Semi-Annual Report to Shareholders 1998
Vontobel U.S. Value Fund
Vontobel International Equity Fund
Vontobel Eastern European Equity Fund
Vontobel International Bond Fund
Vontobel Emerging Markets Equity Fund
Vontobel Eastern European Debt Fund
A Series of Vontobel Funds, Inc.
A "Series" Investment Company
<PAGE>
VONTOBEL U.S. VALUE FUND - SEMI-ANNUAL REPORT 1998
Dear Shareholder:
The first six months of 1998 saw a continuation of the long-lived bull market in
U.S. equities, with the benchmark S&P 500 Index posting a 17.71% total return
through June 30th. The bulk of the gain came in the first three months of the
year, even as analysts began to cut earnings estimates for the first two
quarters. Investors, apparently, were willing to look beyond the near-term
profit diminution, focusing instead on the still optimistic forecasts for growth
in the second half of 1998 and beyond. In addition to the positive earnings
projections, U.S. stocks were buoyed by the continuing inflow of funds, with
domestic investors being joined of late by foreign buyers who view U.S. markets
as a safe haven in times of stress and who also want dollar-denominated assets
to protect against weakness of their home currencies. Corporations flush with
cash and anxious for growth also played a role in the market's rise, with
several deals offering hefty premiums and speculation regarding takeover targets
clearly evident in some sectors.
The pervasive optimism that characterized stock performance in the first quarter
faded noticeably in the June period, though. Market "breadth"--i.e., gainers
less losers--dropped off as investors narrowed their choices to those companies
seemingly best positioned to post earnings increases in an increasingly
difficult environment. This flight to quality is a result of investors' concerns
about diminishing earnings prospects given the continuing economic turmoil in
Asia, which is having a more widespread and prolonged effect than had been
anticipated six months ago. Exporters are clear losers, but they're not alone.
With the falloff in Asian demand, prices for many goods, particularly
commodities, have dropped sharply. Already weak pricing power has been further
eroded in the wake of this demand shortfall and the currency devaluations that
put domestic producers at a competitive disadvantage versus overseas suppliers.
Devaluations also diminish the overseas earnings of multinationals that
translate profits back into the surging dollar. Add to this the wage pressures
that have come with full employment, and you've got the makings of a profit
squeeze. Further uncertainty came late in the second quarter as virtually all of
General Motors' North American plants closed down due to a labor dispute.
Relative to the S&P 500's 17.71% gain, your fund had a tough six months, rising
10.90%. Net Asset Value stood at $18.31 per share at June 30. Having started the
year holding approximately 35% of fund assets in cash, and having been presented
with few really compelling investment opportunities over the past six months,
the fund performed about as we would have expected it to. With investors bidding
up the prices of high-quality steady growers, we reduced or eliminated positions
in such "new nifty fifty" names as Coca-Cola, Wrigley's and McDonalds. We
trimmed the fund's Wells Fargo position as the stock rose in anticipation of a
merger offer, and sold completely when the offer came. We added to a couple of
positions, including Fannie Mae, and established new positions in Dallas
Semiconductor, Mercury General and General Re (which agreed to an acquisition by
Berkshire Hathaway subsequent to our purchase of the stock). We ended the
quarter with 37% of fund assets in cash and cash equivalents.
The narrowing breadth referenced above is frequently cited as one reason for the
"average" stock mutual fund's underperformance versus the S&P 500 benchmark over
the first half of 1998. Indeed, funds in the growth and income category tracked
by Lipper Analytical Services lagged the broad index by over 5% in the past two
quarters, providing an average return of 12.11%. Deteriorating breadth is
sometimes cited by market observers as a sign of an impending downturn, and for
that reason has some participants worried. The possibility of a better buying
opportunity as growing fear manifests itself in stock prices is not something we
worry about; we would welcome the chance to put more of your fund's assets into
attractively priced shares of quality businesses. Employing a bottom-up approach
to investing, we cannot call the overall direction of the market, but can only
stick with an investment discipline that has worked well and that has
intellectual appeal. We expect that, in the months ahead, the market will give
us ample opportunity to profitably and prudently deploy the fund's large cash
position in investments promising sufficient safety of principal along with
satisfactory return potential.
Finally, we note that Vontobel U.S. Value Fund's net assets have continued to
increase, growing from $203.1 million at year-end 1997 to $244.7 million at June
30th. We welcome our new shareholders, and invite all investors to visit our
website at www.vusa.com.
Sincerely,
Edwin Walczak, Fund Manager
Mark Robertson, Associate Fund Manager
July 31, 1998
Schedule of Portfolio Investments
June 30,1998 (Unaudited)
Number of Market
Shares Security Value
- --------- -------------------------------- -------
COMMON STOCK: 62.00%
BANKING: 0.54%
69,072 California Center Bank* $ 1,346,904
-----------
ELECTRONIC COMPU-SEMICONDUCTOR: 2.01%
160,300 Dallas Semiconductor Corp. 4,969,300
----------
INSURANCE - DISABILITY: 9.84%
261,100 Provident Companies Inc. 9,007,950
277,000 UNUM Corp. 15,373,500
----------
24,381,450
----------
INSURANCE-DIVERSIFIED: 14.07%
165,000 American International Group 24,090,000
285,500 Esg Re Limited* 6,173,938
156,525 Old Republic International Corp. 4,588,139
----------
34,852,077
----------
INSURANCE-PROPERTY/CASUALTY: 17.45%
287,400 Chubb Corp. 23,099,775
146,700 Commerce Group 5,684,625
115,000 Mercury General Corp. 7,410,313
125,750 Orion Capital 7,026,281
----------
43,220,994
----------
INSURANCE- MULTI-LINE: 1.33%
13,000 General Re Corp. 3,295,500
----------
MEDICAL: 1.91%
64,000 Johnson & Johnson 4,720,000
---------
OTHER FINANCIAL: 8.31%
338,724 Federal National Mortgage Assn. 20,577,483
----------
PUBLISHING AND BROADCAST: 5.25%
70,100 Gannett Co. 4,981,481
145,600 Knight Ridder 8,017,100
----------
12,998,581
----------
RESTAURANTS: 1.29%
46,200 McDonald's Corp. 3,187,800
----------
TOTAL COMMON STOCKS:
(Cost: $131,519,134) 153,550,089
-----------
Principal
Amount U.S. GOVT. SECURITIES: 24.26%
- ------------
$5,000,000 U.S. Treasury Note maturity date 07/31/98; 6.25% 15,014,062
15,000,000 U.S. Treasury Note maturity date 08/31/98; 6.125% 15,021,093
15,000,000 U.S. Treasury Note 6.07% maturity date 09/30/98; 6% 15,028,125
15,000,000 U.S. Treasury Note 6.07% maturity date 10/31/98; 5.875% 15,023,438
----------
TOTAL U.S. GOVERNMENT SECURITIES:
(Cost: $60,093,000) 60,086,718
----------
TOTAL INVESTMENTS:
(Cost: $191,613,470)** 86.26% $213,636,807
Other assets, net 13.74% 34,029,613
----- ----------
NET ASSETS 100.00% $247,666,420
====== ============
* Non-income producing
** Cost for Federal income tax purposes is $191,613,470 and net unrealized
appreciation consists of:
Gross unrealized appreciation $23,887,605
Gross unrealized depreciation (1,864,268)
----------
$22,023,337
===========
See Notes to Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (Unaudited)
- -------------------------
ASSETS
Investments at value (identified cost of $191,613,470)
(Note 1& 3) $ 213,636,807
Cash 18,386,488
Receivables:
Interest receivable $ 1,072,840
Dividend receivable 133,763
Capital stock sold 14,223,893
Securities sold 672,817
-------
16,103,313
Other assets 161,497
-------
Total Assets 248,288,105
-----------
LIABILITIES
Payables:
Capital stock reaquired 454,943
Investment management fees 157,747
Administrative fee 8,995
-----
Total Liabilities 621,685
-------
Net Assets $ 247,666,420
=============
Net Asset Value, Offering and Redemption Price per Share
($247,666,420 / 13,522,717 shares outstanding) $18.31
======
At June 30, 1998 there were 50,000,000 shares of $.01 par value stock authorized
and components of net assets are:
Paid in capital $207,410,520
Undistributed net investment income 1,476,077
Net unrealized appreciation of investments 22,023,337
Accumulated net realized gain on investments 16,756,486
----------
Net Assets $247,666,420
============
See Notes to Financial Statements
STATEMENT OF OPERATIONS
Six months ended June 30, 1998 (Unaudited)
- ------------------------------------------
Investment Income
Income:
Interest $ 2,130,395
Dividend 975,344
-------
Total Income $3,105,739
----------
Expenses:
Investment management fees (Note 2) 853,592
Transfer agent fees (Note 2) 157,040
Recordkeeping and administrative services (No 275,446
Legal and audit fees 26,026
Filing fees and registration (Note 2) 98,074
Shareholder servicing and reports(Note 2) 169,139
Custodian fees 11,817
Amortization of organization cost 9,016
Other 40,762
------
Total expenses 1,640,912
Expenses reimbursed or waived (11,250)
-------
Net expense 1,629,662
---------
Net investment income 1,476,077
---------
Realized and unrealized gain on investments
Net realized gain on investments 16,756,486
Net change in unrealized appreciation on investments 6,773,979
---------
Net gain on investments 23,530,465
----------
Net increase in net assets resulting from operations $25,006,542
===========
See Notes to Financial Statements
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------
Six months Year
ended ended
June 30, 1998 December 31,
(Unaudited) 1997
----------- ----
Operations
Net investment income $ 1,476,077 $ 723,976
Net realized gain on investments 16,756,486 20,634,950
Change in unrealized
appreciation of investments 6,773,979 8,708,910
--------- ---------
Net increase in net assets
resulting from operations 25,006,542 30,067,836
Distributions to Shareholders from:
Net investment income
($.-- and $.10 per share) -- (687,957)
Net realized gain from
investment transactions ($.-- and
$1.88 per share) -- (12,944,667)
Capital Share Transactions:
Net increase in net assets resulting
from capital share transactions* 19,540,251 117,132,758
---------- -----------
Net increase in net assets 44,546,793 133,567,970
Net assets at beginning of period 203,119,627 69,551,657
Net assets at the end of the period
(including undistributed
net investment income
of $1,476,077 and $-,
respectively) $ 247,666,420 $ 203,119,627
============= =============
*A summary of capital share transactions follows:
Six months ended
June 30,
1998 Year ended December 31,
(Unaudited) 1997
----------- ----
Shares Value Shares Value
------ ----- ------ -----
Shares sold 9,003,651 $155,155,125 12,326,479 $203,031,416
Shares reinvested
from distribution -- -- 703,536 11,509,842
Shares redeemed (7,780,160) (135,614,874) (5,777,581) (97,408,500)
---------- ------------ ---------- -----------
Net increase 1,223,491 $ 19,540,251 7,252,434 $117,132,758
========= ============ ========= ============
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- ----------------------------------------------
Six months ended
June 30, 1998
Years ended December 31,
------------------------
(Unaudited) 1997 1996 1995 1994 1993
----------- ---- ---- ---- ---- ----
Per Share Operating Performance
Net asset value,
beginning of period $16.51 $13.78 $13.25 $10.26 $12.64 $12.00
Income from investment operations
Net investment income 0.10 0.10 0.17 0.05 0.09 0.16
Net realized and unrealized
gain (loss) on
investments 1.70 4.61 2.65 4.09 (0.08) 0.56
---- ---- ---- ---- ----- ----
Total from investment operations 1.80 4.71 2.82 4.14 0.01 0.72
---- ---- ---- ---- ---- ----
Less distributions
Distributions from net invest -- (0.10) (0.19) (0.04) (0.23)(0.02)
Distributions from
realized gains -- (1.88) (2.10) (1.11) (2.16)(0.06)
Total distributions -- (1.98) (2.29) (1.15) (2.39)(0.08)
Net asset value, end of period $18.31 $16.51 $13.78 $13.25 $10.26 $12.64
------ ------ ------ ------ ------ ------
Total Return 10.90% 34.31% 21.28% 40.36% 0.02% 6.00%
Ratios/Supplemental Data
Net assets,
end of period (000's) $247,666 $203,120 $69,552 $55,103 $29,852 $34,720
Ratio to average
net assets - (A)
Expenses - (B) 1.36%** 1.61% 1.48% 1.65% 1.62% 1.82%
Expenses - net (C) 1.36%** 1.58% 1.43% 1.50% 1.62% 1.82%
Net investment income 1.23%** 0.72% 0.63% 0.38% 0.76% 1.23%
Portfolio turnover rate 56.01% 89.76% 108.36% 95.93% 98.90% 137.32%
Average brokerage
commissions per share $0.0823 $0.0810 $0.0883 --- --- ---
(A) Management fee waivers reduced the expense ratios and increased net
investment income ratios by 0.02% 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
Notes to the Financial Statements
June 30, 1998 (Unaudited)
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, $329,264 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 $157,040 for its services for the six months ended June 30,
1998.
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 $97,470,915 and $84,632,055,
respectively.
NOTE 4-DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income
and realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These distribution differences are primarily due to differing
treatments for equalization and post-October capital losses.
<PAGE>
VONTOBEL INTERNATIONAL EQUITY FUND - SEMI-ANNUAL REPORT 1998
Dear Shareholder:
Investors rushed back into Asian markets during the first quarter, which,
together with strong performance in Europe, pushed Morgan Stanley Capital
International's EAFE Index up nearly 15% in US$ terms. However, Asian/Pacific
markets saw their gains eradicated in the turbulent June quarter, as the
region's economic crisis gathered a new head of steam. Despite the continued
outperformance in the major European bourses, which turned in double-digit local
currency and US dollar returns, the index eked out only a 1% US$ gain for the
quarter, for a year-to-date return of 15.93%.
Vontobel International Equity Fund produced a total return of 17.25% for the
first half, which compares favorably with the benchmark return as well as the
15.49% average total return of the universe of international equity funds
tracked by Lipper Analytical Services. For the 3- and 5-year periods ending June
30, 1998, the fund ranked within the 11th and 19th percentiles of the Lipper
universe of 292 and 134 funds, respectively. At June 30, 1998 the fund's closing
Net Asset Value stood at $21.28 and net assets totaled $187,2567,925, v.
$160,937,262 at the end of 1997.
We attribute the fund's outperformance of the benchmark index and its peer group
average to the fact that, as active managers, we follow no preset guidelines for
market allocation. Our approach is to invest in markets that meet our criteria
for transparency, liquidity and valuation and that represent good value from a
bottom-up perspective. No matter where the market, we look for companies that
have reliable track records of generating revenues and strong returns on their
investment and whose management is committed to creating shareholder value. Our
adherence to uniformly stringent valuation methods across all the markets in our
universe has shielded us to a certain extent from the contagion effect of Asian
markets. For example, we did not commit new assets to Asia/Pacific during the
first quarter and instead purchased such excellent European companies as ASM
Lithography, Dassault Systems, Philips and Societe Generale, whose stocks had
fallen 25-40% during this period. Our overweight in Europe grew to 73% of total
fund assets at June 30th vs. 65% at year end, and the fund's performance
benefited from its increased exposure to the region.
For the last three years we've considered Europe a very attractive market due to
converging interest rates and low absolute valuations in terms of price to cash
flow and price to earnings, and our consistent overweight in the region during
this period has contributed handsomely to our total returns. Today, we believe
the region has rerated itself to a level that we consider as fair value, trading
at a P/E of 20x, with EPS growing at 19% and cash flow at 20%.
Nevertheless, the conditions remain in place for continued outperformance in the
near term: First, with 10-year bonds yielding 4.75 %, the earnings yield for
European stocks is extremely favorable in historical terms. Second, corporate
Europe, finally, is demonstrating its commitment to creating shareholder value.
The UK is particularly advanced in this regard, and a number of our UK holdings
have delivered excellent results in terms of ROE, free cash flow and ROI, like
Lloyds TSB, Commercial Union, Hays and Rentokil. Third, the balanced
supply/demand equation remains a positive for European equity markets. Lastly,
what will prolong strong equity performance in Europe is the fact that companies
are overcapitalized. If Europe follows in the footsteps of the US in moving from
its current ratio of debt to enterprise value of 8% to 35%, it could release US$
2 trillion in excess equity for M&A, dividends and share buybacks, thereby
reducing overall notional capital costs by about 1% and boosting earnings and
ROE's considerably.
In contrast to the profound secular changes that are transforming the European
economies, Japan remained distressingly inert. Japan's problems are the same as
they were six years ago, except that now the economy faces the risk of an asset
deflation spiral, as happened in the UK in the late `60s, thereby threatening
the magnification of the Asian crisis to truly global proportions. The recent
change in prime ministers has so far done nothing to dispel the pessimism
regarding Japan's lack of political resolve.
Measured against bonds, the Japanese market remains cheap. However, given the
uncertainty about equity valuations, the earnings yield is a less than reliable
indicator. In order to achieve good returns for 1998, as we did in 1996 and
1997, we require a large margin of safety for investing in Japan, investing only
in firms with strong balance sheets, double-digit profit growth, and competitive
advantages. Companies like Murata, Rohm, Nintendo, Sony, Fuji Photo Film and
Bridgestone, we believe, represent great value in terms of their international
or domestic franchises. They are investable on their own terms; as stated above,
our commitment to a market is dictated not by the need to assure a certain
geographical distribution but by our ability to identify companies in investable
markets that satisfy our valuation criteria. The average multiples of our
Japanese companies are about P/E 23x and P/S 2.4x, which compares favorably with
other markets.
We left in place our hedges against the German mark, Swiss and French francs,
and the yen during the first half.
Many of the companies we own are market leaders in their industry, and still
have the potential for continuous rerating due to their high entry barriers,
strong free cash flows and well balanced product portfolios, e.g., Assa Abbloy
in security locks, Novartis in pharmaceuticals, Philips in lighting and consumer
electronics, SAP in software design and applications. Their excellent track
records of consistent growth give us the confidence to discount their future
growth at the same double-digit rates over the next 5-7 years. Ideally, if we
are correct in our assessment, that's about how long we'd like to own them in
our portfolios; this results in a lower turnover ratio for our fund, to the
benefit of our shareholders' after-tax returns. We continue to seek attractive
companies that produce returns that exceed their cost of capital.
Fabrizio Pierallini, Fund Manager
Rajiv Jain, Associate Fund Manager
July 31, 1998
Schedule of Portfolio Investment
June 30, 1998 (Unaudited)
Number of Market
Shares Description Value
- ------ ----------- -----
Common Stocks and Warrants: 95.51%
Belgium: 1.03%
6,700 Barco NV NPV (Engineering) $ 1,874,348
----- -----------
Denmark: 0.31%
8,000 Bang & Olufsen Holding B * (Electric Products) 576,693
----- -------
Finland: 0.53%
60,000 Cultor Oy Ser '2' (Food-Process) 963,969
------ - -------
France: 8.96%
32,000 Axa S A (Insurance) 3,601,755
20,666 Bic (Consumer Goods) 1,470,890
2,700 Cgip (Diversified) 1,427,874
52,000 Dassault Systemes SA
(Aerospace and Military Technology) 2,453,033
6,500 Generale des Eaux Wts 5/2/2001
(Utility-Water) 12,803
3,800 L'Oreal (Consumer Goods) 2,115,269
48,000 Scor (Reinsurance) 3,046,925
17,315 Total SA Cl B (Oil) 2,252,684
------ ---------
16,381,233
----------
Germany: 9.67%
11,500 Adidas AG (Consumer Goods) 1,990,403
4,700 Alliance AG (Insurance) 1,551,327
139 Allianz AG New E 98 * (Multi-line Insurance) 45,494
50,000 Bayer AG (Chemicals) 2,582,309
1,400 Bayerische Motoren Werk (Automobile) 1,414,251
419 Bayerische Motoren Werk New (Automobile) 417,222
9,000 CKAG Colonia Konzern AG (Insurance) 1,115,857
20,000 Mannesmann AG (Machinery) 2,031,454
7,250 SAP AG Pfd (Computer Software) 4,934,818
13,500 SGL Carbon AG (Chemicals) 1,580,174
---------------
17,663,309
---------------
Great Britain: 19.12%
1,198 BAA ORD(Transportation-Miscellaneous) 12,942
15,949 British Petroleum PLC Sponsored ADR (Petroleum) 1,407,499
40,000 Capita Group PLC (Human Resources) 345,461
117,135 CGU PLC (Insurance) 2,188,544
328,000 Compass Group (Food-Catering) 3,778,865
60,149 CRH ORD(Construction) 854,271
130,000 Dixons Group PLC (Retail) 1,044,063
92,347 EMI Group PLC (Leisure and Recreational Products) 807,965
90,000 Hays PLC (Commercial Services) 1,510,244
75,000 HSBC Holdings ORD (Banking) 1,907,215
199,348 Lloyds TSB Group ORD (Finance-Consumer Loans) 2,792,623
76,798 Misys PLC (Computer Services) 4,366,219
235,000 Norwich Union PLC (Insurance) 1,709,794
151,685 Powerscreen International (Industrial Components) 227,942
83,959 Provident Financial Group PLC (Financial) 1,317,752
550,000 Rentokil Initial PLC (Diversified) 3,958,024
189,000 Shell Transport and Trading Regd. (Oil) 1,331,719
91,640 Siebe (Multi Industry) 1,831,545
90,000 Smithkline Beecham PLC (Pharmaceutical) 1,099,998
110,000 Viridian Group PLC (Utility) 645,616
42,000 Zeneca Group PLC ORD (Medical-Drugs) 1,803,677
---------------
34,941,978
---------------
Ireland: 3.66%
200,306 Allied Irish Banks PLC (Banking) 2,909,723
36,600 Elan Corp ADR * (Medical Products) 2,353,838
261,812 Greencore Group (Food-Process) 1,420,729
---------------
6,684,290
---------------
Netherlands: 10.33%
40,644 Aegon N V ADR (Insurance) 3,515,706
33,108 Aegon NV (Insurance) 2,883,607
55,000 ASM Lithography * (Technology) 1,629,255
90,000 Elsevier NV (Publishing) 1,359,599
32,290 Hagemeyer NV (Wholesale and International Trade) 1,398,236
32,000 Ing Groep NV (Financial Services) 2,097,413
24,756 Koninklijke Ahrend NV (Furnishing) 808,869
22,000 Philips Electronics (Technology) 1,851,180
50,242 Vedior NV * (Human Resources) 1,421,558
50,914 Vendex International NV (Merchandising) 1,916,587
---------------
18,882,010
---------------
Norway: 0.22%
35,000 Smedvig As Sponsored ADR B (Oil) 398,125
---------------
Spain: 0.94%
20,000 BCO Popular ESP REG (Banking) 1,709,604
---------------
Sweden: 6.86%
160,000 Abb Ab Shs B (Capital Goods) 2,228,240
68,700 Assa Abloy Series 'B'
(Metal Processors and Fabrication) 2,702,173
106,666 Astra Ab Ser B Free (Pharmaceutical) 2,127,855
33,000 Hennes and Mauritz B Free (Merchandising) 2,107,418
66,000 Om Gruppen AB (Financial Services) 1,374,583
140,000 Skandia Forsakrings AB Free
(Multi-line Insurance) 2,002,405
---------------
12,542,674
---------------
Switzerland: 11.96%
21,000 Credit Suisse Group REG (Financial) 4,680,380
345,000 Credit Suisse Wts (Financial) 3,144,027
1,500 Nestle AG REG (Food) 3,215,347
1,250 Novartis AG REG (Pharmaceutical) 2,083,471
2,200 Pharma Vision * (Pharmaceutical) 1,306,082
75 Roche Holdings AG (Pharmaceutical) 1,113,138
410 Roche Holdings Genusscheine DRC (Pharmaceutica) 4,032,853
900 Swiss Reinsurance Registered (Insurance) 2,279,865
---------------
21,855,163
---------------
Australia: 0.82%
113,499 National Australia Bank Ltd (Banking) 1,500,681
---------------
Hong Kong: 1.27%
250,000 Cheung Kong Holdings (Real Estate) 1,232,576
271,400 Dah Sing FCL Services (Financial Services) 313,504
180,000 Sun Hung Kai Properties (Real Estate) 768,973
---------------
2,315,053
---------------
Japan: 19.67%
100,500 Bank Of Tokyo-Mitsubishi (Banking) 1,068,692
115,000 Bridgestone Corporation (Tire and Rubber) 2,730,464
40,000 Canon, Inc. (Office Equipment) 912,085
102,750 Credit Saison Co. (Finance) 2,045,405
400 Ezaki Glico Co. (Food and Household Products) 2,279
70,000 Fuji Photo Film Co. (Consumer Goods) 2,447,428
45,000 Hitachi Maxell (Audio/Video Products) 856,709
39,000 Hoya Co. (Glass Products and Electronics) 1,109,486
24,000 Ito-Yokado (Retail) 1,134,460
75,000 Jusco Co. (Retail) 1,381,700
195,000 Komatsu Ltd. (Machinery and Engineering) 951,392
32,500 Murata Manufacturing (Manufacturing) 1,058,670
25,000 Nintendo Co. (Consumer Goods) 2,325,455
30 NTT Data Corporation (Telecommunications) 1,087,987
113,000 Omron Corporation (Machinery) 1,734,120
38,000 Rohm Company (Electronics) 3,919,794
18,000 SMC (Machines) 1,374,643
23,000 Sony Corporation (Electronics) 1,989,576
77,000 Taisho Pharmaceutical (Pharmaceutical) 1,443,628
123,000 Takeda Chemical Industries (Medical-Drugs) 3,285,461
60,000 Tokyo Broadcasting (Broadcasting) 673,206
48,000 Tokyo Electron (Electronics) 1,476,709
220,000 Yasuda Fire & Marine Insurance (Insurance) 939,592
---------------
35,948,941
---------------
Malaysia: 0.16%
300,000 Malayan Banking BHD (Banking) 298,897
---------------
Total Investments
(Cost: $124,200,781)** 95.51% 174,536,968
Other assets less liabilities 4.49% 8,204,369
------------ ---------------
Net Assets 100.00% $182,741,337
============ ===============
* Non-income producing
** Cost for Federal income tax purposes is $124,200,781 and net unrealized
appreciation consists of:
Gross unrealized appreciation $60,600,445
Gross unrealized depreciation (10,264,258)
---------------
Net unrealized appreciation $50,336,187
===============
ADR--Security represented is held by the custodian bank in the form of American
Depository Receipts.
Forward Currency Contracts Outstanding
June 30, 1998 (Unaudited)
Face Value Contract Delivery Appreciation/
US Dollar Price Date Depreciation
--------- ----- ---- ------------
Swiss Franc $ 6,160,587 1.4609 09/10/98 $172,774
Deutsche Mark 19,281,622 1.8152 09/10/98 (219,846)
French Franc 6,570,194 6.0881 09/10/98 (79,479)
Japanese Yen 15,985,932 125.11 09/10/98 1,353,678
Japanese Yen 15,348,016 130.31 10/05/98 661,763
---------- ------ -- -- -- -------
$63,346,351 $1,888,890
=========== ==========
See Notes to Financial Statements
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
- -------------------------
Assets
Investments at value (identified
cost of $124,200,781)(Notes 1 &3) $174,536,968
Cash denominated in foreign currencies
(Cost $1,015,420) 1,022,009
Cash 8,490,738
Receivables
Capital stock sold 1,505,877
Dividend 378,488
Forward currency contracts 63,346,351
----------- 65,230,716
Other assets 24,120
----------------
Total Assets 249,304,551
----------------
Liabilities
Payables
Forward currency contracts payable
at market value-proceeds $63,346,351 61,457,461
Investment management fees 131,417
Capital stock reacquired 4,580,885
Administration fees 8,246
----------- 66,178,009
Accrued expenses 385,205
----------------
Total Liabilities 66,563,214
----------------
Net Assets $182,741,337
================
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($182,741,337 / 8,587,421 shares outstanding) $21.28
================
NET ASSETS
At June 30, 1998 there were 50,000,000 shares of $.01 par value stock authorized
and the components of net assets are:
Paid in capital $123,994,565
Undistributed net investment income 528,695
Accumulated net realized gain on investments
and foreign currency translations 5,993,181
Net unrealized appreciation on investments
and foreign currencies 52,224,896
----------------
$182,741,337
================
See Notes to Financial Statements
Statement of Operations
Six months ended June 30, 1998 (Unaudited)
- ------------------------------------------
INVESTMENT INCOME
Income:
Interest $155,638
Dividend
(Net of foreign tax withheld of $180,241) 1,603,074
------------
Total income $1,758,712
------------
Expenses:
Investment management fees (Note 2) 773,667
Custodian and accounting fees (Note 3) 80,199
Transfer agent fees (Note 2) 39,095
Recordkeeping and administrative servic 182,501
Legal and audit fees 26,795
Filing fees and registration (Note 2) 23,584
Shareholder servicing and reports (Note 56,150
Other 88,654
------------
1,270,645
Custodian fee waiver (40,628)
------------
Total expenses 1,230,017
------------
Net investment income 528,695
------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain from security
transactions and foreign currency translation 8,083,948
Change in unrealized depreciation
of investments and foreign currencies 18,910,356
------------
Net gain on investments 26,994,304
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $27,522,999
============
See Notes to Financial Statements
Statement of Changes in Net Assets
- -----------------------------------------------------------------
Six months
ended Year ended
June 30, 1998 December 31,
(Unaudited) 1997
----------- ----
OPERATIONS
Net investment income (loss) $528,695 ($269,659)
Net realized gain on investments and
foreign currency translations 8,083,948 11,288,347
Increase in unrealized appreciation
of investments and foreign currencies 18,910,356 2,518,629
-------------- ---------------
Net increase in net assets resulting
from operations 27,522,999 13,537,317
Distributions to shareholders from:
Realized gain on investments
($-0- and $1.78 per share, respectively --- (14,484,891)
Capital share transactions *
Net increase (decrease) in net assets
resulting from capital
share transactions* (5,602,660) 10,058,821
------------- ---------------
Total increase in net assets 21,920,339 9,111,247
Net Assets
Beginning of period 160,820,998 151,709,751
------------- ---------------
End of period $182,741,337 $160,820,998
============= ===============
* Summary of capital share activity follows:
Six months ended
June 30, 1998 Year ended
(Unaudited) December 31, 1997
-- --------- -----------------
Shares Value Shares Value
--------- ----------- ------------ --------------
Shares sold 4,914,509 $100,990,198 2,418,086 $46,636,966
Shares reinvested
from
distributions --- --- 703,496 13,035,788
Shares redeemed (5,187,772) (106,592,858) (2,586,904) (49,613,933)
--------- ----------- ------------ --------------
Net increase
(decrease) (273,263) ($5,602,660) 534,678 $10,058,821
========= =========== ============ =============
See Notes to Financial Statements
Financial Highlights
For a Share Outstanding Throughout Each Period
- -----------------------------------------------------------------
Six months ended
June 30, 1998 Years ended December 31,
---------------------------------
(Unaudited) 1997 1996 1995 1994 1993
----------- ---- ---- ---- ---- ----
Per Share Operating
Performance
Net asset value,
beginning of year $18.15 $18.22 $17.13 $16.23 $17.22 $12.23
Income from investment
operations-
Net investment
income (loss) 0.06 (0.03) 0.03 0.16 0.01 0.08
Net realized and
unrealized
gain (loss)
on investments 3.07 1.74 2.85 1.61 (0.92) 4.91
--------- -------- ------- -------- -------- -------
Total from
investment operations 3.13 1.71 2.88 1.77 (0.91) 4.99
--------- -------- ------- -------- -------- -------
Less distributions-
Distributions from
net investment income --- --- (0.03) (0.17) (0.08) ---
Distributions from
realized gains --- (1.78) (1.76) (0.70) --- ---
--------- -------- -------- -------- -------- -------
Total distributions --- (1.78) (1.79) (0.87) (0.08) ---
--------- -------- -------- -------- -------- -------
Net asset value,
end of year $21.28 $18.15 $18.22 $17.13 $16.23 $17.22
======== ======== ======== ======= ======== =======
Total Return 17.25% 9.19% 16.98% 10.91% (5.28%) 40.80%
Ratios/Supplemental Data
Net assets,
end of period (000's) $182,741 $160,821 $151,710 $130,505 $138,174 $136,932
Ratio to average
net assets-
Expenses (A) 1.47%** 1.56% 1.60% 1.63% 1.54% 1.77%
Expenses-net (B) 1.42%** 1.50% 1.39% 1.53% 1.54% 1.77%
Net investment
income (loss) 0.61%** (0.17%) 0.15% 0.41% 0.08% 0.85%
Portfolio turnover rate 24.11% 38.45% 54.58% 68.43% 34.04% 10.66%
Average commission rate
paid per share $0.0440 $0.0349 $0.0279 --- --- ---
** Annualized
(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.
See Notes to Financial Statements
Notes to the Financial Statements
June 30, 1998 (Unaudited)
- -------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel International Equity Fund
(the"Fund") is a series of Vontobel Funds, Inc. ("VFI") which is registered
under The Investment Company Act of 1940, as amended, as a diversified open-end
management company. The Fund was established in December, 1984 as a series of
VFI which has allocated to the Fund 50,000,000 of its 500,000,000 shares of $.01
par value common stock. The investment objective of the Fund is to achieve
capital appreciation by investing in a continuously managed diversified
portfolio of equity securities.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Investments traded on stock exchanges are valued at the
last quoted sales price on the exchange on which the securities are traded as of
the close of business on the last day of the period or, lacking any sales, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are valued on the exchange designated by or under
the authority of the Fund's Board of Directors. Securities traded in the
over-the-counter market are valued at the last available sale price in the
over-the-counter market prior to time of valuation. Temporary investments in
U.S. dollar denominated short-term investments are valued at amortized cost,
which approximates market. Portfolio securities which are primarily traded on
foreign exchanges are generally valued at the closing price on the exchange on
which they are traded, and those values are then translated into U.S. dollars at
the current exchange rate.
B. Federal Income Taxes. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required.
C. Security Transactions and Dividends. Security transactions are accounted for
on the trade date. The cost of securities sold is determined generally on a
first-in, first-out basis. Dividends are recorded on the ex-dividend date.
D. Currency Translation. The market values of foreign securities, currency
holdings, other assets and liabilities initially expressed in foreign currencies
are recorded in the financial statements after translation to U.S. dollars based
on the exchange rates at the end of the period. The cost of such holdings is
determined using historical exchange rates. Income and expenses are 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 and futures, equalization and post-October capital
and currency losses.
G. 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.
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 six months
ended June 30, 1998, no reimbursement was necessary.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $184,807 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 $39,095 for its services for the six months ended June 30,
1998.
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 $39,788,050 and $40,351,424, respectively. The
Custodian has provided credits in the amount of $40,628 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund.
<PAGE>
VONTOBEL EASTERN EUROPEAN EQUITY FUND - SEMI-ANNUAL REPORT 1998
Dear Shareholder:
The battering of the region's markets in the wake of the Asian crisis, coupled
with unusually high redemption activity, brought net assets down to $75,378,170,
v. $139,408,405 at the end of 1997. At June 30, 1998, the fund's closing net
asset value stood at $12.18, resulting in a first-half loss of 20.1%. The
Hungarian and Czech markets posted small losses of 2.3 and 2.7% respectively,
while Poland's impressive 15% gain was obliterated by the 60+% decline in the
Russian market.
Although staggering in its magnitude, the fund's loss was based less on
fundamentals than investor fright. The economic meltdown in Asia caused a
wholesale rout in emerging markets worldwide. Russia, whose economy is dependent
on commodities that are no longer in demand by the erstwhile fast-growing
economies of the Pacific Rim, was particularly hard hit. As if that weren't
enough, Yeltsin's tussle with Parliament over his selection of Sergei Kiriyenko
to replace the summarily dismissed Viktor Chernomyrdin as prime minister, an
attack on the ruble, and Russia's general fiscal chaos had investors fleeing to
the exits.
As a matter of perspective, we point out that this year's rout in the Russian
market follows a spectacular gain of 100+% in 1997, and that the enormity of
Russia's foreign debt has long been a known quantity. Having drastically reduced
our Russian exposure during the first half from 23.5% to 9.4%, we're sticking to
our positions. Obviously, the market will not rebound without an improvement in
investor sentiment on emerging markets as an asset class, but the low trading
volumes support our view that many investors have decided to suffer through the
present crisis so as to be in the market when the rebound occurs. While we think
a devaluation will most likely not happen, we have hedged against this
eventuality by increasing the proportion of oil stocks in our holdings, because
they're much less sensitive to the ruble level. Oil and gas stocks account for
half of our exposure to the Russian market.
The main beneficiary of our shift out of Russia was Poland, befitting our
confidence in its improving fundamentals. Solid economic growth, tight fiscal
and monetary policy, and the prospect of further privatizations have enhanced
the government's credibility, as has Hanna Gronkiewicz-Waltz's reappointment to
a second 6-year term as head of the central bank. GDP growth is forecast at 6.5%
for 1998, inflation is falling; the zloty remains stable and, importantly, the
current account deficit seems to be under control. In this environment we should
start to see a turnaround in corporate profitability, reversing the trend of
falling earnings that persisted from 1996 into 1997 primarily because of capital
increases and restructuring costs. We forecast 10% earnings growth in 1998 and
20% in 1999 (vs. -20% in 1997).
We're also bullish on the long-term growth prospects of our Hungarian holdings,
although Russia's woes have put heavy pressure on those that derive a
significant percentage of their revenues in Russia (i.e., pharmaceutical
companies Gedeon Richter and Egis Gyogysergyar). Another factor weighing heavily
on the market was political uncertainty following the victory of the
center-right Fidesz party in May's parliamentary elections. The market's initial
reaction was negative, given Fidesz's lack of governing experience and demogogic
pre-election promises. However, the new coalition government has shown itself to
be more pro-reform and market-oriented than had been anticipated, and the market
rallied to the news of the appointment of Zsigmond Jarai, former chairman of the
Budapest Stock Exchange and CEO of ABN Amro Hungary, as finance minister. We are
optimistic that Hungary will continue along the reformist path it embarked on
when it implemented its austerity plan in 1995.
The fund's weightings in the four major regional markets vs. the
year-end weightings is shown below:
6.30.98 12.31.97
------- --------
Poland 42.6% 26.7%
Hungary 31.1% 35.6%
Russia 9.4% 23.5%
Czech Republic 7.5% 3.1%
Not surprisingly, the fund's most concentrated positions are in Poland and
Hungary (see accompanying chart); its largest Russian positions are puny in
comparison: Rostelcom (2.6%), Gazprom (1.5%) and Lukoil (1.1%). Our positive
view on both Poland and Hungary is reinforced by the continued bright outlook
for Europe, their largest trading partner. We remain medium-term negative on the
Czech Republic. Its failure to elect a majority government in June makes it
difficult to envisage the implementation of a vigorous pro-reform agenda. Even
if sentiment on Russia were to remain bearish in the medium term, we believe
that investors would eventually differentiate between Russia and the Central
European markets. In this case, the Hungarian and Polish markets could see a
revaluation--1998 P/Es are 13.2 and 9.2 respectively-- which would bring them
more in line with Western European markets.
Luca Parmeggiani
Fund Manager
July 31, 1998
10 largest holdings at June 30, 1998:
6.2% Pannonplast (construction/plastics) Hungary
5.6% Prokom (information technology) Poland
5.2% Wielkpolski (banking) Poland
5.1% Gedeon Richter (pharma) Hungary
4.9% Pick Szeged (food processing) Hungary
4.7% Polish Natl Investment Fund Poland
4.4% Egis Gyogysergyar (pharma) Hungary
4.4% Magyar Olaj (oil & gas) Hungary
4.4% BIG Bank (banking) Poland
3.6% Computerland (information technology) Poland
Schedule of Portfolio Investments
June 30, 1998 (Unaudited)
Number of Market
Shares Description Value
- ------ ----------- -----
Common Stocks and Warrants: 99.04%
Croatia: 2.24%
85,500 Zagrebacka Banka GDR *(Banking) $1,688,625
-----------
Czech Republic: 7.51%
87,000 CKD Praha Holding AS * (Engineering) 2,185,842
135,000 Komercni Banka AS Sponsored ADR *(Banking) 1,660,500
130,000 SP Telecom AS *(Telecommunications) 1,798,604
---------------
5,644,946
---------------
Estonia: 1.06%
1,206,800 Britannic Group PLC * (Timber) 795,923
---------------
Hungary: 31.10%
25,000 Borsodchem RT(Chemicals-Plastics) 731,426
130,180 Danubius Hotel and Spahuf *(Hotel) 2,620,514
94,882 Egis Gyogysergyar(Pharmaceutical) 3,342,444
15,692 Inter Europa Bank(Financial) 961,995
3,923 Inter Europa Bank Rt New 98(Financial) 240,499
122,000 Magyar Olay Es Gazipari Rt (Oil and Gas) 3,293,073
126,015 Pannonplast (Construction Material) 4,669,785
52,865 Pick Szeged Ord. Bearer (Food-Meat Products) 3,093,345
50,050 Pick Szeged Rt Sponsored GDR (Food-Meat Products) 578,078
47,847 Richter Gedeon Vegyeszeti Gyar(Pharmaceutical) 3,852,627
---------------
23,383,786
---------------
Lithuania: 2.50%
10,150 Baltic Republic Fund *(Other) 1,877,750
---------------
Poland: 42.65%
161,000 Agros Holdings Series C * (Consumer Goods) 2,354,746
26,000 Bank Przemyslowo Handlowy(Banking) 1,864,067
2,479,685 Big Bank Gdanski(Banking) 3,306,721
150,000 Computerland Poland SA *(Technology) 2,688,557
170,172 Elektrim SA(Engineering) 2,074,078
29,975 Exbud SA *(Construction) 361,041
55,000 Exbud SA GDR *(Construction) 627,000
102,670 Jelfa SA *(Pharmaceutical) 2,429,101
175,000 Mostostal Zabrze-Holding SA (Construction) 988,672
45,932 Optimus SA Shares(Technology) 922,065
13,468 Polfa Kunto Series A *(Pharmaceutical) 233,672
133,464 Polish National Invest Fund *(Other) 3,559,550
248,000 Prokom Software Sponsored SA GDR *(Software) 4,216,000
505,966 Wielkopolski(Banking) 3,917,718
168,094 Zakalady Metali Lekkich *(Manufacturing) 2,530,810
---------------
32,073,798
---------------
Romania: 2.58%
2,500 Romanian Investment Fund *(Other) 1,937,500
---------------
Russia: 9.40%
90,000 AO Mosenergo Sponsored ADR *(Utility) 438,750
1,600,000 Core Kuzbassenergo GDR* 176,000
23,000 Core Yar Telecom GDR* 57,500
100,000 Gazprom ADR(Gas) 1,100,000
11 Irkutskenergo RDC(Utility) 137,500
26,000 Lukoil Oil Co. Sponsored ADR (Oil and Gas) 858,000
19 Megionneftegaz RDC (Oil and Gas) 237,500
480,000 Nearmedic Austrian *(Pharmaceutical) 567,709
82,314 Rao Gazprom ADR(Gas) 905,454
150,000 Rostelecom Long Distance
and International Telephone ADR
(Telecommunications 1,987,500
5 Russian Dep Trust Ctf Gdr 144a* 25,000
21 Russian Depository Adr 144a* 262,500
40,000 Tatneft Sponsored ADR (Oil and Gas) 315,000
---------------
7,068,413
---------------
Total Investments:
(Cost: $93,695,044) 99.04% 74,470,741
Other assets less liabilities 0.96% 718,512
------------ ---------------
Net Assets 100.00% $75,189,253
============ ===============
* Non-income producing
** Cost for Federal income purposes is $93,695,044 and net unrealized
depreciation consists of:
Gross unrealized appreciation $3,384,815
Gross unrealized depreciation (22,609,118)
---------------
Net unrealized depreciation ($19,224,303)
===============
ADR--Security represented is held by the custodian bank in the form of American
Depository Receipts.
GDR--Security represented is held by the custodian bank in the form of Global
Depository Receipts.
RDC--Security represented is held by the custodian bank in the form of Russian
Depository Certificates.
See Notes to Financial Statements
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
- -------------------------
Assets
Investments at value (identified
cost of $93,695,044)(Notes 1 & 3) $74,470,741
Cash denominated in foreign currencies (cost $132,952) 133,427
Receivables
Capital stock sold 38,650
Dividend 312,524
Investments sold 908,495
----------- 1,259,669
Other assets 37,020
----------------
Total Assets 75,900,857
----------------
Liabilities
Cash overdraft 151,536
Payables
Capital stock reacquired 182,878
Investment management fees 82,435
----------- 265,313
Accrued expenses 294,755
----------------
Total liabilities 711,604
Net Assets ----------------
$75,189,253
================
NET Asset Value, Offering
and Redemption Price per Share
($75,189,253 / 6,172,325 shares outstanding) $12.18
================
Net Assets
At June 30, 1998 there were 50,000,000 shares of $.01 par value stock authorized
and the components of net assets are:
Paid in capital $107,050,057
Accumulated net investment income(loss) (736,587)
Accumulated net realized loss on investments
and foreign currency translations (11,894,395)
Net unrealized depreciation on investments
and foreign currencies (19,229,822)
----------------
Net Assets $75,189,253
================
See Notes to Financial Statements
Statement of Operations
Six months ended June 30, 1998 (Unaudited)
- ------------------------------------------
INVESTMENT INCOME
Income:
Dividend (Net of foreign tax withheld of $38,451) $554,939
------------
Expenses:
Investment management fees (Note 2) 701,734
Organization 6,950
Custodian and accounting fees (Note 3) 145,699
Transfer agent fees (Note 2) 183,139
Recordkeeping and administrative services 118,709
Legal and audit fees 21,276
Filing fees and registration (Note 2) 44,993
Shareholder servicing and reports (Note 55,326
Other 94,826
------------
1,372,652
Custodian fee waiver (112,628)
------------
Total expenses 1,260,024
------------
Net investment income (loss) (705,085)
------------
Realized and unrealized loss on investments and foreign currencies
Net realized loss from security transactions
and foreign currency transactions (9,904,692)
Change in unrealized depreciation of investments
and foreign currencies (11,573,545)
------------
Net loss on investments (21,478,237)
------------
Net decrease in net assets resulting from operations ($22,183,322)
============
See Notes to Financial Statements
Statement of Changes in Net Assets
- -----------------------------------------------------------------
Six months ended Year ended
June 30, 1998 December 31,
(Unaudited) 1997
----------- ----
OPERATIONS
Net investment income(loss) ($705,085) ($1,736,904)
Net realized gain (loss)
on investments and currency
translations (9,904,692) 11,205,526
Increase (decrease) in
unrealized appreciation
(depreciation) of investments
and foreign currencies (11,573,545) (15,462,328)
----------- -----------
Net decrease in net assets
resulting from operations (22,183,322) (5,993,706)
Distributions to shareholders from:
Realized gains on investments
($-0- and $.92 per share,respectively) --- (8,627,379)
Capital shares transactions *
Increase (decrease) in net assets
resulting from capital share
transactions (42,035,830) 92,176,846
----------- -----------
Total increase (decrease) in net assets (64,219,152) 77,555,761
NET ASSETS:
Beginning of period 139,408,405 61,852,644
----------- -----------
End of period $75,189,253 $139,408,405
=========== ===========
* Summary of capital share activity follows:
Six months
ended
June 30, Year ended
1998 December 31,
(Unaudited) 1997
----------- ----
Shares Value Shares Value
------ ----- ------ -----
Shares sold 619,585 $8,942,688 12,074,912 $215,450,927
Shares reinvested
from distributions --- --- 537,499 8,014,108
Shares redeemed (3,589,760) (50,978,518) (7,623,001) (131,288,189)
----------- ------------ ----------- ------------
Net increase
(decrease) (2,970,175) ($42,035,830) 4,989,410 $92,176,846
============ ============= ========== ============
See Notes to Financial Statements
Financial Highlights
For a Share Outstanding Throughout The Period
- -----------------------------------------------------------------
Six months
ended Year Feb. 15*
June 30, ended to
1998 Dec. 31, Dec. 31,
(Unaudited) 1997 1996
----------- ---- ----
Per Share Operating Performance
Net asset value, beginning of period $15.25 $14.89 $10.00
------ ------ ------
Income from investment operations-
Net investment income (loss) (0.12) (0.19) (0.06)
Net realized and unrealized
gain (loss) on investments (2.95) 1.47 4.95
----- ---- ----
Total from investment operations (3.07) 1.28 4.89
----- ---- ----
Less distributions-
Distributions from realized
gains on investments --- (0.92) ---
----- ----- ------
Total distributions --- (0.92) ---
----- ----- -----
Net asset value, end of period $12.18 $15.25 $14.89
====== ====== ======
Total Return (20.13%) 8.74% 48.90%
Ratios/Supplemental Data
Net assets, end of period (000's) $75,901 $139,408 $61,853
Ratio to average net assets-
Expenses (A) 2.45%** 1.94% 2.02%**
Expenses-net (B) 2.24%** 1.66% 1.71%**
Net investment income (loss) (1.26%)** (1.30%) (1.07%)**
Portfolio turnover rate 30.84% 105.86% 38.69%
Average commission rate paid per share $0.0363 $0.0963 $0.0737
(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
Notes to the Financial Statements
June 30, 1998 (Unaudited)
- -------------------------
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.
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. 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.
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.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $145,326 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 $183,139 for its services for the six months ended June 30,
1998.
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, net of cost recovery, are included in other income.
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 $33,653,424 and $74,855,523, respectively. The
custodian has provided credits in the amount of $112,628 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund .
<PAGE>
VONTOBEL INTERNATIONAL BOND FUND
SEMI-ANNUAL REPORT 1998
Dear Shareholder:
At June 30, 1998, the fund's closing Net Asset Value stood at $10.20, producing
a total return of 3.1% year to date vs. 2.7% for the J.P. Morgan Government Bond
Index (ex-US).
The fund was well served by its strategy of investing only in the highest
quality bonds. In most markets, less than top-rated bonds performed poorly
because of the widening of yield spreads (=underperformance) caused by the
ongoing Asia crisis. Our lack of exposure to yen bonds also served us well as
the yen weakened dramatically vs. the US dollar. Japanese bonds lost 4% in the
first half. Traditionally `dollar bloc' currencies like the Australian and New
Zealand dollars followed the yen downward because of the high relative
importance of the Japanese currency to these countries, and falling commodity
prices.
The second quarter was marked by consolidation of the convergence trend of
European bond yields. The euro was officially launched during the first weekend
in May, and all 10-year rates of the countries participating in the European
Monetary Union are now within 0.07% to 0.3% of German rates. We foresee no
change in our strategy in the next few months as monetary union takes center
stage. Most European government bonds are now fairly valued and are behaving
like a single bloc, anticipating the single market by 8 months. European bond
marts averaged a 5% return. The last market to offer any decent pickup over core
Europe is the UK, but the volatility of the pound sterling poses a problem. The
Bank of England surprised markets in early June by increasing interest rates by
25 bps, and the short end of the sterling market was hit badly. Spreads between
the UK and Europe have widened to even more attractive levels, but the
prevailing view is that this may have been the last rate hike, and the pound
looks likely to lose more ground against European currencies.
The outlook for European bonds remains positive. Inflation remains subdued in
core European markets and looks unlikely to pick up in the second half of 1998.
Moderate growth, together with European corporate restructuring and the
competitive pressures of a single currency, continue to cap inflationary
expectations. We expect that the new European Central Bank will follow a
restrictive monetary stance, and the euro remains our largest weighting. Our
currency allocation at June 30, 1998 was as follows:
ECU 20.7%
Deutschemark 16.9%
Italian Lira 12.0%
French franc 11.3%
British pound 9.6%
Danish krone 9.5%
Canadian dollar 6.7%
Irish punt 4.4%
Dutch guilder 3.7%
Cash 5.2%
Sven Rump
Fund Manager
July 31, 1998
Schedule of Portfolio Investments
June 30, 1998 (Unaudited)
Principal Market
Amount* Security Description Value
BONDS: 94.77%
BRITISH POUND 9.57%
60,000 DSL Bank 9.25% 19 Aug 2002 $ 819,706
------ ---- -- ---- ---------
Corporate Bond
CANADIAN DOLLAR 6.72%
800,000 Government of Canada 6.5% 1 June 2004 575,076
------- --- - ---- -------
Government Bond
DANISH KRONE 9.53%
5,000,000 Kingdom of Denmark 7% 15 Dec 2004 815,889
--------- - -- ---- -------
Government Bond
DEUTSCHE MARK 16.92%
900,000 Republic of Finland 7.5% 27 Jan 2000 524,896
Government Bond
1,000,000 Republic of Germany 6.5% 14 Oct 2005 616,259
Government Bond
500,000 Republic of Germany 7.125% 20 Dec 2002
Government Bond 307,547
-------
1,448,702
---------
EUROPEAN CURRENCY 20.66%
600,000 DSL Bank 4.75% 27 May 2003 664,411
Corporate Bond
350,000 EuroFima 8.5% 4 Jun 2007 478,826
Supranational Entities
500,000 France O.A.T. 10% 26 Feb 2001
Government Bond 625,812
-------
1,769,049
---------
FRENCH FRANC 11.27%
5,000,000 France O.A.T. 7.25% 25 Apr 2006 964,496
-------
Government Bond
IRISH PUNT 4.36%
250,000 Republic of Ireland 6.25% 18 Oct 2004 373,586
-------
Government Bond
ITALIAN LIRA 11.99%
1,500,000,000 American Int'l Group 11.7% 4 Dec 2001 1,026,570
---------
Corporate Bond
NETHERLANDS GUILDER 3.75%
600,000 Government of Netherlands 9% 15 May 2000 320,900
------- -------
Government Bond
Total Investments:
(Cost: $8,601,164)** 94.77% 8,113,974
Other assets less liabilities 5.23% 447,544
---- -------
Net Assets 100.00% $8,561,518
====== ==========
*Stated in local currencies
**Cost for Federal income tax purposes is $8,601,164
and net unrealized depreciation consists of:
Gross unrealized appreciation $441,206
Gross unrealized depreciation (928,396)
--------
($487,190)
=========
See Notes to Financial Statements
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
- -----------------------------------------------------------------
Assets
Investments at value (Identified
cost of $8,601,164) (Notes 1 & 3) $8,113,974
Cash denominated in foreign currencies
(cost $50,802) 50,554
Cash 81,733
Receivables:
Interest $ 255,261
Capital Stock Sold 20,353
------
275,614
Other assets 43,519
------
Total Assest 8,565,394
---------
Liabilities
Capital stock reacquired 1,602
Administration fees 2,274
-----
3,876
-----
Net Assets $8,561,518
==========
NET Asset Value, Offering and Redemption
Price per share
($8,561,518/839,229 shares outstanding) $10.20
=========== ======= ======
At June 30, 1998 there were 50,000,000 shares of $.01 par value stock authorized
and components of net assets are:
Paid in capital $9,136,541
Undistributed net investment income 250,940
Accumulated net realized loss on investments
and foreign currency translation (338,872)
Net unrealized depreciation
of investments and foreign currencies (487,091)
--------
Net Assets $8,561,518
==========
See Notes to Financial Statements
Statement of Operations
June 30, 1998 (Unaudited)
- -----------------------------------------------------------------
INVESTMENT INCOME
Interest $319,429
--------
EXPENSES:
Investment management fees (Note 2) 45,723
Organization 6,100
Custodian fees 30,938
Transfer agent fees (Note 2) 9,731
Recordkeeping and administrative
services (Note 2) 9,144
Legal and audit fees 4,672
Filing and
registration fees (Note 2) 4,511
Shareholder servicing
and reports (Note 2) 2,910
Other 11,538
------
Total expenses 125,267
Expenses reimbursed or waived (56,778)
-------
Net expenses 68,489
------
Net investment income 250,940
-------
Realized and unrealized gain (loss) on investments
Net realized loss from security transactions
and foreign currency translations (338,872)
Net change in unrealized
depreciation on investments and foreign currencies 367,398
-------
Net gain on investments 28,526
------
Net increase in net assets resulting from operations $279,466
========
See Notes to Financial Statements
Statement of Changes in Net Assets
- -----------------------------------------------------------------
Six months
ended Year
June 30, ended
1998 December 31,
(Unaudited) 1997
----------- ----
Operations
Net investment income $250,940 $1,146,677
Net realized loss on investments
and foreign currency translation (338,872) (1,022,601)
Change in unrealized appreciation
(epreciation) of investments and
foreign urrencies 367,398 (2,092,635)
------- ----------
Net increase (decrease) in net assets
resulting from operations 279,466 (1,968,559)
Distribution to shareholders from:
Realized gains on investments
($.-- and $.38 per share,
respectively) --- (401,372)
Capital Share Transactions
Net decrease in net assets
from capital share transactions* (2,510,792) (13,715,794)
---------- -----------
Net decrease in net assets (2,231,326) (16,085,725)
Net asset at beginning of period 10,792,844 26,878,569
---------- ----------
Net Assets at the end of the period
(including undistributed net investment income
of $250,940 and $.--, respectively) $8,561,518 $10,792,844
======== = ========== ===========
*A summary of capital share transactions follows:
Six months ended
June 30, 1998 Year ended
(Unaudited) December 31,1997
----------- ----------------
Shares Value Shares Value
------------ ------------ ------------ ------------
Shares sold 46,696 $470,090 208,557 $2,162,409
Shares
reinvested
from
distributions -- -- 39,686 392,896
Shares
redeemed (299,271) (2,980,882) (1,616,069) (16,271,099)
-------- ---------- ---------- -----------
Net decrease (252,575) ($2,510,792) (1,367,826) ($13,715,794)
======== =========== ========== ============
See Notes to Financial Statements
Financial Highlights
For a Share Outstanding Throughout each Period
- -----------------------------------------------------------------
Six months March 1*
ended to
June 30, 1998 Years ended December 31 Dec. 31,
(Unaudited) 1997 1996 1995 1994
----------- ---- ---- ---- ----
Per Share Operating
Performance
Net asset value,
beginning of period $ 9.89 $10.93 $10.60 $9.48 $10.00
------ ------ ------ ----- ------
Income from investment
operations-
Net investment income 0.30 0.61 0.47 0.61 0.70
Net realized and unrealized
gain (loss) on investm 0.01 (1.27) 0.32 1.06 (0.50)
---- ----- ---- ---- -----
Total from investment
operations 0.31 (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 0.00 (0.38) (0.46) (0.55) (0.72)
---- ----- ----- ----- -----
Net asset value,
end of period $10.20 $ 9.89 $10.93 $10.60 $ 9.48
====== ====== ====== ====== ======
Total Return 3.13% (6.04)% 7.51% 17.60% 1.98%
Ratios/Supplemental Data
Net assets,
end of period (000's) $8,562 $10,793 $26,879 $16,253 $10,235
Ratio to average net assets-(A)
Expenses (B) 1.50%** 1.60% 1.84% 1.76% 1.35**
Expense ratio-net (C) 1.50%** 1.40% 1.52% 1.35% 1.35**
Net investment income 5.49%** 5.92% 4.78% 5.38% 3.99**
Portfolio turnover rate 7.59% 0.00% 19.89% 18.63% 19.00%
* 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 1.24% for the six months ended June 30,1998, 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
Notes to the Financial Statements
June 30, 1998 (Unaudited)
- -------------------------------------
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 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 six months ended June 30, 1998, a reimbursement of $
56,778 was made.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $6,820 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 $9,731 for its services for the six months ended June 30,
1998.
Certain officers and/or directors of the Fund are also officers and/or directors
of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS--Purchases and sales of securities other than short-term
notes aggregated $663,434 and $2,662,169 respectively.
<PAGE>
VONTOBEL EMERGING MARKETS EQUITY FUND
SEMI-ANNUAL REPORT 1998
Dear Shareholder:
Emerging markets rebounded by 25% from January 12 to April 21, spurred by good
news out of Asia: Indonesia announced it would restructure its banks, Korea
agreed to convert up to US$ 30 billion of short-term loans, thereby averting a
rollover crisis, and Thailand removed foreign exchange controls. However, unless
they were extremely nimble, investors who bought into that rally have lost it
all since. Since April 21st, emerging markets have fallen 28%, giving back all
their Q1 gains and more.
After a 7% first quarter gain, the fund declined 15.5% last quarter. At June 30,
1998, the fund's closing Net Asset Value stood at $8.52, resulting in a first
half loss of 9.6%. This compares with a 19.9% loss for Morgan Stanley Capital
International's Emerging Markets Free (EMF) Index and a 15.6% average loss for
the universe of emerging market equity funds tracked by Lipper Analytical
Services.
The fund's shareholders were largely sheltered from the crises in Asia due to
our huge underweight in the region. We took advantage of the Asian rally to shed
stocks whose fundamentals continued to deteriorate following the massive
devaluations. We sold positions in Korea, Thailand and Malaysia and added to a
number of names in Greece, Turkey, Israel, India and South Africa. Apart from
our pared down exposure to Asia, what contributed most to the fund's relative
outperformance year to date was its overweights in Greece, Israel and Brazil and
large weighting in financials and technology stocks in peripheral markets. In
Greece, for example, despite taking profits in stocks that appreciated well over
50%, we still have an overweight of 7.5% (vs. 5% for the EMF).
At June 30, our overall regional allocation was as follows:
MSCI EMF
(at 6.30.98)
------------
Europe 16.4% 11.4%
Middle East/Africa 37.7% 19.0%
Latin America 33.3% 41.5%
Pacific Rim 6.3% 21.1%
Subcontinent 3.6% 7.0%
Thanks to strong returns in some of our holdings in Turkey and Israel, they now
figure among our top five country markets, in descending order as follows:
Turkey 13.8%. South Africa 13.7%, Brazil 13.1%, Mexico 9.4%, Israel 8.0%.
Argentina's eclipse from the list reflects the further deterioration in Latin
American markets due to depressed commodity markets.
With the exception of IOI, a palm oil plantation stock in Malaysia whose prices
have remained stable for the last 10 years, we've largely avoided deep cyclicals
and commodities. Even in South Africa, our focus is on companies in the service
industry whose profitability profile and business exposure are largely
comparable to any well managed UK firm. IT consultant Dimension Data, for
example, has 48% ROE and strong EPS growth for the last 10 years.
1998 will remain a transition year. We continue to avoid increasing our exposure
to Asia for the following reasons: 1) Extremely weak corporations are struggling
to service trillions dollars of debt, on which interest payments this year will
amount to at least $300 billion, or nearly half of total exports. 2) Domestic
operations are losing money, and the profitability of overseas sales, having
benefited from extraordinary factors in Q1, is deteriorating. 3) Asset sales to
foreigners are not progressing as expected because of labor militancy, lopsided
debt structures, due diligence complications and, most of all, a wide perception
gap concerning value. In sum, the corporate sector will not be able to generate
the cash flow necessary to stay solvent.
As prudent investors we actively seek attractive stocks in a universe that has
expanded considerably beyond the borders of Asia and Latin America. Emerging
markets outside these regions now account for nearly 40% of the benchmark index
vs. only about 27% a year ago. Wherever a company is listed, we have to
understand if it is generating or consuming cash, how much debt it employs
relative to its shareholder equity and in which currency its debt is
denominated. This leads us to focus on cash flow and liquidity ratios, like
interest coverage, dividend coverage and net equity to total assets. We're very
particular--we want to invest in companies that we could hold for several years
because they are industry leaders with competitive advantages and a record of
sustained growth in earnings, return on equity and return on invested capital.
Lastly, we don't want complacent management. We want companies whose managers
have demonstrated their commitment to growing their business, as reflected in
R&D and capital expenditure figures.
The fund is traded close to 12x PE with overall expected EPS growth of 15% and
ROE of 23%.
Fabrizio Pierallini, Fund Manager
Rajiv Jain, Associate Fund Manager
July 31, 1998
Schedule of Portfolio Investments
June 30, 1998 (Unaudited)
Number
of Market
Shares Description Value
- ------ ----------- -----
Common Stocks and Warrants: 91.13%
Botswana: 0.89%
17,000 Sechaba Breweries Ltd. (Brewery) $22,531
---------------
Croatia: 0.96%
1,500 Pliva DD GDR (Pharmaceutical) 24,375
---------------
Egypt: 1.33%
3,120 Commercial International Bank GDR (Banking) 33,852
---------------
Great Britain: 0.87%
5,300 Antofagasta Holdings (Conglomerate) 22,124
---------------
Greece: 7.55%
700 Alpha Credit Bank (Banking) 56,768
700 Alpha Credit Bank Rts 7/24/98 *(Banking) 1,193
1,300 Hellenic Bottling Company(Beverages) 40,178
3,333 Hellenic Telecommunications Organization SA
(Telephone-Integrated) 85,486
200 Stet Hellas Telecom SA ADR *(Telecom) 8,300
---------------
191,925
---------------
Hungary: 0.31%
100 Gedeon Richter Ltd GDR (Pharmaceutical) 8,000
---------------
Israel: 7.36%
1,500 ECI Telecommunications (Telecommunications Equipment) 56,812
663 Formula Systems (1985) Ltd *(Technology) 23,205
27,686 Leumi Bank Le Israel(Banking) 55,242
700 Nice Systems Ltd Sponsored ADR *(Technology) 26,250
7,780 Super-Sol Ltd B Shs(Retail) 25,639
---------------
187,148
---------------
Poland: 2.13%
1,500 Bank Handlowy GDR(Banking) 28,650
1,500 Prokom Software SA GDR *(Technology-Software) 25,500
---------------
54,150
---------------
Portugal: 4.50%
600 Brisa Auto Estrada Priv 25,690
500 Telecel Comuni Pessoais SA(Telecom-Cellular) 88,884
---------------
114,574
---------------
South Africa: 13.82%
5,300 Carson Holdings Limited * (Consumer Products) 8,044
2,000 Coronation Holdings Ltd - N Shs (Financial Services) 30,017
10,697 Dimension Data Holdings Ltd. *(Computers-Integrated) 57,724
800 Investec Group Ltd (Financial Services/Banking) 31,029
2,020 Liberty Life Association of Africa (Insurance) 39,378
9,300 NBS Boland Group Ltd(Financial) 12,076
2,535 Nedcor Ltd(Financial) 54,718
3,500 Persetel Q Data Holdings Ltd(Technology) 31,282
12,500 Primedia Limited - N Shs(Media) 81,998
5,600 Softline Limited *(Technology) 5,383
---------------
351,649
---------------
Turkey: 13.94%
2,112,500 Akbank(Banking) 68,235
331,000 Aksigorta S A(Insurance) 21,445
386,000 Eregli Demir Ve Celik *(Metals) 60,165
27,000 Migros(Retail) 26,366
446,000 Vestel Electronik Sanayai *(Electronics) 59,467
2,670,000 Yapi Kredi Bankasi(Banking) 118,894
---------------
354,572
---------------
India: 2.88%
1,500 India Tobacco Ltd GDR *(Tobacco) 25,875
3,000 Mahanagar Tele Nigam GDR *(Telecom) 31,425
1,500 Videsh Sanchar Nigam GDR *(Telecommunications) 16,050
---------------
73,350
---------------
Indonesia: 0.28%
12,000 PT Gudang Garam(Tobacco) 7,126
---------------
Malaysia: 3.59%
25,000 IOI Corporation Berhad(Agriculture) 12,469
25,000 Resorts World Berhad(Gaming) 27,468
10,000 RJ Reynolds Berhad(Tobacco) 13,855
25,000 Sime Darby Berhad(Conglomerate) 17,228
12,000 Telekom Malaysia(Telecommunications) 20,240
---------------
91,260
---------------
Pakistan: 0.68%
28,000 Hub Power Co Ltd *(Utility) 7,804
500 Lever Brothers Pakistan Ltd * (Consumer Products) 9,424
---------------
17,228
---------------
Philippines: 1.72%
10,800 Cosmos Bottling Corporation (Beverages) 1,217
500 Philippine Long Distance Telephone
Sponsored ADR(Telecom) 11,311
197,000 SM Prime Holdings (Real Estate/Retail) 31,180
---------------
43,708
---------------
Argentina: 2.40%
300 Disco SA Sponsored ADR *(Food-Retail) 9,600
2,800 Perez Companc SA Sponsored ADR(Diversified) 27,300
800 YPF SA Sponsored ADR (Oil and Gas) 24,050
---------------
60,950
---------------
Brazil: 13.20%
2,300 Companhia Cervejaria Sponsored ADR (Beverages) 28,750
734 Companhia Energetica Sponsored ADR(Utility-Electric) 22,754
3,000 Companhia Paranaense Sponsored ADR(Utility) 27,750
30,000 Investimentos Itau PN(Conglomerate) 18,936
125,000 Itaubanco Pfd Reg(Banking) 71,333
2,500 Petrobras Sponsored ADR (Oil and Gas) 46,250
1,100 Telebras Sponsored ADR(Telephone-Integrated) 120,106
---------------
335,879
---------------
Chile: 1.75%
800 Chilectra SA Sponsored ADR(Utility) 17,200
120 Cia Telecom Chile ADR Rts 6/30/98(Telecom) 41
1,100 Embotelladora Andina ADR(Beverages) 19,250
1,000 Linea Aerea Nacional Sponsored ADR(Airline) 8,125
---------------
44,616
---------------
Mexico: 9.01%
40,000 Biperb *(Electronics) 15,893
9,920 Cieb/corp Interame De Entre Cv B *(Entertainment/Media) 27,602
1,322 Ciel /corp Interamer Entren L/* 3,090
11,000 Contal*cp(Beverages) 36,728
200 Grupo Iusacell Sponsored ADR *(Telecom) 2,750
7,000 Grupo Modelo SA Sereis C(Brewery) 59,444
1,400 Kimberly Clark de Mexico ADR
(Manufacturing-Paper and Paper Products) 24,500
600 Panamerican Beverages Class A(Beverages) 18,862
2,300 Tubos de Acero de Mexico ADR(Manufacturing-Steel) 29,469
1,000 TV Azteca SA ADR(Media) 10,813
---------------
229,151
---------------
Peru: 0.88%
1,100 Telefonica Del Peru SA B ADR(Telephone-Integrated) 22,481
---------------
Venezuela: 1.08%
1,100 Cia Anonima Tel De Ven Sponsored ADR
(Telephone-Integrated) 27,500
---------------
Total Investments:
(Cost: $2,498,195)** 91.13% 2,318,149
Other assets less liabilities 8.87% 225,618
--------- ---------------
Net Assets 100.00% $2,543,767
========= ===============
* Non-income producing
** Cost for Federal income tax purposes is $2,498,195 and net
unrealized depreciation consists of:
Gross unrealized appreciation $31,156
Gross unrealized depreciation (211,202)
---------------
Net unrealized depreciation ($180,046)
===============
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
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
- -----------------------------------------------------------------
Assets
Investments at value (identified
cost of $2,498,195)(Notes 1 & 3) $2,318,149
Cash denominated in foreign currencies 22,973
Receivables
Investments sold $292,669
Dividend 3,821 296,490
-----------
Other assets 105,505
----------------
Total assets 2,743,117
----------------
Liabilities
Cash overdraft 166,058
Payables
Investments purchased 10,962
Capital stock reacquired 17,040
Investment management fees 5,290
----------- 33,292
----------------
Total liabilities 199,350
----------------
Net Assets $2,543,767
================
Net Asset Value, Offerng and Redemptioin Price Per Share
($2,543,767 / 298,367 shares) $8.53
================
Net Assets
At June 30, 1998 there were 50,000,000 shares of $.01 par value stock authorized
and the components of net assets are:
Paid in capital $3,111,442
Accumulated net investment income 3,667
Accumulated net realized loss on
investments and foreign currency translations (389,417)
Net unrealized depreciation on investments
and foreign currencies (181,925)
----------------
Net Assets $2,543,767
================
See Notes to Financial Statements
Statement of Operations
June 30, 1998 (Unaudited)
- -----------------------------------------------------------------
INVESTMENT INCOME
Income:
Dividend (Net of foreign tax withheld of $2,925) $41,921
------------
Expenses:
Investment management fees (Note 2) 22,989
Custodian and accounting fees (Note 3) 15,040
Transfer agent fees (Note 2) 6,940
Legal and audit 5,090
Recordkeeping and administrative servi 6,467
Filing fees and registration (Note 2) 3,689
Shareholder servicing and reports (Not 2,637
Amortization of organization expense 6,972
Miscellaneous 7,517
------------
Total expenses 77,341
Expenses reimbursed or waived (39,087)
------------
Net expenses 38,254
------------
Net investment income 3,667
------------
Net Realized and Unrealized Loss on Investments
Net realized loss from security transactions
and foreign currency translations (282,213)
Change in unrealized depreciation of
investments and foreign currencies (74,463)
------------
Net loss on investments (356,676)
------------
Net decrease in net assets resulting from operations ($353,009)
============
See Notes to Financial Statements
Statement of Changes in Net Assets
- -----------------------------------------------------------------
Six months ended August 25, * to
June 30, 1998 December 31,
(Unaudited) 1997
----------- ----
Operations
Net investment income (loss) $ 3,667 ($16,689)
Net realized loss on investments
and foreign currencies (282,213) (108,947)
Increase in unrealized depreciation
of investments and foreign currencies (74,463) (107,462)
--------- ----------
Net decrease in net assets
resulting from operations (353,009) (233,098)
Capital shares transactions
Increase (decrease) in net
assets resulting from
capital share transactions** (703,766) 3,833,640
--------- ----------
Total increase (decrease)
in net assets (1,056,775) 3,600,542
Net Assets:
Beginning of period 3,600,542 ---
--------- ----------
End of period
(including undistributed net
investment income of
$3,337 and $-0-, respectively)
$2,543,767 $3,600,542
========== ==========
**A summary of capital share transactions follows:
Six months ended August 25, * to
June 30, 1998 December 31,
(Unaudited) 1997
----------- ----
Shares Value Shares Value
--------- ---------- ----------- ----------
Shares sold 53,898 $ 517,085 406,059 $4,075,864
Shares redeemed (137,751) (1,220,851) (23,839) (242,224)
--------- --------- ---------- ----------
Net increase
(decrease) (83,853) ($703,766) 382,220 $3,833,640
========= ========= ========== ==========
* Commencement of operations
See Notes to Financial Statements
Financial Highlights
For a Share Outstanding Throughout The Period
- -----------------------------------------------------------------
Six months ended August 25, *
June 30,1998 to
(Unaudited) Dec. 31, 1997
----------- -------------
Per Share Operating Performance
Net asset value, beginning of period $9.42 $10.00
--------- --------
Income from investment oerations-
Net investment income (loss) 0.01 (0.04)
Net realized and unrealized
loss on investments (0.90) (0.54)
--------- --------
Total from investment operations (0.89) (0.58)
--------- --------
Net asset value, end of period $8.53 $9.42
========= ========
Total Return (9.45%) 5.80%
Ratios/Supplemental Data
Net assets, end of period (000's) $2,544 $3,601
Ratio to average net assets--(A)
Expenses (B) 2.08%** 2.41%**
Expenses-net (C) 2.08%** 2.20%**
Net investment loss 0.20%** (1.42%)**
Portfolio turnover rate 57.21% 16.36%
Average commission rate paid per share $0.0060 $0.0145
(A) Management fee waivers reduced the expense ratio and increased the ratio of
net investment income by 2.12% (annualized) for the six months ended
June 30, 1998.
(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
Notes to the Financial Statements
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
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, $10,870 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 $6,940 for its services for the six months ended June 30,
1998.
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 $1,838,034 and $2,159,696, respectively. The
custodian has provided credits in the amount of $ against custodian and
accounting charges based on credits on uninvested cash balances of the Fund .
<PAGE>
VONTOBEL EASTERN EUROPEAN DEBT FUND
SEMI-ANNUAL REPORT 1998
Dear Shareholder:
We are pleased to report that Eastern European debt markets overall withstood
the trials and tribulations that have afflicted emerging markets equities as a
result of the Asian crisis. The region's debt markets rebounded strongly during
the first half of 1998 as investors finally began to distinguish between the
economic situation in the Eastern European core countries and those in Asia. The
glaring exception was Russia. The trigger for Russia`s collapse was its
perennial budget problem, not exactly news, but the resurgence of the crisis in
Asia has conferred on it a greater order of magnitude. Happily, the debacle in
Russian bonds (the 1-year Russian GKO declined by 40% in the first half) was
more than compensated by strong performance in other regional markets. Poland's
June 2002 bond gained 9.1% in the first half, while the Czech Republic's
February 2003 bond gained 8.5%. The Hungarian bond index registered an even more
impressive first-half gain of 11.3%.
Eastern European debt also outperformed other regional emerging markets debt, as
measured by JP Morgan's Emerging Markets Bond Index of US-dollar-denominated
securities, including Brady bonds, which posted a year-to-date return of 0.11%.
At June 30, 1998, the fund's closing Net Asset Value stood at $10.68 and net
assets totaled $14,451,706. Year to date, the fund posted a total return of
10.10%. This performance can be attributed to our nearly 40% weighting in
zloty-denominated assets at a time when the zloty held its own against a rising
dollar, and our minimal exposure to Russian debt.
In an environment of declining inflation, restrictive monetary policy, and
stable currencies, Eastern European fixed income investments remain attractive
and less risky than other emerging markets. Since the beginning of the year
foreign capital has been pouring into the region's major markets. Because of the
inflow of capital, some currencies (Czech crown, Slovakian koruna and Polish
zloty) have been trending upward against the deutsche mark and the US dollar.
The main focus of inflows is Poland, where revised government forecasts now call
for a 1997 current account deficit of 4% of GDP (vs. a 5% initial forecast), and
a 1998 inflation rate of 9.5% (vs. 14.9% for 1997 and 19.9% in 1996). Solid
economic growth, tight fiscal and monetary policy, and the prospect of further
privatizations have enhanced government credibility. This, in turn, has
attracted capital flows, giving a boost to the currency, which has held its own
against the US dollar since the beginning of the year, and appreciated 7%
against the currency basket. Foreign reserves grew by 30% yoy to $23 billion as
of the first quarter and, since Poland's foreign and domestic debt is not
short-term, the zloty is not vulnerable to speculative attack. We continue to be
bullish on Poland.
In April we committed about 4% of fund assets to a Russian-ruble-denominated
bond issued by the International Finance Corporation with an attractive 25%
yield, given an inflation rate of 10%. Although our entry into the Russian ruble
market turned out to be premature, this limited exposure had little impact on
fund performance.
At the end of June the fund's currrency allocation/cash was as follows: Polish
zloty 38.5%, Czech crown 25.6%, Hungarian forint 22.2% Russian ruble 3.5%, with
the remaining 9.2% in cash. 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).
We anticipate continued outperformance in the Polish, Hungarian and Czech
markets. Although we think Russian bonds have been oversold, we don't plan to
increase our exposure for the time being; the yields are very attractive, but
exaggerated price swings may lead to even greater volatility. Eastern European
debt continues to be a very attractive asset class from both the standpoint of
capital appreciation and yield.
Volker Wehrle
Fund Manager
July 31, 1998
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1998 (Unaudited)
Principal
Amount* Security Description Market Value
- ------- -------------------- ------------
Bonds: 90.82%
CZECH CROWN: 25.61%
24,000,000 Czech Republic 12.2% 15 Aug 2002 $733,308
Government Bond
14,000,000 Deutsche Bank Finance NV 10.5% 21 Jan 2000 405,859
Corporate Bond
46,000,000 General Electric Mtn 13.5% 1 Oct 1999 1,386,456
Corporate Bond
20,000,000 ING Verzekeringen 10.625% 20 Jan 2000 579,492
Corporate Bond
20,000,000 SBC Jersey 10.625% 28 Jan 1999
Corporate Bond 595,567
---------
3,700,682
---------
HUNGARY FORINT: 22.19%
300,000,000 Government of Hungary 16.5% 24 Jul 1999 1,374,142
Government Bond
125,000,000 Government of Hungary 21.0% 24 Oct 1999 601,433
Government Bond
135,000,000 Government of Hungary 16.0% 12 May 2000 615,609
Government Bond
140,000,000 Government of Hungary 14.0% 24 Jun 2002
Government Bond 615,832
-------
3,207,016
---------
POLISH ZLOTY: 39.53%
2,100,000 Republic of Austria 19.25% 11 Jun 1999 597,720
Government Bond
7,000,000 Government of Poland 15.0% 12 Oct 1999 1,887,210
Government Bond
4,000,000 Government of Poland 12.0% 12 Jun 2001 989,963
Government Bond
5,000,000 Poland Treasury Bond 12.0% 12 Oct 2001 1,221,681
Government Bond
1,600,000 International Finance Company 0% 28 May 1999 388,185
Supranational Bond
2,200,000 International Bank for
Recon & Dev 19.5% 17 Jun 1999
Supranational Bond 627,760
-------
5,712,519
---------
RUSSIAN RUBLE: 3.49%
4,000,000 International Finance Corp 25.0% 15 Apr 1999 504,696
-------
Corporate Bond
Total Investments: 90.82% 13,124,913
(Cost:$13,072,936) 9.18% 1,326,793
---- ---------
Other Assets, net 100.00% $14,451,706
====== ===========
* Stated in local currencies
**Cost for Federal income tax purposes is $13,072,936 and net unrealized
appreciation consists of:
Gross unrealized appreciation $ 347,784
Gross unrealized depreciation (295,807)
--------
Net unrealized appreciation $ 51,977
==========
See Notes to Finanacial Statements
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (Unaudited)
- -------------------------
Assets
Investments at value
(identified cost of $13,072,936 )
(Notes 1 & 3) $13,124,913
Cash denominated in foreign currencies
(Cost $106,680) 103,979
Cash 241,041
Receivables:
Capital stock sold 72,498
Interest 864,154
------- 936,652
Other assets 61,894
----------
Total Assets 14,468,479
----------
Liabilities
Payables:
Advisory fee 16,225
Administrative fees 548
-------
Total Liabilities 16,773
---------
Net Assets $14,451,70
==========
Net Asset Value, Offering and Redemption Price per Share
($14,451,706 / 1,353,573 shares outstanding) $10.68
==========
At June 30, 1998 there were 50,000,000 shares of $.01 par value
stock authorized and components of net assets are:
Paid in capital $13,473,44
Undistributed net investment income 1,002,570
Accumulated net realized loss on
investments and currency transactions (77,619)
Net unrealized appreciation on investments
and currency transactions 53,314
------
Net Assets $14,451,70
==========
See Notes to Financial Statements
STATEMENT OF OPERATIONS
PERIOD ENDED JUNE 30, 1998 (Unaudited)
- --------------------------------------
Investment income
Interest $1,025,071
----------
Expenses:
Investment management fees (Note 2) $ 91,325
Custodian fees 11,231
Transfer agent fees (Note 2) 3,004
Recordkeeping and administrative services (No 15,238
Filing and registration fees (Note 2) 5,541
Shareholder servicing and reports (Note 2) 1,979
Legal and Audit 5,446
Organization 7,095
Other 7,588
-----
Total expenses 148,447
Expenses reimbursed or waived (5,360)
------
Net expenses 143,087
-------
Net investment income 881,984
-------
Realized and unrealized gain (loss) on investments
Net realized loss from security transactions
and foreign currency translations (77,619)
Change in unrealized appreciation of
investments and foreign currencies 609,049
-------
Net gain on investments 531,430
-------
Net increase in net assets resulting from operations $1,413,414
==========
See Notes to Financial Statements
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------
Six months
ended
June 30, Aug. 25,*
1998 to Dec. 31,
(Unaudited) 1997
----------- ----
Operations:
Net investment income $ 881,984 $ 378,510
Net realized gain (loss) on
foreign currency transactions (77,619) 87,300
Increase (decrease) in unrealized
appreciation of investment 609,049 (555,735)
------- --------
Net increase (decrease) in
net assets resulting from
operations 1,413,414 (89,925)
Distributions to Shareholders from:
Net investment income
($.-- and $.24 per share,
respectively) --- (345,224)
Capital Share Transactions
Net increase (decrease) in
net assets resulting from
capital share transactions** (1,399,633) 14,873,074
---------- ----------
Net increase in net assets 13,781 14,437,925
Net assets at beginning of period 14,437,925 ---
----------
Net assets at the end of the period
(Includes undistributed net investment
income of $1,002,570 and $120,586,
respectively) $14,451,706 $14,437,925
=========== ===========
*A summary of capital share transactions follows:
Six months ended
June 30, 1998 August 25,* to
(Unaudited) December 31, 1997
----------- -----------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold 105,337 $1,075,147 1,479,779 $14,800,400
Shares reinvested from d -- -- 31,417 298,459
Shares redeemed (240,305) (2,474,780) (22,655) (225,785)
-------- ---------- ------- --------
Net increase (decrease) (134,968) ($1,399,633) 1,488,541 $14,873,074
======== =========== ========= ===========
*Commencement of operations
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
Six months Aug. 25,*
ended to
June 30, 1998 Dec. 31,
(Unaudited) 1997
----------- ----
Per Share Operating Performance
Net asset value, beginning of pe $9.70 $10.00
----- ------
Income from investment operations
Net investment income 0.66 0.26
Net realized and unrealized gain (loss) on
investments 0.32 (0.32)
---- -----
Total from investment operations 0.98 (0.06)
---- -----
Less distributions
Distributions from net invest -- (0.24)
---- -----
Net asset value, end of period $10.68 $9.70
====== =====
Total Return 10.33% (0.55%)
Ratios/Supplemental Data
Net assets, end of period (000's) $14,452 $14,438
Ratio to average net assets -(A)
Expenses - (B) 1.96%** 2.38%**
Expenses - net (C) 1.96%** 2.19%**
Net investment income 12.08%** 8.28%**
Portfolio turnover rate 10.11% 0.00%
*Commencement of operations
**Annualized
(A) Management fee waivers reduced the expense ratio and increased the ration of
net investment income by .7% for the six months ended June 30, 1998.
(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.
See Notes to Financial Statements
Notes to the Financial Statements
June 30, 1998 (Unaudited)
- -------------------------
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, $14,689 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 $3,004 includes expense for its services for the six months
ended June 30, 1998.
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--Purchases and sells of securities other than short-term
notes aggregated $2,450,010 and $1,308,342, respectively.
<PAGE>
Investment Advisor:
Vontobel USA Inc.
450 Park Avenue
New York, New York 10022
Distributor:
First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
Independent Auditors:
Tait, Weller and Baker
Eight Penn Center Plaza
Suite 800
Philadelphia, Pennsylvania 19103
Transfer Agent:
For account information, wire purchase or redemptions, call or write to
Vontobel's Transfer Agent:
Fund Services, Inc.
Post Office Box 26305
Richmond, Virginia 23260
(800) 628-4077 Toll Free
More Information:
For 24 hour, 7 days a week price information, and for information on any
series of Vontobel Funds, Inc., investment plans, and other shareholder
services, call Commonwealth Shareholder Services at (800) 527-9500 Toll
Free.
NASDAQ SYMBOL:
VUSVX--U.S. Value Fund
VNEPX--International Equity Fund
VEEEX--Eastern European Equity Fund
VIBDX--International Bond Fund
VEEDX--Vontobel Eastern European Debt Fund
<PAGE>
Vontobel Fund Distributors
a division of First Dominion Capital Corp.
member firm NASD
1500 Forest Avenue, Suite 223
Richmond, Virginia 23229
Telephone (800) 527-9500
