shares sold 2,418,086 $46,636,966 2,028,975 $36,708,062
Shares
reinvested
from 703,496 13,035,788 699,320 12,545,808
distribution
Shares (2,586,904) (49,613,933) (2,020,237) (36,395,229)
redeemed
---------------------------- ---------------- -----------
Net 534,678 $10,058,821 708,058 $12,858,641
increase
(decrease)
============================ ================ ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
Financial Highlights
For a Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
Years ended
December 31
--------------- ---------- - ------------- ------------- --- ------------
1997 1996 1995 1994 1993
--------------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value,
beginning of year $18.22 $17.13 $16.23 $17.22 $12.23
--------------- --------- ------------- ------------ ------------
Income from investment
operations-
Net investment 0.17 0.03 0.16 0.01 0.08
income (loss)
Net realized and
unrealized
gain (loss) on 1.74 2.85 1.61 1.13 4.91
investments
--------------- --------- ------------- ------------ ------------
Total from 1.71 2.88 1.77 (0.91) 4.99
investment operations
--------------- --------- ------------- ------------ ------------
Less distributions-
Distributions from 0.00 0.17 1.88 1.97 0.00
net investment income
Distributions from 18.70 18.72 1.35 0.00 0.00
realized gains
--------------- --------- ------------- ------------ ------------
Total distributions (1.78) (1.79) (0.87) 1.97 0.00
--------------- --------- ------------- ------------ ------------
Net asset value, end of $18.15 $18.22 $17.13 $16.23 $17.22
year
=============== ========= ============= ============ ============
Total Return 9.19% 16.98% 10.91% (5.28%) 40.80%
Ratios/Supplemental Data
Net assets, end of $160,821 $151,710 $130,505 $138,174 $136,932
period (000's)
Ratio to average net
assets-
Expenses (A) 1.56% 1.60% 1.63% 1.54% 1.77%
Expenses-net (B) 1.50% 1.39% 1.53% 1.54% 1.77%
Net investment income (0.17%) 0.15% 0.41% 0.08% 0.85%
(loss)
Portfolio turnover rate 38.45% 54.58% 68.43% 34.04% 10.66%
Average commission rate $0.0349 $0.0279 --- --- ---
paid per share
(A) Expense ratio has been increased to include additional custodian fees since
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.
</TABLE>
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
December 31, 1997
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 carefully selected and continuously
managed diversified portfolio consisting primarily of equity securities of
issuers located in Europe and the Pacific Basin.
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.
<PAGE>
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. 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. 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, net operating losses, equalization and
post-October capital and currency losses.
G. 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 and .75% on average daily net assets over $100 million.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $419,496 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.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend
Disbursing Agent. FSI received $67,540 for its services for the
year ended December 31, 1997.
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 $57,003,288 and $59,662,807, respectively. The
Custodian has provided credits in the amount of $100,000 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund.
<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 Equity Fund, a series of Vontobel Funds, Incorporated,
including the schedule of portfolio investments as of December 31, 1997,
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 confirmations of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. 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, 1997,
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 23, 1998
<PAGE>
[GRAPH GOES HERE]
Eastern European
Equity Fund EEEI
02/15/96 $10,000.00 $10,000.00
12/31/96 $14,890.00 $12,394.00
12/31/97 $16,191.39 $11,584.59
<PAGE>
VONTOBEL EASTERN EUROPEAN EQUITY FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, 1997 the fund's closing Net Asset Value stood at $15.25 and net
assets totaled $139,408,405, vs. $61,852,644 at the end of 1996. For the year,
the fund produced a total return of 8.8%. For the same period, Nomura Research
Institute's Eastern European Equity Index (covering the Czech, Hungarian, Polish
and Slovakian markets) suffered a 6.5% decline in US dollar terms. On December
12 the fund paid a per share distribution of $0.66 in short-term capital gains
and $0.26 in long-term capital gains to shareholders of record as of December 5.
Eastern Europe was marked by two major events in 1997. First, the region's
markets collapsed in the wake of the Asian economic and financial crises despite
a lack of fundamental similarities between the regions. This disproportionate
reaction was unfortunate but not surprising: in times of major crisis, investors
"fly to quality" and sell their holdings in emerging markets first. In our view,
the investment rationale for investing in Eastern Europe is intact. Asia's
problems will have no impact on the acceleration of domestic consumption in
Eastern Europe and its increased rapprochement with Europe.
Second, both Morgan Stanley Capital International and the International Finance
Corporation have expanded their emerging markets indices to include Russia. The
impact on these indices, which serve as benchmarks for many fund managers, was
substantial. Russia's 5.9% weighting in the MSCI Emerging Markets Free Index had
the effect of increasing the regional weighting of EMEA (Europe/Middle
East/Africa) to nearly that of Emerging Markets Asia (28.3% vs. 29.4%). Three
years ago, the emerging markets universe comprised only Latin America and Asian
markets, EMEA was nonexistent. That changed two years ago with the inclusion of
South Africa, and Russia's inclusion brings new attention to the region.
In its first year of operation, the fund's core markets were Hungary and Poland,
which together accounted for 66% of portfolio assets at the end of 1996. In 1997
that changed as we brought our weighting in Russia to over 20%; at June 30, the
fund had a higher weighting in Russia (27%) than in Poland (18%). In the last
quarter we gradually decreased our Russian weighting in favor of an increased
weighting in Poland. At year end the fund was 99% invested, with nearly 86% of
portfolio assets allocated to these three core markets as follows: Hungary
35.6%, Poland 26.7% and Russia 23.5%. The remaining 13% of invested assets were
allocated to Croatia (4.1%), the Czech Republic (3.1%), Lithuania (2.9%),
Romania (1.6%), Slovenia (0.8%) and Estonia (0.6%).
We anticipate a difficult investment environment in 1998, characterized by two
competing trends:
The Asian turmoil will continue at least through the first quarter, keeping
investors in emerging markets at bay. Russia in particular will be seen as very
risky and will remain volatile; prices have collapsed to very low levels, which
could attract some hedge fund interest. But the currency remains a question
mark. Taking into account the high level of foreign ownership of the Russian
T-bill and equity markets, and the low level of foreign reserves, the ruble is
vulnerable, which will keep upward pressure on interest rates. Hungary saw the
strongest rebound after the November collapse, so it could experience some
profit taking. Poland is historically one of the world's most volatile markets,
and may not reattract investors until global markets become calmer. The other
regional markets are much smaller and therefore much more sensitive to fund
flows.
On the other hand, valuations in Eastern Europe have become very low again,
which means the markets are poised for a rally. Fear of redemptions is keeping
fund cash levels high, but as soon as the situation stabilizes, we expect fund
managers to redeploy some of their cash reserves to the region. The first two
beneficiaries of renewed investor interest would be Russia, which has not
recovered from the November crisis, and Poland, where macroeconomists are
beginning to be much less pessimistic than they were nine months ago. The
latter's current account deficit seems to be under control and is now estimated
at 4% of GDP for 1997, whereas most economists had been predicting 6.5% to 8%.
It remains to be seen whether the corporate earnings of listed companies will
rebound in 1998 from their decline last year; but the fact that GDP grew by 6.1%
in 1996 and 6.3% in 1997 bodes well for future earnings growth. The Czech market
remains unattractive; political evolution will be the key to its recovery since
the country needs a strong government to implement unpopular but necessary
measures.
From a stock selection perspective, we have decided to take more concentrated
positions. At December 31st, our five largest holdings were:
Gedeon Richter (Hungary) 5.0% pharmaceuticals
Egis (Hungary) 4.5% pharmaceuticals
Pannonplast (Hungary) 3.8% construction
Lukoil (Russia) 3.7% oil & gas
MOL (Hungary) 3.5% oil & gas
We look at not only a company's fundamental valuation but also the liquidity of
its stock, which explains the predominance of Hungarian stocks among our top
holdings. Hungary and Russia have the most liquid markets in the region. Since
we anticipate a high level of volatility in the coming months, we strongly
believe that a disciplined approach to fundamental stock selection will be
rewarding.
Luca Parmeggiani
Fund Manager
February 9, 1998
<PAGE>
VONTOBEL EASTERN EUROPEAN EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Number of Market
Shares Description Value
- --------- ---------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS: 99.23%
Croatia 4.08%
277,400 Pliva DD GDR (Pharmaceutical) $4,812,890
27,000 Zagrebacka Banka GDR * (Banking) 870,750
---------------
5,683,640
---------------
Czech Republic 3.09%
70,000 CKD Praha Holding AS * (Engineering) 2,327,531
171,000 Komercni Banka AS Sponsored ADR * 1,983,600
(Banking)
---------------
4,311,131
---------------
Estonia 0.65%
1,206,800 Britannic Group PLC (Timber) 901,805
---------------
Hungary 35.74%
25,000 Borsodchem RT (Chemicals-Plastics) 900,879
130,180 Danubius Hotel & Spahuf * (Hotel) 3,951,705
90,882 Egis Gyogysergyar (Pharmaceutical) 5,695,560
70,260 Graboplast RT Regd (Construction Material) 3,715,185
15,692 Inter Europa Bank (Financial) 1,444,391
150,000 Magyar Olay Es Gazipari Rt (Oil & Gas) 3,635,340
157,000 Matav RT ADR * (Telephone - Integrated) 4,082,000
85,000 Mezogep RT * (Automotive & Machinery) 2,164,068
53,000 Mol Magyar Olay GDR Regs (Oil & Gas) 1,272,000
7,000 Pannonplast Muanua (Construction 368,464
Material) combine???
92,122 Pannonplast Muanyagipari (Construction 4,849,096
Material)combine???
52,865 Pick Szeged Ord Bearer (Food-Meat 4,218,950
Products)
50,050 Pick Szeged Tem Sponsored GDR (Food-Meat 645,145
Products)
29,500 Primagaz Hungaria Co Ltd (Gas) 995,153
62,000 Richter Gedeon Vegyeszeti Gyar 7,041,005
(Pharmaceutical)
350,000 Scala Business Solutions * (Computer 2,322,669
Software)
150,000 Tiszai Vegyi Kombinat (Chemicals) 2,519,034
-------------
49,820,644
-------------
Lithuania 2.88%
10,150 Baltic Republic Fund (Other) 2,131,500
22,000 Birzai Milk Sponsored GDR * (Food-Dairy) 464,200
25,000 Vilniaus Bankus AB GDR (Banking) 1,412,500
---------------
4,008,200
---------------
Poland 26.75%
192,000 Agros Holdings Series C * (Consumer Goods) 3,976,170
38,951 Bank Przemyslowo Handlowy (Banking) 2,022,137
15,000 Bank Slaski (Banking) 829,787
3,462,485 Big Bank Gdanski (Banking) 3,388,815
180,000 Computerland Poland SA * (Technology) 2,859,574
38,789 Drosed SA (Poultry) 517,187
110,000 Elektrim SA (Engineering) 1,064,113
415,574 Exbud SA * (Construction) 3,890,480
50,000 Fabryki Mebli Forte SA (Home Furnishings) 153,191
2,594 Impexmetal SA * (Metal 20,752
Processors/Fabrication)
110,000 Jelfa SA * (Pharmaceutical) 2,434,043
144,000 KGHM Polska Midez SA * (Metal - 531,064
Diversified)
320,000 KGHM Polska Miedez SA GDR * (Metal - 2,224,000
Diversified)
239,485 Mostostal Zabrze-Holding SA (Construction) 1,236,490
45,932 Optimus SA Shares (Technology) 1,211,823
44,650 Polfa Kunto Series A * (Pharmaceutical) 1,279,333
123,183 Polifarb Cieszyn (Chemicals) 576,601
8,333 Polifarb Cieszyn SA Ser D (Chemicals) 39,478
130,000 Prokom Software Sponsored GDR (Software) 1,459,900
157,013 Sokolowskie Zaklady Miesne S.A. * (Food - 191,534
Meat Products)
635,966 Wielkopolski (Banking) 3,193,361
274,000 Zakalady Metali Lekkich * (Manufacturing) 4,197,447
---------------
37,297,280
---------------
Romania 1.61%
2,500 Romanian Investment Fund (Other) 2,250,000
---------------
Russia 23.61%
50,000 Core Bashinformsvyaz GDR * 70,000
1,000 Core Electrosviaz Mos GDR * 500,000
1,600,000 Core Kuzbassenergo GDR * 800,000
1,125 Core Moscow City Tel GDR * 1,406,250
350,000 Core Rostelecom GDR * 1,137,500
65,000 Core Rostovelectrosv GDR * 143,000
10,000 Core Stavropol Elek GDR * 320,000
23,000 Core Yar Telecom GDR * 138,000
420 CSFP Norilsk Nickel RDC * (Financial) 2,415,000
125,000 Irkutskenergo AO Sponsored ADR (Utility) 1,187,500
18 Irkutskenergo RDC (Utility) 900,000
57,000 Lukoil Oil Co Sponsored ADR (Oil & Gas) 5,244,000
40 Megionneftegaz RDC (Oil & Gas) 2,000,000
5 Megionftgaz RDC (Oil & Gas) 131,500
70,000 Mosenergo AO Sponsored ADR (Utility) 2,583,000
480,000 Nearmedic Austrian * (Pharmaceutical) 985,949
472,500 Surgutneftegaz ADR (Oil & Gas) 4,786,425
25,000 Tatneft Sponsored ADR (Oil & Gas) 3,525,000
192,600 Torgoviy Dom Gum Sponsored ADR (Retail) 1,203,750
99,000 Unified Energy System Russia S GDR * 2,970,000
(Utility-Electric)
12,900 Vimpel Communications Sponsored ADR 459,562
(Telecom)
--------------
32,906,436
--------------
Slovenia 0.82%
67,600 SKB Banka D D GDR (Banking) 1,149,200
----------
TOTAL INVESTMENTS:
(Cost: $145,981,857)** 99.23% 138,328,336
Other assets, net 0.77% 1,080,069
------------ ---------------
NET ASSETS 100.00% $139,408,405
============ ===============
</TABLE>
* Non-income producing
** Cost for Federal income purposes is $145,981,857 and
consists of:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross $14,682,438
unrealized
appreciation
Gross (22,335,959)
unrealized
depreciation
------------
Net ($7,653,521)
unrealized
appreciation/depreciation
============
</TABLE>
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 Certificate
See Notes to Financial Statements
<PAGE>
Statement of Assets and Liabilities
December 31, 1997
- ------------ ------------ ------------ ------------ ----------- ---------- --
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments
at value
(identified
cost of $138,328,336
$145,981,857)(Notes
1 & 3)
Cash 757,752
(including
foreign
currencies)
Receivables
Capital 415,939
stock sold
Dividends 17,252
4,232,541
Investments
sold
----------- 4,665,732
Other assets 43,970
------------
TOTAL 143,795,790
ASSETS ----------------
LIABILITIES
Payables
3,411,519
Securities
purchased
147,414
Investment
management
fees
Capital 588,645
stock
redeemed ----------- 4,147,578
Accrued 239,807
expenses ----------------
TOTAL 4,387,385
LIABILITIES
-------------
NET ASSETS $139,408,405
===============
NET ASSET
VALUE,
OFFERING
AND
REDEMPTION
PRICE PER
SHARE
($139,408,405 / 9,142,500 $15.25
shares outstanding) ================
</TABLE>
At December 31, 1997 there were 50,000,000 shares of $.01 par value stock
authorized and the components of net assets are:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Paid in $149,085,887
capital
Net realized
loss on
investments
and (7,656,277)
currency transactions
(1,989,703)
Accumulated
loss on
investments
(31,502)
Accumulated
net
investment
loss
----------------
Net Assets $139,408,405
================
</TABLE>
See Notes to Financial Statements
<PAGE>
Statement of Operations
Year ended December 31, 1997
- ---------------------------------------- ------------ --------- ------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Income:
Dividend (Net of foreign tax withheld of 1,076,540
$61,981)
------------
Total income
Expenses:
Investment management fees (Note 2) 2,113,314
Organization 13,774
Custodian and accounting fees (Note 3) 467,089
Transfer agent fees (Note 2) 84,127
Recordkeeping and administrative services 347,118
(Note 2)
Legal and audit fees 39,187
Filing fees and registration (Note 2) 33,252
Shareholder servicing and reports (Note 2) 52,490
Other 130,182
------------
Total expenses 3,280,533
Custodian fee waiver (467,089)
------------
Expenses, net 2,813,444
------------
Net investment income (1,736,904)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on investments 11,591,758
Net realized loss on foreign currency (386,232)
conversions
Net decrease in unrealized appreciation
on investments and foreign currencies (15,462,328)
------------
Net loss on investments (4,256,802)
------------
Net decrease in net assets
resulting from operations ($5,993,706)
============
</TABLE>
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
- -------- ------------ ---------------- ----------- ---------------- ----------
<TABLE>
<CAPTION>
Year ended February 15, *
to
December 31, December 31
1997 1996
---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net ($1,736,904) ($260,396)
investment
loss
Net
realized
gain (loss)
on
investments
and
11,205,526 (1,057,304)
foreign
currencies
Change in
unrealized
appreciation
of (15,462,328) 7,806,051
investments
and
currencies
---------------- ----------------
Net (5,993,706) 6,488,351
increase
(decrease)
in net
assets
resulting
from
operations
DISTRIBUTION
TO
SHAREHOLDERS
FROM:
Realized (8,627,379) 0
gains on
investments
($.92 per
share)
CAPITAL
SHARE
TRANSACTIONS
Net
increase in
net assets
resulting
from capital
share 92,176,846 55,364,293
transactions**
---------------- ----------------
Net 77,555,761 61,852,644
increase in
net assets
Net assets 61,852,644 0
at
beginning
of period
---------------- ----------------
NET ASSETS $139,408,405 $61,852,644
at the end
of the
period
================ ================
</TABLE>
**A summary of capital share transactions follows:
<TABLE>
<CAPTION>
Year ended February 15, *
to
December 31, December 31
1997 1996
------------ ---------------- ---------------- ----------
Shares Value Shares Value
------------ ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Shares sold 12,074,912 $215,450,927 5,134,390 $69,104,233
Shares 537,499 8,014,108 0 0
reinvested
from
distributions
Shares (7,623,001) (131,288,189) (981,300) (13,739,940)
redeemed
------------ ---------------- ---------------- ----------
Net 4,989,410 $92,176,846 4,153,090 $55,364,293
increase
============ ================ ================ ==========
</TABLE>
*Commencement of operations
See Notes to Financial Statements
<PAGE>
Financial Highlights
For a Share Outstanding Throughout The Period
<TABLE>
<CAPTION>
Year ended February 15, *
December 31, to
1997 December 31, 1996
---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value,
beginning of period $14.89 $10.00
---------------- ----------------
Income from investment
operations-
Net investment gain 1.86 0.14
(loss)
Net realized and
unrealized
gain on investments 1.47 4.95
---------------- ----------------
Total from
investment
operations 1.28 4.89
---------------- ----------------
Less distributions-
Distributions from
realized
gains on investments 1.13 0.00
---------------- ----------------
Total distributions (0.92) 0.00
---------------- ----------------
Net asset value, end of $15.25 $14.89
period
================ ================
Total Return 8.74% 48.90%
================ ================
Ratios/Supplemental Data
Net assets, end of $139,408 $61,853
period (000's)
Ratio to average net
assets-
Expenses (A) 1.94% 2.02% **
Expenses-net (B) 1.66% 1.71% **
Net investment gain (1.30%) (1.07%) **
(loss)
Portfolio turnover rate 105.86% 38.69%
Average commission rate $0.0963 $0.0737
paid per share
</TABLE>
(A) Expense ratio has been increased to include additional custodian fees which
were offset by custodian fee credits. (B) Expense ratio-net reflects the effect
of the custodian fee credits the fund received.
* Commencement of operations was February 15, 1996.
** Annualized
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
December 31, 1997
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel Eastern European 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 February,
1996 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 objective of the Fund is to seek to achieve capital appreciation by
investing in a carefully selected and continuously managed diversified portfolio
consisting primarily of equity securities of issuers located in Eastern Europe.
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.
<PAGE>
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, net operating losses and post-October
capital and currency losses.
F. Use of 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 AND OTHER--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 1.00% on average daily net assets over
$500 million.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $432,860 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 $84,127 for its services for the
year ended December 31, 1997.
To discourage short-term investing and recover certain administrative, transfer
agency, shareholder servicing and other costs associated with such short-term
investing, the Fund charges a 2% fee on such redemption of shares held less than
six months. Such fees amounted to $994,629 for the year ended December 31, 1997,
representing 0.59% of average net assets.
<PAGE>
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 $247,503,226 and $163,104,263, respectively. The
custodian has provided credits in the amount of $467,089 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund .
<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
Eastern European Equity Fund, a series of Vontobel Funds, Incorporated,
including the schedule of portfolio investments as of December 31, 1997,
the related statement for the year then ended, and the related statement of
changes in net assets and the financial highlights for the period February 15,
1996 (commencement of operations) to December 31, 1997. 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, 1997, 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 Eastern European Equity Fund as of December 31,1997, 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 three years in the period then ended and the period March 1, 1994 to
December 31, 1994, in conformity with generally accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 23, 1998
<PAGE>
[GRAPH GOES HERE]
INTERNATIONAL
BOND 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
12/31/97 $12,072.47 $12,782.07
<PAGE>
VONTOBEL INTERNATIONAL BOND FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, 1997 the fund's closing Net Asset Value stood at $9.89, and net
assets totaled $10,792,844. For the year, the fund declined by 6.0%, vs. a 3.8%
decline in the J.P. Morgan Government Bond Index ex-US. On December 12 the fund
paid a per share distribution of $0.38 in long-term capital gains to
shareholders of record as of December 5.
The fund suffered no repercussions from the financial crisis in Asia since it
holds only high-investment-grade issues and has no exposure to emerging markets
debt. However, once again in 1997 the U.S. dollar's continued strength wiped out
local currency gains in international bonds for US-dollar-based investors. In
the last quarter, the yield on 30-year U.S. Treasury bonds fell below 6% for the
first time in nearly three years.
By contrast, five European countries raised their short-term interest rates in
October, and at the beginning of November French banks and in December German
banks raised their prime lending rates by 25 and 20 basis points respectively.
Germany's rate of consumer price inflation edged up to 1.9% in November; a year
ago the country's inflation rate was 1.4%. The Bank of Canada raised interest
rates by 25 basis points on November 25th to support the Canadian dollar.
In the run-up to the start of European economic and monetary union, convergence
of European bond yields has virtually become a fait accompli. Yield
differentials between the countries' bond markets principally reflect liquidity
and risk premiums relative to the quality of the underlying borrowers. Most
European economies have begun to recover, which normally would put a cap on bond
prices. However, falling commodity prices, due to a likely slump in economic
growth in Asia, will remove any threat of inflation and thus support bond
prices.
With 10-year government paper yielding under 2%, Japanese bonds are not
appealing. A weak economy, with a growing public sector deficit, record low
interest rates and a weakening currency do not bode well for fixed income
investors.
Our market and currency allocation at year-end 1997 was as follows: Australian
dollar 6.5%, Canadian dollar 5.5%, German mark 13.3%, Danish krone 7.4%, Spanish
peseta 7.4%, French franc 8.7%, pound sterling 7.6%, Irish punt 6.9%, Italian
lira 9.6%, Dutch guilder 3.0%, European Currency Unit 16.9%. Market and currency
selection benefited from the allocation of some 40% of our portfolio to the five
best-performing markets in local currency terms (U.K.+ 14.85%, Italy + 14.45%,
Australia + 13%, Ireland + 12.73% and Spain + 10.9%). However, double-digit
local currency returns did not compensate for the appreciation of the U.S.
currency, which rallied by over 10% against all major currencies except the
pound sterling and the Canadian dollar in 1997.
As we move into 1998, bond markets will be watching how Asian disinflation will
be offsetting inflationary pressures in the Western economies. In Europe markets
are focused on the political risks surrounding the creation of the European
Monetary Union and the new European Central Bank. From an economic standpoint,
EMU is all but a done deal. Foreign exchange rates, like the lira against the
mark, hardly move at all any more. The official EMU exchange rates are scheduled
to be fixed in May, after which money rates will converge as well.
In Japan, which we have shunned, there is the risk that domestic buyers of bonds
will shift their attention to offshore investments, attracted by the prospect of
higher yields, particularly if the yen should continue to fall. Therefore, we
will maintain our current portfolio structure with an emphasis on European
markets and the dollar bloc countries. As the valuations of the major equity
markets become stretched, it's not a bad time to look for value in international
fixed income instruments.
Sven Rump
Fund Manager
February 9, 1998
<PAGE>
[GRAPH GOES HERE]
<PAGE>
Vontobel International Bond Fund
Schedule of Portfolio Investments
December 31, 1997
<TABLE>
<CAPTION>
Market
Amount* Security Value
Description
--------- ------------------- ------------ ------
<S> <C> <C>
BONDS: 92.90%
AUSTRALIAN DOLLAR 6.49%
1,000,000 Queensland $ 699,934
Treasury Corp. 8%
14 Aug 2001
Corporate Bond --------------
BRITISH POUND 7.57%
460,000 DSL Bank 9.25% 19 816,766
Aug 2002
Corporate Bond --------------
CANADIAN DOLLAR 5.46%
800,000 Government of 589,108
Canada 6.5% 1 June
2004
Government Bond --------------
DANISH KRONE 7.38%
5,000,000 Kingdom of Denmark 796,271
7% 15 Dec 2004
Government Bond --------------
DEUTSCHE MARK 13.30%
900,000 Republic of 530,044
Finland 7.5% 27
Jan 2000
Government Bond
1,000,000 Republic of 601,334
Germany 6.5% 14
Oct 2005
Government Bond
500,000 Republic of 305,559
Germany 7.125% 20
Dec 2002
Government Bond --------------
1,436,937
--------------
EUROPEAN CURRENCY 16.98%
350,000 EuroFima 8.5% 4 463,887
Jun 2007
Supranational
Entities
500,000 France O.A.T. 10% 629,635
26 Feb 2001
Government Bond
600,000 United Kingdom 738,823
9.125% 21 Feb 2001
Government Bond --------------
1,832,345
--------------
FRENCH FRANC 8.74%
5,000,000 France O.A.T. 943,591
7.25% 25 Apr 2006
Government Bond --------------
IRISH PUNT 6.93%
500,000 Republic of 748,281
Ireland 6.25% 18
Oct 2004
Government Bond --------------
ITALIAN LIRA 9.58%
1,500,000,000 American Int'l 1,034,382
Group 11.7% 4 Dec
2001
Corporate Bond --------------
NETHERLAND GUILDER 3.02%
600,000 Government of 325,426
Netherlands 9% 15
May 2000
Government Bond --------------
SPANISH PESETA 7.45%
100,000,000 Spanish Government 803,942
11.3% 15 Jan 2002
Government Bond --------------
Total Bonds:
(Cost: $10,871,773) 10,026,983
--------------
(Cost: 92.90% 10,026,983
$10,871,773)**
Other Assets, net 7.10% 765,861
--------- --------------
NET ASSETS 100.00% $10,792,844
========= ==============
</TABLE>
*Stated in local currencies
**Cost for Federal income tax purposes is $10,871,773 and net unrealized
appreciation consists of:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross unrealized appreciation $102,000
Gross unrealized depreciation (946,790)
--------------
Net unrealized depreciation ($844,790)
==============
</TABLE>
See Notes to Financial Statements
<PAGE>
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments
at value
(Identified
cost of $10,026,983
$10,871,773
(Notes 1
& 3)
Cash 363,743
(including
foreign
currencies)
Receivables
Interest 356,927
Capital 15,000
Stock Sold 371,927
Other 8,238
assets
21,953
Organization
expense --------------
TOTAL 10,792,844
ASSETS --------------
NET ASSETS $10,792,844
==============
NET ASSET
VALUE,
OFFERING
AND
REDEMPTION
PRICE
PER SHARE
($10,792,844/1,091,804)
shares $9.89
outstanding) ==============
</TABLE>
At December 31, 1997 there were 50,000,000 shares of $.01 par value stock
authorized and components of net assets are:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Paid in $11,647,333
capital
Net
unrealized
depreciation
of (854,489)
investments
and
foreign
currencies
--------------
NET ASSETS $10,792,844
</TABLE>
==============
See Notes to Financial Statements
<PAGE>
Statement of Operations
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT
INCOME
Income:
Interest $1,411,450
------------
Expenses:
Investment
management
fees 193,299
(Note 2)
12,827
Organization
75,374
Custodian
fees
(Note 3)
Transfer 18,855
agent
fees
(Note 2)
Recordkeeping
and
Administrative
52,261
services
(Note 2)
Legal 15,419
and audit
fees
Filing
and
11,364
Registration
fees
(Note 2)
Shareholder
servicing
and 10,667
reports
(Note 2)
Other 26,506
------------
416,572
(38,700)
Custodian
fee waiver
(113,099)
Management
fee waiver
------------
Total 264,773
expenses
------------
Net 1,146,677
investment
income
------------
REALIZED
AND
UNREALIZED
LOSS ON
INVESTMENTS
Net (883,499)
realized
loss on
investments
Net (139,102)
realized
loss on
currencies
Net
change in
unrealized
(2,092,635)
Appreciation
on
investments
and
foreign
currencies
------------
Net (3,115,236)
loss on
investments
------------
Net
decrease
in net
assets
($1,968,559)
resulting
from
operations
============
</TABLE>
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- - Year Year
ended ended
December 31, December 31,
1997 1996
-------------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net $1,146,677 $1,172,376
investment
income
Net
realized
gain
(loss)
on (1,022,601) 327,677
investments
and
foreign
currencies
Change
in
unrealized
Appreciation
of (2,092,635) 190,375
investments
and
foreign
currencies
Net -------------- ------------
increase
(decrease)
in net
assets
resulting
from (1,968,559) 1,690,428
operations
DISTRIBUTION
TO
SHAREHOLDERS
FROM:
Net 0 (944,308)
investment
income
($.40
per share)
Realized
gains on
investments
($.38 (401,372) (141,645)
and $.06
per
share,
respectively)
CAPITAL
SHARE
TRANSACTIONS
Net
increase
(decrease)
in
net
assets
resulting
from
capital
share
(13,715,794) 10,030,347
Transactions*
Net -------------- ------------
increase
(decrease)
in
net (16,085,725) 10,634,822
assets
Net
asset at
26,878,569 16,243,747
beginning
of year
-------------- ------------
NET
ASSETS at
the end
of the
year
$10,792,844 $26,878,569
(including
undistributed
net
investment
income
of $0 ============== ============
and
$320,489,
respectively)
</TABLE>
*A summary of capital share transactions follows:
<TABLE>
<CAPTION>
January 1 January 1
to to
December December 31,
31, 1997 1996
------------ ---- ------------ -------------- ---- ------------
Shares Value Shares Value
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Shares 208,557 $2,162,409 1,869,911 $20,499,176
sold
Shares
Shares
reinvested
from
Distributions 39,686 392,896 94,981 1,024,842
Shares
redeemed (1,616,069) (16,271,099) (1,037,455) (11,493,671)
------------ ------------ -------------- ------------
Net (1,367,826) ($13,715,794) 927,437 $10,030,347
increase
(decrease) ============ ============ ============== ============
</TABLE>
See Notes to Financial Statements
<PAGE>
Financial Highlights
For a Share Outstanding Throughout each Period
<TABLE>
<CAPTION>
March 1*
to
Years ended December 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value,
beginning of period $10.93 $10.60 $9.48 $10.00
Income from investment
operations-
Net investment income... 0.61 0.47 0.61 0.70
Net realized and unrealized
gain (loss) on investments (1.27) 0.32 1.06 (0.50)
------ ----- ---- ------
Total from investment
operations....... (0.66) 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 (0.38) (0.06)
Distributions in excess of
net investment income - - (0.02)
Total distributions (0.38) (0.46) (0.55) (0.72)
Net asset value, end of period $9.89 $10.93 $10.60 $9.48
Total Return (6.04)% 7.51% 17.60% 1.98%
Ratios/Supplemental Data
Net assets, end of period(000) $10,793 $26,879 $16,253 $10,235
Ratio to average net assets-(A)
Expenses (B).................... 1.60% 1.84% 1.76% 1.35%**
Expense ratio-net (C).......... 1.40% 1.52% 1.35% 1.35%**
Net investment income ...... ... 5.92% 4.78% 5.38% 3.99%**
Portfolio turnover rate....... 0.00% 19.89% 18.63% 19.00%
</TABLE>
* Commencement of Operations was March 1, 1994.
** Annualized
(A)Management fee waivers reduced the expense ratios and increased the
ratios of net investment income by 0.60% in 1997, 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.
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
December 31, 1997
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.
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, 1997, a reimbursement of $113,099 was made.
As provided in the Administrative Agreement, the Fund
reimbursed Commonwealth Shareholder Services, Inc. ("CSS"), its
administrative agent, $59,783 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 $18,855 for its services for the
year ended December 31, 1997.
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 $0 and $12,490,462 respectively. The Custodian has
provided credits in the amount of $38,700 against custodian and accounting
charges based on credits on cash balances of the Fund.
<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, Incorporated, including the
schedule of portfolio investments as of December 31, 1997, 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 three 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, 1997, 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, 1997, 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 three years in the period then ended and the period March 1, 1994 to
December 31, 1994, in conformity with generally accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 23, 1998
<PAGE>
[GRAPH GOES HERE]
EMERGING MARKETS MS EMERGING
EQUITY FUND MARKETS INDEX
09/01/97 $10,000.00 $10,000.00
12/31/97 $ 9,420.00 $ 7,664.82
<PAGE>
VONTOBEL EMERGING MARKETS EQUITY FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, 1997 the fund's closing Net Asset Value stood at $9.42 and net
assets totaled $3,600,542. For the four-month period since its inception on
September 1, 1997 through year end, the fund produced a total return of -5.8%.
For the fourth quarter, the fund produced a total return of -8.9%, vs. the
- -17.7% total return of the fund's benchmark, Morgan Stanley Capital
International's Emerging Markets Free Index (EMF), and the average -16.9% total
return of the 148 emerging markets equity funds tracked by Lipper Analytical
Services. The fund made no year-end distributions of income and capital gains.
This time the crisis in emerging markets was triggered not by overvalued
currencies but by a huge debt build-up in Asia that had a spillover effect on
global foreign exchange markets. On average the region's currencies fell about
50% last year, and were still setting record lows into the new year. A year ago
we had slashed our allocation to the emerging Asian markets in our international
equity portfolios due to 1) high valuations relative to price-to-cash flow and
debt-to-equity ratios, and 2) our growing perception that Asian companies were
feeling the strain of severe competitive pressures. Not much good news has come
out of Asia since, whether it be ill winds out of Borneo, avian flu, record
currency declines or political stonewalling. So, when we launched Vontobel
Emerging Markets Equity Fund in September, we allocated only 14% to the region.
Our portfolio allocation at year end reflects our level of conviction in terms
of current valuation risks:
MSCI EMF
(at 1.9.98)*
Latin America 37% 41%
EMEA (Europe, Middle East, Africa) 32% 31%
Asia 14% 28%
Cash 17%
*Source: Morgan Stanley Capital International
Latin America: The economic and financial crisis in Asia has led to a renewed
focus on currency risk and systematic risk in Latin America's banking systems,
and have helped to accelerate structural reforms. Brazil has implemented
long-awaited administrative reforms and Argentina has made fiscal adjustments to
reduce the risk of rising deficits. The average maturity profile for credits in
Latin America has improved since the end of 1996. Foreign direct investment
continues to be strong on a y-o-y basis, which is relevant for capital accounts.
In contrast to Asia, exports are growing at a strong 16% rate. In terms of
absolute market valuation the region remains fairly attractive. On average our
holdings have a P/E of 12.5x with growth rates exceeding 16%. From an enterprise
value standpoint, 40% of our holdings in Latin America trade at below 5x. With
greater risk controls in place, Latin America seems to have avoided the
spillover effect from the Asian crisis both from an economic and financial
standpoint. We are maintaining our exposure to the region at a market weight and
are projecting an expected return of about 10-12% for the six-month period
ending June 1998.
Europe, Middle East, Africa (EMEA): We are maintaining an overweight in both
Greece and Turkey, for a combined 10% weighting vs. the benchmark at 5%. Both
markets are trading at single-digit P/E's. Our exposure to Eastern Europe is
concentrated in Hungary. We added three positions in South Africa and now have
close to a full market weight (11%). Our major exposure in this market is to
financial services companies that are well financed and that have a strong core
earnings structure; we have no exposure to the negative trends of
commodity-linked companies like gold mines.
Asia: Symptoms of economic distress are being magnified by rising political
uncertainty. According to some critics, the International Monetary Fund's
medicine cabinet may be short on tiger balm. In particular, the IMF has drawn
heat for its advocacy of high interest rates, which will slow investments,
consumption and capital flows. This will result in higher current account
deficits and increase the cost in domestic currency of corporate debt service.
Asia will have to trade at a discount to Latin America before it reattracts
capital inflows. For now, most of our valuation ratios, like P/E, P/B and P/CF,
give us no clear indication of the risk of further deterioration in earnings
profiles within Asia. As the crisis continues to unfold, we are maintaining our
underweight in the region, although we've altered the country allocation
somewhat. We reduced our weighting in Korea in favor of establishing a more
sizeable presence in India, nearly 4% vs. the EMF at 6%. We also took a position
in the Taiwan market by purchasing Yageo, a manufacturer of resistors used in
both the low- and high-end electronics industries. It was a great opportunity
for a company with a single-digit P/E multiple, a P/CF of 6x, and little debt.
We think this company will be unaffected by a cutback in demand from
semiconductor companies in Korea.
The fund trades at about 14x P/E with an average EPS growth profile of 20%.
Developing countries as a whole are slowly becoming market-based economies.
Company failures will inevitably result, but equity investors will benefit from
increased efficiency and transparency. We are sticking with companies that have
low gearings (debt to equity less than 0.5), that generate strong cash flow on a
year-over-year basis, and that have strong leadership in their industries. We
remain cautious and have targeted an expected return range of 15-24% in U.S.
dollars over the next twelve months.
Fabrizio Pierallini, Fund Manager
Rajiv Jain, Associate Fund Manager
February 9, 1998
<PAGE>
[GRAPH GOES HERE]
<PAGE>
<TABLE>
<CAPTION>
VONTOBEL EMERGING MARKETS EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1997
Number of Market
Shares Description Value
- --------- -------------------------------------- ---------------
<S> <C>
COMMON STOCKS AND WARRANTS: 82.96%
Egypt 1.40%
2,400 Commercial International Bank GDR (Banking) $50,220
---------------
Greece 4.22%
1,200 Alpha Credit Bank (Banking) 70,053
4,000 Hellenic Telecommunications Organization S.A. 81,993
(Telephone - Integrated) ---------------
152,046
---------------
Hungary 2.00%
100 Gedeon Richter Ltd GDR (Pharmaceutical) 11,300
3,000 Graboplast Rt GDR (Manufacturing) 27,000
1,400 Mol Magyar Olay GDR (Oil & Gas) 33,600
---------------
71,900
---------------
Israel 2.22%
1,100 ECI Telecommunications (Telecommunication 28,050
Equipment)
1,100 Teva Pharmaceutical Ind Sponsored ADR 52,044
(Medical-Drugs)
---------------
80,094
---------------
Poland 0.47%
1,500 Prokom Software SA GDR * (Technology-Software) 16,845
---------------
Portugal 4.46%
1,600 Portugal Telecom S.A. Sponsored ADR (Telephone 75,200
- Integrated)
800 Telecel Comuni Pessoais S.A. (Telecom - 85,239
Cellular)
---------------
160,439
---------------
South Africa 11.45%
20,697 Dimension Data Holdings Ltd. (Computers - 89,312
Integrated)
2,000 Liberty Life Association of Africa (Insurance) 51,372
9,300 NBS Boland Group Ltd (Financial) 23,028
2,500 Nedcor Ltd (Financial) 55,481
30,000 Orion Selections Ltd (Financial) 64,728
12,500 Primedia Limited N Shares (Media) 60,362
6,500 Sasol Ltd (Diversified) 68,119
---------------
412,402
---------------
Turkey 5.91%
845,000 Akbank (Banking) 74,409
44,000 Ford Otomotiv Sanayi A S (Automobile) 36,622
2,670,000 Yapi Ve Kredi Bankasi (Banking) 101,776
---------------
212,807
---------------
India 3.79%
3,000 India Tobacco Ltd GDR (Tobacco) 60,300
2,650 State Bank of India GDR (Financial) 48,230
2,000 Videsh Sanchar Nigam GDR (Telecommunications) 28,050
---------------
136,580
---------------
Indonesia 0.94%
12,000 PT Gudang Garam (Tobacco) 18,273
1,400 Telekomunikasi Indonesia ADR 15,487
(Telephone-Integrated) ---------------
33,760
---------------
Korea 0.44%
2,400 Korea Fund (Other) 15,900
---------------
Malaysia 5.77%
50,000 Telekom Malaysia (Telecommunications) 147,834
12,000 Webs Index Fund Inc., Malaysia (Other) 60,000
---------------
207,834
---------------
Taiwan 3.19%
10,000 Yageo Corporation GDR * (Electronic Components) 115,000
---------------
Argentina 4.80%
700 Disco SA Sponsored ADR * (Food-Retail) 31,150
3,800 Perez Companc SA Sponsored ADR (Diversified) 52,725
2,600 YPF SA Sponsored ADR (Oil & Gas) 88,887
---------------
172,762
---------------
Brazil 16.01%
8,000 Companhia Cervejaria Sponsored ADR (Beverage) 113,500
1,300 Companhia Energetica Sponsored ADR 58,500
(Utility-Electric)
100,000 Itaubanco Pfd Regd (Banking) 53,761
4,000 Petrobras Sponsored ADR (Oil & Gas) 94,500
2,200 Telebras Sponsored ADR (Telephone-Integrated) 256,162
---------------
576,423
---------------
Chile 3.76%
1,500 Banco de Edward-Sponsored ADR (Banking) 25,500
1,500 Chilectra SA Sponsored ADR (Utility) 38,985
900 Compania de Tele de Chile Sponsored ADR 26,887
(Telecommunications)
1,000 Soc Quinica Y Min de Chile ADR 44,000
(Chemicals-Diversified) ---------------
135,372
---------------
Mexico 7.92%
5,000 Alfa S.A.- A (Diversified) 33,889
7,000 Grupo Modelo SA Series C (Brewery) 58,807
1,200 Kimberly Clark de Mexico ADR 27,600
(Manufacturing-Paper & Paper Products)
1,000 Panamerican Beverages Cl A (Beverages) 32,625
700 Telefonos de Mexico ADR (Telephone-Integrated) 39,244
4,300 Tubos de Acero de Mexico ADR * 92,988
(Manufacturing-Steel)
---------------
285,153
---------------
Peru 2.59%
4,000 Telefonica Del Peru SA B ADR 93,250
(Telephone-Integrated) ---------------
Venezuela 1.62%
1,400 Cia Anonima Tel De Ven Sponsored ADR 58,275
(Telephone-Integrated)
---------------
TOTAL INVESTMENTS:
(Cost: $3,094,486)** 82.96% 2,987,062
Other assets, net 17.04% 613,480
------------ ---------------
NET ASSETS 100.00% $3,600,542
============ ===============
</TABLE>
* Non-income producing
** Cost for Federal income purposes is $3,094,486 and
consists of:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross unrealized appreciation $190,818
Gross unrealized depreciation (298,242)
------------
Net unrealized depreciation ($107,424)
============
</TABLE>
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
See Notes to Financial Statements
<PAGE>
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments
at value
(identified
cost of $2,987,062
$3,094,486)(Notes
1 & 3)
Cash 686,284
(including
foreign
currencies)
Dividends $3,680
receivable
Other assets 65,136
----------------
TOTAL 3,742,162
ASSETS
----------------
LIABILITIES
Payable 141,350
for
securities
purchased
Accrued 270
expenses
----------------
TOTAL 141,620
LIABILITIES
----------------
NET ASSETS $3,600,542
================
NET ASSET
VALUE,
OFFERING
AND
REDEMPTION
PRICE PER
SHARE
($3,600,542 $9.42
/ 382,220
shares
outstanding)
================
</TABLE>
At December 31, 1997 there were 50,000,000 shares of $.01 par value stock
authorized and the components of net assets are:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Paid in $3,815,208
capital
Net
unrealized
loss on
investments
and (107,462)
currency
transactions (107,204)
Accumulated
loss on
investments
----------------
Net Assets $3,600,542
================
</TABLE>
See Notes to Financial Statements
<PAGE>
Statement of Operations
September 1, * to December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Income:
Dividend (Net of foreign tax withheld of $9,209
$346)
------------
Expenses:
Investment management fees (Note 2) 14,720
Custodian and accounting fees (Note 3) 10,781
Transfer agent fees (Note 2) 3,128
Recordkeeping and administrative services 7,618
(Note 2)
Filing fees and registration (Note 2) 2,467
Shareholder servicing and reports (Note 2) 3,490
Other 931
------------
Total expenses 43,135
Reimbursement by manager 18,048
Custodian fee waiver 30,251
------------
Expenses, net 25,898
------------
Net investment loss (16,689)
------------
REALIZED AND UNREALIZED LOSS ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized loss on investments (107,204)
Net realized loss on foreign currencies 31,025
conversions
Net increase in unrealized depreciation
on investments and foreign currencies (107,462)
------------
Net loss on investments ($216,409)
------------
Net decrease in net assets
resulting from operations ($233,098)
</TABLE>
============
* Commencement of operations
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
September 1, * to
December 31
1997
----------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment loss ($16,689)
Net realized loss
on investments and
foreign currencies (108,947)
Net unrealized depreciation
of investments and (107,462)
currencies
----------------
Net decrease in net assets (233,098)
resulting from operations
CAPITAL SHARE TRANSACTIONS
Net increase in net assets
resulting from capital
share transactions** 3,833,640
----------------
Net increase in net assets 3,600,542
Net assets at beginning of 0
period
----------------
NET ASSETS at the end
of the period $3,600,542
================
</TABLE>
**A summary of capital share
transactions follows:
<TABLE>
<CAPTION>
September 1, * to
December 31, 1997
---------------- ----------
Shares Value
----------- ----------
<S> <C> <C>
Shares sold 406,059 $4,075,864
Shares redeemed (23,839) (242,224)
----------- ----------
Net increase 382,220 $3,833,640
=========== ==========
</TABLE>
* Commencement of operations
See Notes to Financial Statements
<PAGE>
Financial Highlights
For a Share Outstanding Throughout The Period
- ---------------------- ----------------------------
<TABLE>
<CAPTION>
September 1, *
to
December 31, 1997
----------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset
value,
beginning $10.00
of period
----------------
Income from
investment
operations-
Net 0.16
investment
loss
Net
realized and
unrealized
loss on 1.51
investments
----------------
Total
from
investment
(0.58)
operations
----------------
Net asset $9.42
value, end
of period
================
Total Return 5.80%
Ratios/Supplemental
Data
Net assets, $3,601
end of
period
(000's)
Ratio to
average net
assets- (A)
Expenses 2.41% **
(B)
2.20% **
Expenses-net
(C)
Net (1.42%) **
investment
loss
Portfolio 16.36%
turnover rate
Average $0.0145
commission
rate paid
per share
</TABLE>
(A) Management fee waivers reduced the expense ratio and increased net
investment income ratio of 1.25%. (B) Expense ratio has been increased to
include additional custodian fees which were offset by custodian fee credits.
(C) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
* Commencement of opertions
**Annualized
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
December 31, 1997
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel Emerging Markets 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 August, 1997 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 objective of the Fund is to seek to achieve long-term capital appreciation
by investing in a carefully selected and continuously managed diversified
portfolio consisting primarily of equity securities of issuers in developing
countries around the world.
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
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, net operating losses and post-October
capital and currency losses.
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 sixty (60) months.
G. Use of 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 AND OTHER--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 1.00% on average daily net assets over
$500 million.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $11,074 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 $3,128 for its services for the
period ending December 31, 1997.
To discourage short term investing and recover certain administrative, transfer
agency, shareholder servicing and other costs associated with such short term
investing, the Fund charges a 2% fee on such redemption of shares held less than
six months.
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 $3,653,756 and $452,066, respectively. The custodian
has provided credits in the amount of $2,517 against custodian and accounting
charges based on credits on uninvested cash balances of the Fund .
<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
Emerging Markets Equity Fund, a series of Vontobel Funds, Incorporated,including
the schedule of portfolio investments as of December 31, 1997, and the related
statements of operations and changes in net assets, and the financial highlights
for the period September 1, 1997 (commencement of operations) to December 31,
1997. 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 audit.
We conducted our audit 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, 1997, by
correspondence with the custodian and brokers. 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 audit provides 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 Emerging Markets Equity Fund as of December 31,1997, the results of its
operations, the changes in its net assets, and the financial highlights for the
period September 1, 1997 to December 31, 1997, in conformity with generally
accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 23, 1998
<PAGE>
[GRAPH GOES HERE]
EASTERN EUROPEAN
DEBT FUND DB-EEE-IG
09/01/97 $10,000.00 $10,000.00
12/31/97 $ 9,944.00 $10,430.00
<PAGE>
VONTOBEL EASTERN EUROPEAN DEBT FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, 1997 the fund's closing Net Asset Value stood at $9.70 and net
assets totaled $14,437,925. For the four-month period since its inception on
September 1, 1997 through year end, the fund posted a small loss of -0.6%. On
December 12 the fund paid a per share distribution of $0.24 in income to
shareholders of record as of December 5.
The fund was launched during a tumultuous period in global securities markets.
In reaction to the economic and financial crisis in Asia, investors bolted out
of Eastern European equity and debt markets, paying no heed to the differing
fundamentals between the regions. In Eastern Europe the transition process is in
its infancy, whereas in Asia the process in some countries is almost completed.
Current account deficits in Eastern Europe are mainly the result of capital
investments required by the transition process to a free market economy, and not
runaway consumption in the private sector as in Asia. Lastly, currencies in
Eastern Europe are not pegged at unrealistically high exchange rates to the US
dollar, as has been the case in Asia. Instead, the region's currencies are
adjusted in line with their inflation differentials against a trade-weighted
basket of currencies including the dollar. Overall, the macroeconomic picture in
Eastern Europe remains positive, which we expect to see confirmed in improving
inflation and current account figures in the months ahead. We anticipate that
investors will soon begin to differentiate among the emerging markets, instead
of lumping them together in an unvariegated mass, and that fund flows will find
their way back to these markets, lured by their strengthening fundamentals and
excellent long-term growth prospects.
The biggest price drops were suffered in US dollar- and D-mark denominated bonds
issued by Eastern European issuers. Local currency issues, on the other hand,
were scarcely affected by the developments in the emerging market debt universe.
The participation of foreign investors in most of the Eastern European bond/debt
markets is quite small, with the exception of Russia and Ukraine; in Russia
foreigners hold more than 30% of the $50 billion market in Russian GKO's
(T-bills). In Poland and Hungary, on the other hand, foreigners hold only about
10% the debt market. Generally speaking, Eastern European debt markets are
dominated by local insurance companies and, to a lesser extent, domestic pension
funds. Because domestic players were not forced to sell when the Asian flu
infected world markets, Eastern European markets held up quite well. The main
exception was Russia, where ruble-denominated bonds were badly hit as a result
of rate hikes by the central bank. The rate increases were a necessary defensive
move to protect the currency, which came under pressure after foreign investors
began to sell both their equity and debt holdings.
Given that market and currency allocation are the principal drivers of bond
market returns, the fund's relatively good performance can be attributed to its
concentration in local currency government debt and lack of exposure to the
Russian market. Our year-end allocation was as follows:
Local Currency
% of Fund Yields
Czech crown 19.6% 14.9%
Hungarian forint 23.2% 18.6%
Polish zloty 36.0% 22.5%
Slovak koruna 1.9% 30.0%
Cash 19.3%
Looking forward, the fund will remain heavily invested in Polish and Hungarian
bonds, largely based on the improving inflation outlook in both countries. We
started the fourth quarter with a 35% cash position, almost half of which we put
to work by increasing our weightings in the Czech Republic and Poland. After the
rise in yields following the debacle in Asia, the Czech bond market has become
more attractive despite the political uncertainty preceding the general
elections to be held in June. When the political picture becomes clearer, we
intend to put more funds to work in the Czech market, while maintaining a lower
weighting than in Hungary and Poland.
With regard to Russia, we now have put in place the custody and settlement
arrangements to invest in Russian T-bills issued in rubles. However, we believe
the credit quality of Russian sovereign debt does not, for the time being,
justify even a small weighting (keeping in mind that our investment policy is to
invest principally in debt instruments that bear the rating of BBB or better by
S&P or Baa or higher by Moody's).
The majority of the fund's holdings are investment-grade instruments issued by
governments and supranational entities, such as the European Bank for
Reconstruction and Development, and none is rated below A- (S&P). In view of the
benign inflation outlook, nominal as well as real yields of Eastern European
debt instruments are quite attractive. We believe this sector of the
international bond market is of interest for long-term investors looking for
high interest income and added international diversification.
Volker Wehrle
Fund Manager
February 9, 1998
<PAGE>
[GRAPH GOES HERE]
<PAGE>
Vontobel Eastern European Debt Fund
Schedule of Portfolio Investments
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount* Security Description Value
- ------------ ------------------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BONDS:
CZECH CROWN: 19.63%
14,000,000 Bayerische Vereinsbk $ 377,667
10.625% 10 Feb 1999
Corporate Bond
24,000,000 Czech Republic 12.2% 642,225
15 Aug 2002
Government Bond
14,000,000 Deutsche Bank Finance 369,369
NV 10.5% 21 Jan 2000
Corporate Bond
14,500,000 European Investment Bank 380,465
11.0% 10 Oct 2001
Supranational Bond
20,000,000 ING Verzekering 523,622
10.625% 20 Jan 2000
Corporate Bond
20,000,000 SBC Jersey 10.625% 28 540,103
Jan 1999
Corporate Bond
------------
2,833,451
------------
HUNGARY FORINTS: 23.19%
300,000,000 Government of Hungary 1,441,357
16.5% 24 Jul 1999
Government Bond
125,000,000 Government of Hungary 637,959
21.0% 24 Oct 1999
Government Bond
135,000,000 Government of Hungary 638,101
16.0% 12 May 2000
Government Bond
140,000,000 Government of Hungary 630,416
14.0% 24 Jun 2002
Government Bond
------------
3,347,833
------------
POLISH ZLOTY: 35.98%
2,100,000 Republic of Austria 564,468
19.25% 11 Jun 1999
Government Bond
2,200,000 International Bank for 592,908
Recon & Dev 19.5% 17
Jun 1999
Supranational Bond
1,600,000 International Finance 338,156
Company 0% 28 May 1999
Supranational Bond
7,000,000 Government of Poland 1,727,660
15.0% 12 Oct 1999
Government Bond
4,000,000 Government of Poland 876,596
12.0% 12 Jun 2001
Government Bond
5,000,000 Poland Treasury Bond 1,095,745
12.0% 12 Oct 2001
Government Bond
------------
5,195,533
------------
SLOVAKIA KORUNA: 1.86%
10,000,000 International Finance 269,137
Corporation 13.625% 7
May 1998
Supranational Bond ------------
Total Bonds:
(Cost: $12,162,957) 11,645,954
TOTAL INVESTMENTS:
(Cost: $12,162,957)** 80.66% 11,645,954
Other Assets, net 19.34% 2,791,971
-------- ------------
NET ASSETS 100.00% $14,437,925
========= ============
</TABLE>
* Stated in local currencies
**Cost for Federal income tax purposes is $12,162,957 and net unrealized
depreciation consists of :
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross $ 3,931
unrealized
appreciation
Gross (520,934)
unrealized
depreciation
---------
Net $ (517,003)
unrealized
depreciation
=========
</TABLE>
Forward Currency Contracts Outstanding
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Face Value Contract Delivery Appreciation
(U.S. Price Date Depreciation
Dollar)
----------------------- --------- --------- ---------
Deutsche Mark 92,158 164.625 01/14/98 32,155
=============
</TABLE>
See Notes to Financial Statements
<PAGE>
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments
at value
(identified
cost of $11,645,954
$12,162,957
(Notes 1
& 3)
Cash 1,877,769
(including
foreign
currencies)
Forward
currency
contracts
receivable
at 91,545
market
value -
cost
$92,158
Receivables:
Capital 20,000
stock sold
Forward 92,158
currency
contracts
closed
Interest 770,903
----------- 883,061
Other 66,289
assets --------------
TOTAL 14,564,618
ASSETS
-------------
LIABILITIES
Payables:
Payable 92,158
for
forward
currency
contracts
Accrued 19,408
expenses
15,127
Investment
management
fees
--------------
TOTAL 126,693
LIABILITIES --------------
NET ASSETS $14,437,925
==============
NET ASSET
VALUE,
OFFERING
AND
REDEMPTION
PRICE
PER SHARE
($14,437,925/1,488,541)
shares $9.70
outstanding) ==============
</TABLE>
At December 31, 1997 there were 50,000,000 shares of $.01 par value stock
authorized and components of net assets are:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Paid in $14,873,074
capital
Net
unrealized
loss on
investments
and
(555,735)
currency
transactions
Undistributed
net
investment
income 120,586
--------------
NET ASSETS $14,437,925
</TABLE>
==============
See Notes to Financial Statements
<PAGE>
Statement of Operations
September 1* to
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT
INCOME
Income:
Interest $478,719
------------
Expenses:
Investment
management
fees 57,164
(Note 2)
28,305
Custodian
fees
(Note 3)
Transfer 4,937
agent
fees
(Note 2)
Recordkeeping
and
administrative
9,839
services
(Note 2)
Filing
and
2,093
registration
fees
(Note 2)
Shareholder
servicing
and 4,553
reports
(Note 2)
Other 1,884
------------
Total 108,775
expenses
24,202
Custodian
fee waiver
------------
Expenses, 100,209
net
------------
Net 378,510
investment
income
------------
REALIZED
AND
UNREALIZED
GAIN
(LOSS) ON
INVESTMENTS
Net
realized
gain on
forward
currency
contracts
and 87,300
foreign
currencies
conversions
Net
decrease
in
unrealized
(555,735)
appreciation
on
investments
and
foreign
currencies
------------
Net (468,435)
loss on
investments
------------
Net
decrease
in net
assets ($89,925)
resulting
from
operations
============
</TABLE>
*Commencement of operations
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
September 1,* to
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net $378,510
investment
income
Net
realized
gain
on 87,300
foreign
currency
transactions
Net
unrealized
depreciation
of (555,735)
investments
and
currencies
Net -------------
decrease
in net
assets
resulting
from (89,925)
operations
DISTRIBUTIONS
TO
SHAREHOLDERS
FROM:
Net (345,224)
investment
income
($.24 per
share)
CAPITAL
SHARE
TRANSACTIONS
Net
increase
in
net
assets
resulting
from
capital
share
14,873,074
transactions**
Net --------------
increase 14,437,925
assets
Net
assets at
-
beginning
of period
--------------
NET
ASSETS at
the end
of the
period
$14,437,925
(Includes
undistributed
net
investment
income
of ==============
$120,586)
</TABLE>
*Commencement of operations
**A summary of capital share transactions follows:
<TABLE>
<CAPTION>
September 1,* to
December 31, 1997
------------ ---- ------------
Shares Value
------------ ------------
<S> <C> <C>
Shares 1,479,779 $14,800,400
sold
Shares
reinvested
from
31,417 298,459
distributions
Shares
redeemed (22,655) (225,785)
------------ ------------
Net 1,488,541 $14,873,074
increase
============ ============
</TABLE>
*Commencement of operations
See Notes to Financial Statements
<PAGE>
Financial Highlights
For a Share Outstanding Throughout the Period
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
September 1,* to
December 31, 1997
Per Share
Operating
Performance
Net asset
value,
beginning
of
period...
$10.00
- ------------
Income
from
investment
operations-
Net
investment
income...
0.26
Net
realized
and
unrealized
loss
on
investments
1.73
- ------------
Total
from
investment
operations.......
(0.06)
- ------------
Less
distributions-
Distributions
from net
investment
income
1.81
- ------------
Net asset
value,
end of
period
$9.70
============
Total
Return
(0.55%)
============
Ratios/Supplemental
Data
Net
assets,
end of
period(000)
$14,438
Ratio to
average
net
assets-
Expenses
(A)....................
2.38% **
Expenses-net
(B).............
2.19% **
Net
investment
income
..........
8.28% **
Portfolio
turnover
rate.......
0.00%
(A)
Expense
ratio has
been
increased
to
include
additional
custodian
fees
which
were
offset by
custodian
fee
credits.
(B) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
</TABLE>
* Commencement of operations
**Annualized
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
December 31, 1997
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel Eastern European Debt 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 August, 1997 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 carefully selected and continuously managed
non-diversified portfolio consisting primarily of debt instruments issued by
borrowers located in Eastern European countries.
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.
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. 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 sixty (60) 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 1.25% on the first $100 million of
average daily net assets.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $14,359 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 $4,937 includes
expense for its services for the year ended December 31,
1997.
To discourage short term investing and recover certain administrative, transfer
agency, shareholder servicing and other costs associated with such short term
investing, the Fund charges a 2% fee on such redemption of shares held less than
six months.
Certain officers and/or directors of the Fund are also officers and/or directors
of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY--Purchases of securities other than short-term notes
aggregated $12,138,468. The Custodian has provided credits in the amount of
$8,566 against custodian and accounting charges based on credits on cash
balances of the Fund.
<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
Eastern European Debt Fund, a series of Vontobel Funds, Incorporated, including
the schedule of portfolio investments as of December 31, 1997, and the related
statements of operations and changes in net assets, and the financial highlights
for the period September 1, 1997 (commencement of operations) to December 31,
1997. 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 audit.
We conducted our audit 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, 1997, by
correspondence with the custodian and brokers. 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 audit provides 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 Eastern European Debt Fund as of December 31, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for the
period September 1, 1997 to December 31, 1997, in conformity with generally
accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 23, 1998
<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, VA 23229
INDEPENDENT AUDITORS:
Tait Weller and Baker
8 Penn Center Plaza
Suite 800
Philadelphia, PA 19103
TRANSFER AGENT:
Fund Services, Inc.
1500 Forest Avenue, Suite 111
Richmond, VA 23229
(800) 628-4077
MORE INFORMATION:
For 24 hour, 7 days a week price informtion, 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:
Vontobel U. S. Value Fund = VUSVX
Vontobel International Equity Fund = VNEPX
Vontobel Eastern European Equity Fund = VEEEX
Vontobel International Bond Fund = VIBDX
Vontobel Eastern European Equity Fund = N/A
Vontobel Emerging Markets Equity Fund = N/A
