File Numbers: 2-78931 and 811-3551
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. /_/
Post-Effective Amendment No. 35 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment N
(Check appropriate box or boxex
VONTOBEL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
1500 Forest Avenue, Suite 223, Richmond, VA 23229
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (804) 285-8211
John Pasco, III, 1500 Forest Ave., Suite 223, Richmond, VA 23229
(Name and Address of Agent for Service)
Please send copies of communications to
Steven M. Felsenstein, Esq.
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
Approximate Date of Proposed Public Offering: Upon effectiveness
of this amendment.
It is proposed that this filing will become effective (check
appropriate box).
/X/ immediately upon filing pursuant to paragraph (b).
/ / on (date) pursuant to paragraph (b).
/ / 60 days after filing pursuant to paragraph (a)(1).
/ / on (date) pursuant to paragraph (a)(1).
/ / 75 days after filing pursuant to paragraph (a)(2).
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
No additional shares being registered at this time. Registrant
has previously elected to register an indefinite number of shares
pursuant to Rule 24f-2. The Notice for the fiscal year ended
December 31, 1997 was filed on February 28, 1997.
<PAGE>
CROSS-REFERENCE SHEET
Prospectus for the Vontobel U.S. Value Fund,
Vontobel International Equity Fund (formerly named, Vontobel
EuroPacific Fund), Vontobel Eastern European
Equity Fund and Vontobel International Bond Fund,
Vontobel Emerging Markets Equity Fund and
Vontobel Eastern European Debt Fund
Part A
Item No. Information Required in a Prospectus
1. Cover Page. Cover Page.
2. Synopsis. Prospectus Summary; Fund Expenses.
3. Condensed Financial
Information. Financial Highlights.
4. General Description
of Registrant. Prospectus Summary; Cover Page; General
Information About the Company; The Funds'
Investments and Policies; Additional
Information on Policies and Investments;
Special Risk Considerations; Investment
Restrictions.
5. Management of the
Fund Prospectus Summary; The Company's
Management; General Information About the
Company, To Obtain More Information.
5A. Management's
Discussion of Fund
Performance. 1997 Performance; and *.
6. Capital Stock and
Other Securities. Prospectus Summary; Taxes; Dividends and
Capital Gains Distributions; General
Information About the Company; To Obtain
More Information.
7. Purchase of
Securities Being
Offered. Prospectus Summary; How to Invest; How Net
Asset Value is Determined; Special
Shareholder Services; How to Transfer
Shares.
8. Redemption or
Repurchase. How to Redeem Shares; Special Shareholder
Services; How to Transfer Shares.
9. Pending Legal
Proceedings. Not Applicable.
<PAGE>
Statement of Additional Information for the Vontobel U.S. Value Fund,
Vontobel International Equity Fund (formerly named,
Vontobel EuroPacific Fund), Vontobel Eastern European
Equity Fund and Vontobel International Bond Fund, Vontobel
Emerging Markets Equity Fund and Vontobel
Eastern European Debt Fund
Part B
Item No Information Required in a Statement of
Additional Information
10. Cover Page. Cover Page.
11. Table of Contents. Table of Contents.
12. General Information
and History. Not Applicable.
13. Investment
Objectives and
Policies. Vontobel Funds, Inc.; Investment Policies;
Special Investment Considerations for the
Funds; Investment Restrictions.
14. Management of the
Registrant. Directors and Officers.
15. Control Persons and
Principal Holders of
Securities. Directors and Officers.
16. Investment Advisory
and Other Services. Investment Advisor; Transfer Agent;
Administrator; Distribution.
17. Brokerage Allocation
and Other Practices. Portfolio Transactions.
18. Capital Stock and
Other Securities. General Information and History; Dividends
and Distributions.
19. Purchase, Redemption
and Pricing of
Securities Being
Offered. Special Shareholder Services; Valuation and
Calculation of Net Asset Value.
20. Tax Status. Taxes.
21. Underwriters. Distribution.
22. Calculation of
Performance Data. Performance.
23. Financial
Statements. *Incorporated by reference in the Prospectus.
<PAGE>
Part C
Item No.
Other Information.
24.Financial Statements
and Exhibits. Financial Statements and Exhibits.
25.Persons Controlled By
Or Under Common Control
With Registrant. Persons Controlled By Or Under Common Control
With Registrant.
26.Number of Holders of
Securities. Number of Holders of Securities.
27.Indemnification. Indemnification.
28.Business and Other
Connections of Investment
Advisor. Business and Other Connections of Investment
Advisor.
29. Principal
Underwriters. Principal Underwriters.
30. Location of Accounts
and Records. Location of Accounts and Records.
31. Management Services. Management Services.
32. Undertakings. Undertakings.
* Incorporated herein by reference to Registrant's Annual Report to
Shareholders dated December 31, 1997 as filed with the Commission via
its EDGAR system on February 28, 1997.
<PAGE>
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
VONTOBEL EMERGING MARKETS EQUITY FUND
VONTOBEL EASTERN EUROPEAN EQUITY FUND
VONTOBEL INTERNATIONAL BOND FUND
VONTOBEL EASTERN EUROPEAN DEBT FUND
PORTFOLIOS OF
VONTOBEL FUNDS, INC.
A "SERIES" INVESTMENT COMPANY
1500 Forest Avenue PROSPECTUS
Suite 223 Dated May 1, 1998
Richmond, Virginia 23229
Telephone: 1-800-527-9500
Vontobel Funds, Inc. ("the "Company") (formerly named, The World Funds,
Inc.) is an open-end management investment company commonly known as a "mutual
fund." A "series" mutual fund offers investors a choice of investment
objectives, with each series having its own separate and distinct portfolio of
investments and operating much like a separate mutual fund. This Prospectus
offers shares of the following six series (each, a "Fund") of the Company:
Vontobel U.S. Value Fund ("Value Fund") seeks to achieve long-term
capital returns in excess of the broad market by investing in a
carefully selected, continuously managed non-diversified portfolio
composed principally of equity securities ("Equity Securities," which
include securities convertible into equity securities, such as
warrants, convertible bonds, debentures or convertible preferred stock)
traded on U.S. exchanges. Vontobel International Equity Fund
("International Equity Fund") seeks to achieve capital appreciation by
investing in a carefully selected and continuously managed diversified
portfolio consisting primarily of Equity Securities of issuers
located in Europe and the Pacific Basin.
Vontobel Emerging Markets Equity Fund ("Emerging Markets
Fund") seeks 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. Vontobel Eastern European Equity Fund ("E.
European Equity Fund") seeks to achieve capital appreciation by
investing in a carefully selected and continuously managed diversified
portfolio consisting primarily of Equity Securities of issuers located
in Eastern Europe. Vontobel International Bond Fund ("Bond Fund") seeks
to maximize total return from capital growth and income by investing in
a non-diversified portfolio composed primarily of fixed income
securities traded in bond markets outside the U.S. Vontobel Eastern
European Debt Fund ("E. European Debt Fund") seeks to maximize total
return from capital growth and income by investing in a carefully
selected and
<PAGE>
continuously managed non-diversified portfolio consisting primarily of
debt instruments issued by borrowers located in Eastern European
countries.
The Value, Bond and E. European Debt Funds are non-diversified series,
and the other three Funds are diversified series, of the Company for purposes of
the Investment Company Act of 1940, as amended. Investors will be able to
exchange all or part of their investment from one Fund to another or to certain
other mutual funds, under conditions set by the Company.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
AMOUNTS INVESTED IN THE FUNDS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus sets forth concisely the information about the Funds
that a prospective investor should know before investing. It should be read and
retained for future reference. More information about the Funds has been filed
with the Securities and Exchange Commission and is contained in the "Statement
of Additional Information," dated May 1, 1998, which is available at no charge
upon written request to the Company. The Funds' Statement of Additional
Information is incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-2-
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY........................................................1
FUND EXPENSES.............................................................3
FINANCIAL HIGHLIGHTS......................................................5
1997 PERFORMANCE.........................................................10
THE FUNDS' INVESTMENTS AND POLICIES......................................12
ADDITIONAL INFORMATION ON POLICIES AND INVESTMENTS.......................44
SPECIAL RISK CONSIDERATIONS..............................................48
INVESTMENT RESTRICTIONS..................................................50
PERFORMANCE TERMS AND COMPUTATIONS.......................................51
THE COMPANY'S MANAGEMENT.................................................52
HOW TO INVEST............................................................56
HOW TO REDEEM SHARES.....................................................57
HOW TO TRANSFER SHARES...................................................59
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS...............................60
SPECIAL SHAREHOLDER SERVICES.............................................60
HOW NET ASSET VALUE IS DETERMINED........................................60
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS................................61
TAXES....................................................................62
GENERAL INFORMATION ABOUT THE COMPANY....................................63
TO OBTAIN MORE INFORMATION...............................................64
<PAGE>
P R O S P E C T U S S U M M A R Y
The following summary is qualified in its entirety by the more detailed
information appearing in the body of this Prospectus.
Investment Objectives Vontobel U.S. Value Fund ("Value Fund") seeks to achieve
long-term capital returns in excess of the broad market by investing in a
carefully selected, continuously managed non-diversified portfolio composed
principally of equity securities ("Equity Securities," which include
securities convertible into equity securities, such as warrants,
convertible bonds, debentures or convertible preferred stock) traded on
U.S. exchanges. Vontobel International Equity Fund ("International Equity
Fund") seeks to achieve capital appreciation by investing in a carefully
selected and continuously managed diversified portfolio consisting
primarily of Equity Securities of issuers located in Europe and the Pacific
Basin. Vontobel Emerging Markets Equity Fund ("Emerging Markets Fund")
seeks 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. Vontobel Eastern European Equity Fund ("E. European Equity
Fund") seeks to achieve capital appreciation by investing in a carefully
selected and continuously managed diversified portfolio consisting
primarily of Equity Securities, of issuers located in Eastern Europe.
Vontobel International Bond Fund ("Bond Fund") seeks to maximize total
return from capital growth and income by investing in a non-diversified
portfolio composed primarily of fixed income securities traded in bond
markets outside the U.S. Vontobel Eastern European Debt Fund ("E. European
Debt Fund") seeks 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. See "The Funds'
Investments and Policies" on Page 12.
Principal Investments The Funds' primary investments:
Value Fund - Equity Securities traded on U.S. exchanges.
International Equity Fund - Equity Securities principally of
issuers located in Europe and the Pacific Basin. Emerging
Markets Fund - Equity Securities principally of issuers in
developing countries around the world. E. European Equity Fund
- Equity Securities principally of issuers located in Eastern
Europe.
Bond Fund - primarily fixed income securities traded in bond
markets outside the U.S. E. European Debt Fund - primarily
fixed income securities of issuers located in Eastern Europe.
See "The Funds' Investments and Policies" on Page 12.
<PAGE>
Investment Advisor Vontobel USA Inc. (the "Advisor")is the investment
advisor and manages the investments of each Fund according to its
investment objective and policies. See "The Company's Management" on
Page 52.
Distributions/Dividends Paid annually from available capital gains and
income. See "Dividends and Capital Gains Distributions" on Page 61.
Reinvestment Distributions may be reinvested automatically. See
"Dividends and Capital Gains Distributions" on Page 61.
Purchases Initial purchase is $1,000 minimum. Subsequent purchases must
be a minimum of $50. Shares of the Funds are offered for sale without a
sales charge through the distributor, Vontobel Fund Distributors (see
"How to Invest" on Page 56).
Net Asset Value Quoted daily in the financial section of most
newspapers under Vontobel. Additional information may also be obtained
by calling 1-800-527-9500. See "How the Net Asset Value is Determined"
on Page 60.
Principal Risk Factors There can be no assurance that a Fund will
achieve its investment objective. An investor should consider other
factors, including the following: the International Equity Fund,
Emerging Markets, E. European Equity Fund, Bond Fund and E. European
Debt Fund (each, an "International Fund") invest in foreign securities,
and consequently may be affected by currency fluctuations or exchange
controls, foreign taxes, differences in accounting procedures, less
supervision and regulation of security markets, political or social
instability and other risks. Each International Fund may utilize
various investment strategies, including purchasing and selling
exchange listed and over-the-counter put and call options on
securities, fixed income indices and other financial instruments,
purchasing and selling financial futures contracts and options thereon
and entering into various interest rate transactions and currency
transactions. Each of these strategies entail special risks. The Funds
may invest in repurchase agreements and the Bond Fund may invest in
reverse repurchase agreements. Investing in such securities entails
risks. See "Special Risk Considerations" on Page 48.
Year 000 Risk Factors Many computer software systems in use today can
not properly process date-related information from and after January 1,
2000. The failure of any of the computer systems employed by the Fund's
major service providers to process this type of information properly
could have a negative impact on the Fund's operations and the services
that are provided to the Fund's shareholders. Vontobel USA Inc., the
Fund's investment adviser, and the Fund's principal underwriter,
registrar, transfer agent and dividend disbursing agent have advised
the Fund that they are reviewing all of their computer systems with the
goal of modifying or replacing such systems prior to January
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<PAGE>
1, 2000 to the extent necessary to foreclose any such negative impact.
In addition, the Fund has been advised by the Fund's custodian that it
is also in the process of reviewing its systems with the same goal. As
of the date of this Prospectus, the Fund and Vontobel USA Inc. have no
reason to believe that these goals will not be achieved.
-3-
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that shareholders
in the Funds will incur.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Value International Emerging E. European Bond E. European
Shareholder Transaction Expenses Fund Equity Fund Markets Fund Equity Fund Fund Debt Fund
====================================================================================================================================
Sales Load Imposed on Purchases None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Load Imposed on Reinvested None None None None None None
Dividends
- ------------------------------------------------------------------------------------------------------------------------------------
Redemption Fees None1 None1 None1,3 None1,3 None1 None1,3
- ------------------------------------------------------------------------------------------------------------------------------------
Exchange Fees None2 None2 None2 None2 None2 None2
- ------------------------------------------------------------------------------------------------------------------------------------
1 A shareholder electing to redeem shares via a telephone request will be charged $10 for each such redemption request.
2 A shareholder may be charged a $10 fee for each telephone exchange.
3 A 2% redemption fee is charged on shares held less than six months.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (as Value International Emerging E. European Bond E. European
percentage of average daily net assets) Fund Equity Fund Markets Fund Equity Fund Fund Debt Fund
====================================================================================================================================
Management Fee .98%* 0.91% 1.25% 1.25% .41% 1.25%
- ------------------------------------------------------------------------------------------------------------------------------------
12b-1 Fees None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Other Operating Expenses 0.60%* 0.59%* 0.95% 0.41% 0.99%* 0.94%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Fund Operating Expenses 1.58%* 1.50%* 2.20% 1.66% 1.40%* 2.19%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Advisor has voluntarily agreed to waive a portion of its Management
Fee and custodian fee credits have reduced Other Operating Expenses as
set forth above. Set forth below, for each Fund as applicable, are the
management fees and total operating expenses absent such fee waivers
and/or expense credits as a percentage of the average daily net assets
of each such Fund:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Value International Emerging E. European Bond E. European
Fund Equity Fund Markets Fund Equity Fund Fund Debt Fund
====================================================================================================================================
Management Fees Absent Fee Waivers+ 1.00% 0.91% 1.25% 1.25% 1.00% 1.25%
- ------------------------------------------------------------------------------------------------------------------------------------
Other Operating Expenses Absent Expense
Credits 0.61% 0.65% 2.41% 0.69% 1.19% 1.13%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses Absent Fee
Waivers/Expense Credits 1.61% 1.56% 3.66% 1.94% 2.19% 2.38%
====================================================================================================================================
+ Information concerning reductions in the management fees due to higher Fund
asset levels appears on page 54.
</TABLE>
The purpose of these tables is to assist investors in understanding the
various costs and expenses that they will bear directly or indirectly.
Management expects that, to the extent that
-4-
<PAGE>
the Funds increase in size, their Other Operating Expenses will decline as an
annual percentage rate reflecting economies of scale.
Example
The following examples illustrate the expenses that an investor would
pay on a $1,000 investment over various time periods assuming (1) a 5% annual
rate of return, and (2) redemption at the end of each time period. As noted in
the table above, the Funds do not charge redemption fees (apart from small per
transaction charges for telephone redemption and/or exchange service fees and
the redemption fee of the E. European Equity Fund, the E. European Debt Fund and
the Emerging Markets Fund that is not charged on shares held six months or more,
as noted above).
Fund 1 Year 3 Years 5 Years 10 Years
- ---- ------ ------- ------- --------
Value $16 $50 $86 $188
International Equity $15 $47 $82 $179
Emerging Markets $22 $69 * *
E. European Equity $17 $52 $90 $197
Bond $14 $44 $77 $168
E. European Debt $22 $69 * *
* Fund is a new registrant and estimated expenses for five years and ten years
are not projected.
These examples should not be considered a representation of past or
future expenses or performances. Actual expenses may be greater or lesser than
those shown.
-5-
<PAGE>
FINANCIAL HIGHLIGHTS
The Financial Highlights for the Funds for the periods indicated below
have been examined by Tait, Weller and Baker, independent certified public
accountants, whose unqualified reports thereon appear with the Funds' audited
financial statements in the Annual Reports to Shareholders of the Value,
International Equity, E. European Equity and Bond Funds for the year ended
December 31, 1997 (each, an "Annual Report"). The financial statements of the
foregoing Funds and the reports thereon are incorporated by reference in this
Prospectus from the Annual Reports. Additional performance information for each
of the foregoing Funds is included in its Annual Report. The Annual Reports and
the financial statements therein are available at no cost upon request to the
Company at the address and telephone number noted on the cover page of this
Prospectus.
<TABLE>
<CAPTION>
Vontobel U.S. Value Fund
For a Share Outstanding Throughout Each Period
Years ended December 31,
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
Net asset value, beginning of period $13.78 $13.25 $10.26 $12.64 $12.00 $11.36
------ ----- - ------ ------ ------ ------
Income from investment operations-
Net investment income 0.10 0.17 0.05 0.09 0.16 0.10
Net realized and unrealized gain (loss) on
investments 4.61 2.65 4.09 (0.08) 0.56 1.70
---- ------ --------- ----- ----- -----
Total from investment operations 4.71 2.82 4.14 0.01 0.72 1.80
---- ----- ------ ----- ----- -----
Less distributions-
Distributions from net investment income (0.10) (0.19) (0.04) (0.23) (0.02) (0.10)
Distributions from realized gains on
investments (1.88) (2.10) (1.11) (2.16) (0.06) (1.06)
------ ------ ------ ------- ------ -------
Total distributions (1.98) (2.29) (1.15) (2.39) (0.08) (1.16)
------ ------ ------ ------- ------ -------
Net asset value, end of period $16.51 $13.78 $13.25 $10.26 $12.64 $12.00
====== ====== ====== ====== ====== ======
Total Return 34.31% 21.28% 40.36% 0.02% 6.00% 16.30%
====== ====== ====== ===== ====== ======
Ratios/Supplemental Data
Net assets, end of period (000's) $203,120 $69,552 $55,10 3 $29,852 $34,720 $31,335
Ratio to average net assets-(A)
Expenses (B) 1.61% 1.48% 1.65% 1.62% 1.82% 1.96%
Expenses-net (C) 1.58% 1.43% 1.50% 1.62% 1.82% 1.96%
Net investment income 0.72% 0.63% 0.38% 0.76% 1.23% 0.76%
Portfolio turnover rate 89.76% 108.36% 95.93% 98.80% 137.32 99.66%
Average brokerage commissions per share $0.0810 $0.0883 -- -- -- --
* Commencement of Operations was March 31, 1990; ratios are annualized.
(A) Management fee waivers reduced the expense ratios and increased net
investment income ratios by 0.02% in 1997, 0.04% in 1996, 0.06% in 1995 and
0.09% in 1990.
(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.
-6-
<PAGE>
Vontobel U.S. Value Fund
Continued
For a Share Outstanding Throughout Each Period
Mar. 30*
to
Years ended December 31, Dec. 31
Per Share Operating Performance 1991 1990
---- ----
Net asset value, beginning of period $ 8.86 $10.00
-------------------------------------------------------- ------
Income from investment operations-
Net investment income 0.07 0.14
Net realized and unrealized gain (loss) on
investments 3.23 (1.13)
---- -------
Total from investment operations 3.30 (0.99)
----- -------
Less distributions-
Distributions from net investment income (0.06) (0.15)
Distributions from realized gains on
investments (0.74) 0.00
------- -----
Total distributions (0.80) (0.15)
------- -------
Net asset value, end of period $11.36 $ 8.86
====== =======
Total Return 37.29% (9.90%)
====== =======
Ratios/Supplemental Data
Net assets, end of period (000's) 22,315 $9,488
Ratio to average net assets-(A)
Expenses (B) 2.54% 1.94%*
Expenses-net (C) 2.54% 1.94%*
Net investment income 0.92% 1.48%*
Portfolio turnover rate 166.46% 87.29%
Average brokerage commissions per share -- --
* Commencement of Operations was March 31, 1990; ratios are annualized.
(A) Management fee waivers reduced the expense ratios and increased net
investment income ratios by 0.04% in 1996, 0.06% in 1995 and 0.09% in 1990.
(B) Expense ratio has been increased to include additional custodian fees in
1996 and 1995 which were offset by custodian fee credits; prior to 1995
custodian fee credits reduced expense ratios.
(C) Expense ratio-net reflects the effect of the custodian fee credits the Fund
received.
-7-
<PAGE>
Vontobel International Equity Fund
For a Share Outstanding Throughout Each Period
Years ended December 31,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
Per Share Operating Performance
Net asset value, beginning of period $18.22 $17.13 $16.23 $17.22 $12.23 $12.67
------ ------ ------ ------ ------ ------
Income from investment operations-
Net investment income (0.03) 0.03 0.16 0.01 0.08 0.08
Net realized and unrealized gain
(loss) on investments 1.74 2.85 1.61 (0.92) 4.91 (0.38)
---- ---- ---- ------ ---- ------
Total from investment operations 1.71 2.88 1.77 (0.91) 4.99 (0.30)
---- ---- ---- ------ ---- ------
Less distributions-
Distributions from net investment
income 0.00 (0.03) (0.17) (0.08) 0.00 (0.08)
Distributions from realized gains (1.78) (1.76) (0.70) 0.00 0.00 0.00
Distributions in excess of realized
gains 0.00 0.00 0.00 0.00 (0.00) ( 0.06)
---- ---- ---- ---- ------ -----
Total distributions (1.78) (1.79) (0.87) (0.08) 0.00 ( 0.14)
------ ------ ------ ----- ---- -----
Net asset value, end of period $18.15 $18.22 $17.13 $16.23 $17.22 $12.23
====== ====== ====== ====== ====== ======
Total Return 9.19% 16.98% 10.91% (5.28)% 40.80% (2.37)%
Ratios/Supplemental Data
Net assets, end of period (000's) $160,821 $151,710 $130,505 $138,174 $136,932 $47,761
Ratio to average net assets-
Expenses (B) 1.56% 1.60% 1.63% 1.54% 1.77% 1.98%
Expenses-net (C) 1.50% 1.39% 1.53% 1.54% 1.77% 1.98%
Net investment income (0.17)% 0.15% 0.41% 0.08% 0.85% .79%
Portfolio turnover rate 38.45% 54.58% 68.43% 34.04% 10.66% 27.42%
Average commission rate paid per
share $0.0349 $0.0279 -- -- -- --
(A) Management fee waivers and expense reimbursements reduced the expense ratio
and increased the net investment income ratio by .07% in 1991.
(B) 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.
(C) Expense ratio-net reflects the effect of the custodian fee credits the Fund
received.
-8-
<PAGE>
Vontobel International Equity Fund
(continued)
Years Ended December 31,
1991 1990 1989(D) 1988(D)
---- ---- ------- -------
Per Share Operating Performance
Net asset value, beginning of period $10.67 $12.24 $11.17 $10.27
------ ------ ------ ------
Income from investment operations-
Net investment income .00 .02 (.09) (.03)
Net realized and unrealized gain
(loss) on investments 2.00 (1.54) 1.21 .96
---- ------ ---- -----
Total from investment operations 2.00 (1.52) 1.12 .93
---- ----- ---- -----
Less distributions-
Distributions from net investment income 0.00 ( 0.02) 0.00 0.00
Distributions from realized gains 0.00 0.00 0.00 0.00
Distributions in excess of realized gains 0.00 (.03) (.05) (0.03)
---- ----- ----- -----
Total distributions 0.00 (.05) (.05) (0.03)
---- ----- ----- ------
Net asset value, end of period $12.67 $10.67 $12.24 $11.17
====== ====== ====== ======
Total Return 18.74% (12.42)% 10.03% 9.06%
Ratios/Supplemental Data
Net assets, end of period (000's) $25,611 $10,074 $2,564 $2,732
Ratio to average net assets-
Expenses(B) 2.71%(A) 2.76% 2.99% 2.99%
Expenses-net(C) 2.71%(A) 2.76%(A) 2.99%(A) 2.99%(A)
Net investment income .02%(A) 0.25%(A) (.83%)(A) (.57%)(A)
Portfolio turnover rate 3.40% 60.87% 84.56% 18.60%
(A) Management fee waivers and expense reimbursements reduced the expense ratio
and increased the net investment income ratio by .69%, 3.11%, 5.03% and
1.00% in 1990, 1989, 1988 and 1987, respectively.
(B) Expense ratio has been increased to include additional custodian fees in
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.
(D) Periods during which the Fund was advised by other investment advisors. On
July 6, 1990, the Fund's current investment advisor was appointed and the
Fund's investment objective was changed to its current status.
-9-
<PAGE>
Vontobel Eastern European Equity Fund
For a Share Outstanding Throughout Each Period
Year ended February 15* to
December 31, 1997 December 31, 1996
----------------- -----------------
Per Share Operating Performance $14.89 $10.00
------ ------
Net asset value, beginning of period
Income from investment operations-
Net investment loss (0.19) (0.06)
Net realized and unrealized gain on investments 1.47 4.95
----- ----
Total from investment operations 1.28 4.89
----- ----
Less Distributions
Distributions from realized gains on investments (0.92) 0.00
------ ----
Net asset value, end of period 15.25 $14.89
===== ======
Total Return 8.70% 48.90%
Ratios/Supplemental Data
Net assets, end of period (000's) $139,408 $61,853
Ratio to average net assets-
Expense (A) 1.94% 2.02%**
Expense ratio-net (B) 1.66% 1.77%**
Net investment loss (1.30%) (1.07%)**
Portfolio turnover rate 105.86% 38.69%
Average commission rate paid per share $ 0.0963 $0.0737
* Commencement of Operations
** Annualized
(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.
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<PAGE>
Vontobel International Bond Fund
For a Share Outstanding Throughout Each Period
Years Ended December 31, March 1* to
December 31,
1997 1996 1995 1994
---------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of period $10.93 $10.60 $ 9.48 $10.00
------ ------ ------ ------
Income from investment operations-
Net investment income 0.61 0.47 0.61 0.70
Net realized and unrealized gain (loss) on
investments (1.27) 0.32 1.06 (0.50)
------ ------ ------ ------
Total from investment operations (0.66) 0.79 1.67 0.20
------ ------ ------ ------
Less distributions-
Distributions from net investment income - (0.40) (0.55) (0.70)
Distributions from realized gains on
investments (0.38) (0.06)
------ ------
Distributions in excess of net investment
income - -- -- (0.02)
------ ------ ------
Total distributions (0.38) (0.46) (0.55) (0.72)
-------- ------- -------
Net asset value, end of period $9.89 $10.93 $10.60 $ 9.48
===== ======= ====== ======
Total Return (6.04)% 7.51% 17.60% 1.98%
======= ====== ====== ======
Ratios/Supplemental Data
Net assets, end of period (000's) $10,793 26,879 $16,253 $10,235
Ratio to average net assets (A)
Expense (B) 1.60% 1.84% 1.76% 1.35%**
Expense ratio-net (C) 1.40% 1.52% 1.35% 1.35%**
Net investment income 5.92% 4.78% 5.38% 3.99%**
Portfolio turnover rate 0.00% 19.89% 18.63% 19.00%
* Commencement of Operations
** Annualized
(A) Mangement waivers reduced the expense ratios and increased the ratios of
net investment income by 0.60% in 1997, 0.20 in 1996, 1.00% in 1995 and
0.19% in 1994.
(B) Expense ratio has been increased to include additional custodian fees that
were offset by custodian fee credits, prior to 1995 custodian fee credits
reduced the expense ratio.
(C) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
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<PAGE>
Vontobel Emerging Markets Equity Fund
For a Share Outstanding Throughout Each Period
September 1, 1997* to
Dec. 31, 1997
Per Share Operating Performance
Net asset value, beginning of period $10.00
Income from investment operations-
Net investment income (0.04)
Net realized and unrealized gain (loss) on
investments (0.54)
Total from investment operations (0.58)
Net asset value, end of period $9.42
=====
Total Return (5.80%)
Ratios/Supplemental Data
Net assets, end of period (000's) $ 3,601
Ratio to average net assets (A)*
Expense (B) 2.41%**
Expense ratio-net (C) 2.20%**
Net investment income (1.42)%**
Portfolio turnover rate 16.36%
Average commssion rate paid per share $0.0145
* Commencement of Operations
** Annualized
(A) Management fee waivers reduced the expense ratio and increased net
investment income ratio of 1.25%. (B) Expense ratio has been increased to
include additional custodian fees which were offset by custodian fee credits.
(C) Expense ratio-net reflects the effect of the custodian fee credits.
-12-
<PAGE>
Vontobel Eastern European Debt Fund
For a Share Outstanding Throughout Each Period
September 1, 1997* to
Dec. 31, 1997
Per Share Operating Performance
Net asset value, beginning of period $10.00
Income from investment operations-
Net investment income 0.26
Net realized and unrealized gain (loss) on
investments (0.32)
Total from investment operations (0.06)
Less distributions
Distributions from net investment income (0.24)
Net asset value, end of period $9.70
=====
Total Return (0.55%)
Ratios/Supplemental Data
Net assets, end of period (000's) $14,438
Ratio to average net assets (A)*
Expense (A) 2.38%**
Expense ratio-net (B) 2.19%**
Net investment income 8.28%**
Portfolio turnover rate 0.00%
* Commencement of Operations
** Annualized
(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.
-13-
</TABLE>
<PAGE>
1997 PERFORMANCE
VONTOBEL U.S. VALUE FUND
The Value Fund produced a total return of 34.3% for the year, versus
the 33.4% return for the S&P 400 Stock Index with income. The Fund began the
year 70% invested (other than in cash and cash equivalents) as a result of the
Advisor's inability to find investments that offered both the potential for a
satisfactory return and a sufficient margin of safety in the third year of an
historically unprecedented, and increasingly speculative, bull market. During
the U.S. equity market's corrections in April, July and October 1997 the Advisor
was able to put its large cash reserve to work. Consistent with its investment
discipline, the Advisor trimmed positions as prices rose, and invested
aggressively in each correction, not, for the most part, by adding new names,
but by increasing holdings in the well-managed, predictable businesses that have
been the fund's mainstay over the past several years. In the fourth quarter,
investors around the world seemed to gravitate toward the apparent safety of the
U.S. and, furthermore, towards the kinds of stocks in which the fund seeks to
invest -- the excellent business franchises of Coca-Cola, Disney etc. Despite
the Fund's large fluctuating cash position throughout the year it the fund ended
the year less than 60% invested (other than in cash and cash equivalents) yet
still managed to outperform the general market and place among the top 6%
(41 of 624), 3% (13 of 402) and 23% (56 of 241) of growth and income equity
funds tracked by Lipper Analytical Services, Inc. over the last 1, 3 and 5
years, respectively.
VONTOBEL INTERNATIONAL EQUITY FUND
The International Equity Fund produced a total return of 9.2% for the
year, versus the 1.8% total return of the Morgan Stanley Capital International,
Europe, Australia, Far East Index. This performance placed the Fund among the
top 27% (119 of 426), 20% (51 of 257) and 29% (33 of 112) in the universe of
international equity funds tracked by Lipper Analytical Services over the last
1, 3 and 5 years, respectively. In 1997 excessive valuations throughout Asia
translated into a bear market in emerging markets worldwide. The Advisor's
recognition of overvaluation in the Far East had already led it to reduce the
fund's exposure to Asia/Pacific securities from 17.9% at year end 1995 to 9.9%
at year end 1996. The fund's exposure to the region was further reduced during
1997, and its sole position in Latin America, Brazil's Brahma, was sold for
profit in the fourth quarter, so that by year end the fund's total emerging
markets exposure was only 3.5%. In response to the Asian economic downturn, the
Adviser also cut back the fund's weighting in Japan by from 295 to 23.5% in
the second half. Despite the Japanese market's 30% drop in local currency,
the fund's total return in its Japanese holdings, all of which sell at a
substantial discount to the market, was positive. The fund's outperformance
of its benchmark and its peer group in 1997 can be attributed to its minimal
exposure to the Asian bear market; its overweighting in European markets,
which posted another year of solid gains; and its
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<PAGE>
emphasis on a margin of safety in stockpicking, focusing on companies with
long records of consistent growth in earnings, revenues, and
operating margins, high returns on equity relative to price to cash flow, and
healthy debt ratios. The value of the fund's portfolio was mostly hedged during
the year against a rallying U.S. dollar, which exhibited strength against
virtually all the major trading currencies of continental Europe and, in the
second half, the Japanese yen.
VONTOBEL EASTERN EUROPEAN EQUITY FUND
The E. European Equity Fund produced a total return of 8.8% for the
year, and ranked among the top 21% in the Lipper universe of emerging markets
equity funds. Nomura Research Institute's Eastern European Equity Index
(covering the Czech, Hungarian, Polish and Slovakian markets) suffered a 6.5%
decline in U.S. dollar terms. This index has no exposure to Russian, the
region's best-performing market. The Polish and Czech markets suffered heavy
outflows, the former due to concerns about the current account deficit and
earnings shortfalls, the latter in advance of that country's currency's
devaluation in May. The negative performance of these two markets offset the
spectacular gains made by the Russian and Hungarian markets until the Asian
contagion made itself felt in the third quarter. The collapse of the region's
markets, despite a lack of fundamental similarities with Asia, was unfortunate
but not surprising. In times of major crisis, investors "fly to quality" and
sell their holdings in emerging markets first. The Advisor believes that the
investment rationale for investing in Eastern Europe is intact, and that Asia's
problems will have no impact on the acceleration of domestic consumption in
Eastern Europe and its increased rapprochement with Europe. In anticipation of
continued high volatility, the Advisor has sold off small positions in
relatively illiquid issues and is focusing on building concentrated positions in
companies that not only meet its valuation criteria but those whose stock can be
easily traded.
VONTOBEL INTERNATIONAL BOND FUND
The Bond Fund declined by 6.0% for the year, vs. a 3.8% decline in the
J.P. Morgan Government Bond Index ex-U.S. The fund suffered no repercussions
from the financial crisis in Asia since it holds only high-investment-grade
issues and has no exposure to emerging markets debt. However, once again in 1997
the U.S. dollar's continued strength wiped out local currency gains in
international bonds for U.S.-dollar-based investors. In the last quarter, the
yield on 30-year U.S. Treasury bonds fell below 6% for the first time in nearly
three years. In Europe, convergence of bond yields in anticipation of European
Monetary Union had virtually become a fait accompli. Yield differentials between
the countries' bond markets principally reflected liquidity and risk premiums
relative to the quality of the underlying borrowers. With 10-year government
paper yielding under 2%, Japanese bonds remained unappealing; a weak economy, a
growing public sector deficit, record low interest rates and a weakening
currency do not bode well for fixed income investors. From a market and currency
allocation standpoint, the Advisor allocated some 40% of fund assets to the five
best-performing markets in local currency terms (U.K.,+14.85%, Italy,+14.45%,
Australia,+13%, Ireland,+12.73% and
-15-
<PAGE>
Spain,+ 10.9%). However, double-digit local currency returns did not compensate
for the appreciation of the U.S. currency, which rallied by over 10% against all
major currencies except the pound sterling and the Canadian dollar in 1997.
VONTOBEL EMERGING MARKETS EQUITY FUND
For the four-month period since its inception on September 1, 1997
through December 31, 1997, the Emerging Markets Equity Fund produced a
total return of -5.8%, versus the benchmark Morgan Stanley Capital Inter-
national's Emerging Markets Free Index (EMF) at -15.7%. The fund's first four
months of operation witnessed exceptional volatility in global emerging markets.
The crisis was triggered not by overvalued currencies but by a huge debt
build-up in Asia that had a spillover effect on global foreign exchange markets.
The Advisor had been steadily reducing its exposure to emerging Asian markets in
its international equity portfolios since the fall of 1996, due to 1) high
valuations relative to price-to-cash flow and debt-to-equity ratios, and 2) its
growing perception that Asian companies were feeling the strain of severe
competitive pressures. Therefore, when the Advisor launched the fund in
September, 1997, it limited its allocation to Asia/Pacific emerging markets to
only 14%, half the benchmark weighting. The Fund's outperformance of the
benchmark index and its peer group is attributable to its 50% underweight in
Asia/Pacific emerging markets, as well as the relatively modest valuation of its
holdings. On average, the fund's holdings at year end traded at about 14% Price
to Earnings with an average EPS growth profile of 20%. The Advisor focuses on
companies that have low gearings (debt to equity less than 0.5%), that generate
strong cash flow on a year-over-year basis, and that have strong leadership in
their industries.
VONTOBEL EASTERN EUROPEAN DEBT
The E. European Debt Fund posted a small loss of -.6% for the year. The
fund was launched on September 1, 1997, during a tumultuous period in global
securities markets. In reaction to the economic and financial crisis in Asia,
investors bolted out of Eastern European equity and debt markets, paying no heed
to the differing fundamentals between the regions. The biggest price drops were
suffered in US dollar- and D-mark-denominated bonds issued by Eastern European
issuers. Local currency issues, on the other hand, were scarcely affected by the
developments in the emerging markets debt universe. The participation of foreign
investors in most Eastern European bond/debt markets is quite small, except for
Russia and Ukraine. In Russia foreigners hold more than 30% of the $50 billion
market in Russian GKO's (T-bills). In Poland and Hungary, on the other hand,
foreigners hold only about 10% of the local debt market. Generally speaking,
Eastern European debt markets are dominated by local insurance companies and, to
a lesser extent, domestic pension funds. Because domestic players were not
forced to sell when the Asian flu infected world markets, Eastern European
markets held up
-16-
<PAGE>
quite well. The main exception was Russia, where ruble-denominated bonds were
badly hit as a result of rate hikes by the central bank. The rate increases were
a necessary defensive move to protect the currency, which came under pressure
after foreign investors began to sell both their equity and debt holdings. Given
that market and currency allocation are the principal drivers of bond market
returns, the fund's relatively good performance can be attributed to its
concentration in local currency government debt and lack of exposure to the
Russian market. 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- by
Standard & Poor's Ratings Group ("S&P"). In view of the benign inflation
outlook, Eastern European debt instruments remain an attractive asset class for
long-term investors seeking high interest income and added international
diversification.
THE FUNDS' INVESTMENTS AND POLICIES
VONTOBEL FUNDS, INC.
The Funds are series of Vontobel Funds, Inc. (the "Company"), an
open-end management investment company incorporated in Maryland in 1983. The
Company currently consists of six series, and the Board of Directors may elect
to add more series in the future. A minimum initial investment of $1,000 is
required to open a shareholder account in each Fund, and each subsequent
investment must be $50 or more.
The investment objective of each Fund is fundamental and may not be
changed without the approval of shareholders. The investment policies of each
Fund are not fundamental, however, and may be changed with the approval of the
Company's Board of Directors. All investments entail some risks and there is no
assurance that the investment objective of a Fund can be achieved. See "Special
Risk Considerations" below.
VONTOBEL U.S. VALUE FUND
Investment Objective. The investment objective of the Value Fund is to
seek to achieve long-term capital returns in excess of the broad market by
investing in a carefully selected, continuously managed non-diversified
portfolio of principally equity securities (including securities convertible
into equity securities, such as warrants, convertible bonds, debentures, or
convertible preferred stock) traded on U.S. exchanges. The Advisor uses the S&P
500 Index as the benchmark for the broad market against which the performance of
the Value Fund is measured.
Although the Value Fund's return will be compared to that provided by
the broad market, the Advisor does not utilize traditional relative valuation
measures, such as price to earnings or price to book value ratios. Rather, the
Advisor seeks to achieve attractive absolute returns over the "risk-free" rate,
defined as the rate of return available on 10-year U.S. government securities.
Stated alternatively, the Advisor's utilization of an "absolute" rather than a
"relative"
-17-
<PAGE>
valuation yardstick is designed to achieve not only a satisfactory return over
the risk-free rate but also at the same time safety of principal.
The Value Fund operates as a non-diversified fund for purposes of the
Investment Company Act of 1940, as amended (the "1940 Act"), but will seek to
qualify as a diversified investment company for purposes of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code").
Investment Policies. It is the policy of the Value Fund to invest
primarily in equity securities (common stocks or securities convertible into
common stocks) that are listed on a securities exchange or that have an
established over-the-counter market. The Value Fund may also include among its
holdings equity securities issued by non-U.S.-domiciled firms that are traded on
U.S. exchanges (such as American Depository Receipts and American Depository
Shares. While foreign securities have not historically comprised a significant
percentage of the Value Fund's assets, the Advisor believes that, in a world
in which a company headquartered in Atlanta, Georgia may generate 80% of
earnings in non-U.S. markets, while one based in Basel, Switzerland may
generate 35% of its earnings in North America, the capability to invest in non-
U.S.-domiciled companies is a logical outgrowth of the increasingly global
nature of today's multinational corporations.
It is not the intention of the Advisor to time the direction of the
market or to forecast future changes regarding interest rates or the economy. As
noted above, the Advisor seeks to achieve its investment objective by investing
principally in equity securities. Nonetheless, the Advisor may construct, and in
fact has constructed, a portfolio in which cash and cash equivalents (including,
but not limited to, overnight repurchase agreements and short-term U.S.
Treasuries), and/or fixed-income instruments, comprise a significant portion of
the Value Fund's total assets. The Advisor views its "cash position" as a
residual measure of the ability of its investment personnel to identify enough
stocks that meet their rigorous investment criteria. The Advisor believes that
its ability to hold cash has in the past reduced overall portfolio risk and
increased the effectiveness of its investment strategy by granting a high degree
of investment flexibility in actively managing the fund. As an equity fund, the
Value Fund will normally have at least 65% of its assets invested in common
stocks or securities convertible into common stocks.
Since the Value Fund seeks to achieve capital appreciation while
ensuring safety of principal, it will dispose of a security, regardless of the
time it has been held, to establish gains, to avoid anticipated reductions of
value, or to reduce or eliminate a position in a security which is no longer
believed to offer the potential for suitable gains. Portfolio turnover is
expected not to exceed an annual rate of 100% under normal circumstances. Such a
turnover rate may reflect substantial short term trading and corresponding
brokerage costs which the Value Fund must pay. A higher portfolio turnover rate
may result in additional brokerage commissions or expenses to the Value Fund.
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<PAGE>
The selection of the securities in which the Value Fund will invest
will not be limited to companies of any particular size, or to securities traded
in any particular marketplace, and will be based only upon the expected
contribution such securities would make to the investment objective. The Value
Fund may assume a temporary defensive posture. See "Additional Information on
Policies and Investments - Temporary Defensive Positions" below. For additional
information regarding investments and a description of additional permitted
investments, see "Additional Information on Policies and Investments."
The Value Fund is a "non-diversified" investment company under Federal
securities laws, and therefore may invest a larger portion of its assets in
certain issuers, including foreign governments and domestic issuers other than
the U.S. government. It may invest more than 5% of its assets in government debt
securities of the U.S. However, because it intends to qualify as a "regulated
investment company" for purposes of Subchapter M of the Code, at least 50% of
its total assets must be invested in cash, U.S. government securities, and
securities of issuers (including foreign governments), in which it has invested
not more than 5% of its assets. A regulated investment company is also limited
in its purchases of voting securities of any issuer.
Investment Strategy. In managing the Value Fund, the Advisor draws a
distinction between investment, i.e., an action that seeks safety of principal
and a satisfactory return, versus speculation, i.e., an action that may offer
significant return potential but that offers insufficient safety of principal.
The Advisor believes that the intrinsic value of any asset can be calculated by
discounting the estimated free cash flow generated by that asset over its
lifetime. This belief has led the Advisor to adopt a bottom-up approach that
stresses predictability, one in which the prevailing level of interest rates
provides a yardstick for determining absolute value independent of the level of
market indices. Eschewing many of the tenets of modern portfolio theory, the
Advisor considers the riskiness of an investment to be a function of the
company's business rather than the volatility of its stock price.
The Advisor employs a bottom-up approach to stock picking, with an
emphasis on qualitative criteria in evaluating a company's potential as a
prospective investment opportunity.
A valuation technique based upon the discounting of future cash flows
implies a high degree of reliance upon the estimates of future financial
results. The Advisor believes that the best beginning point to analyzing a
company's future is to review its past. Consequently, those companies that have
produced highly volatile returns and those with short operating histories do not
lend themselves to the Advisor's investment approach. Recognizing the tendency
of markets to overreact to both good news and to bad news, the Advisor, like
many value investors, often takes a contrarian stance to "momentum" managers.
Recognizing also the broader market's tendency to paint with the same brush all
companies within an industry group, the Advisor often finds itself significantly
overweighting out-of-favor market sectors.
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<PAGE>
Having determined that an investment opportunity may exist, the Advisor
reads company-provided materials and public filings and often will look at
materials developed by or related to the company's competitors. The Advisor also
may interview company management, and if the company is followed by brokerage
houses with which the Advisor does business, may also review brokerage firm
research. Most company interviews are by telephone, but personnel of the Advisor
also travel several times each year, visiting companies whose stock is held or
is under consideration, or which are competitors of such companies. In
evaluating a company's suitability as an investment vehicle, the Advisor takes
into account the following:
Predictability: No one can foretell the future with exactitude, but
some businesses are far more predictable than others. An asset cannot
be valued without some idea of the cash flows that asset will generate.
This desire for predictability has for the most part deterred the
Advisor from investing in fast-evolving industries (specifically,
computer technology) and has also deterred the Advisor from committing
capital to highly cyclical businesses.
Generation of Free Cash Flow: Free cash flow is the amount of money
available, after required capital spending, for reinvestment and/or
return to the owners of the business.
Adequate Returns: Those businesses not generating a competitive level
of return on invested capital are unsuitable as investments.
Low Debt: High leverage introduces a level of risk that is
unacceptable.
Elements of a Franchise: This provides a competitive advantage,
enabling high returns over extended periods of time.
Regulatory Environment: The less regulation to which a company is
subject, the better, as less regulation increases the company's ability
to manage and price effectively.
Shareholder-oriented Management: High insider ownership is one
indicator that management will act with the best interests of the
shareholders in mind. Intelligent prudent use of company funds is
another.
The Advisor considers companies that meet these qualitative hurdles
"investable".
A price target is generally reached by treating forecasted free cash
flow as an annuity, using prevailing interest rates as the discount factor. For
those companies in which the Advisor has an exceptional level of confidence, it
projects some level of cash flow growth, using either proprietary or consensus
forecasts. (Price targets may later be adjusted for significant changes in the
prevailing level of interest rates, and also may later be reviewed as
company-specific events dictate.)
-20-
<PAGE>
Generally, a new position will be established if the market price of a
security is 20% or more below calculated intrinsic value. Position size is
dictated by the Advisor's degree of confidence in the business and the stock's
degree of undervaluation, as well as the availability of attractive investment
alternatives. Position sizes normally range from 1% to 6% of portfolio assets,
but the Advisor has occasionally taken larger positions. Generally, portfolios
comprise approximately 20 positions.
A stock is sold for one of two reasons. Either it has reached the
target price or the thesis for purchase has deteriorated. Large positions are
trimmed as stocks approach sell targets. There is no automatic sell-down
percentage.
No conscious sector allocation decision is made. Sector allocation is
the result of stock selection. The Advisor believes that the Value Fund's status
as a non-diversified investment company is an important factor for consideration
by potential investors. The Advisor's ability to allocate up to 50% of the Value
Fund's assets in greater than 5% positions, thereby "concentrating" its
portfolio, may result in reduced risk, insofar as its investment personnel have
greater confidence in the investment worthiness of those securities purchased
and held by the Value Fund. Such concentration may, however, increase the
volatility of the Value Fund's net asset value in the short run.
VONTOBEL INTERNATIONAL EQUITY FUND
Investment Objective. The investment objective of the International
Equity Fund is to seek to achieve capital appreciation by investing in a
carefully selected and continuously managed diversified portfolio consisting
primarily of equity securities (including securities convertible into equity
securities, such as warrants, convertible bonds, debentures or convertible
preferred stock). The investments of the International Equity Fund will consist
principally of equity securities of European and Pacific Basin countries.
Investment Policies. The International Equity Fund is designed as a
core holding for individuals and institutions who wish to diversify their
investment programs to take advantage of opportunities in international
securities markets, with the principal emphasis on opportunities in Europe and
the Pacific Basin. Investing in the International Equity Fund can provide
international diversity to an investor's existing portfolio of U.S. equity
securities and U.S. dollar and foreign currency denominated bonds, thereby
improving risk-adjusted returns. The International Equity Fund will invest most
of its assets in equity securities of countries which are generally considered
to have developed markets, such as the United Kingdom, Germany, France, the
Netherlands, Switzerland, Norway, Spain, Japan, Hong Kong, Australia, and
Singapore. The Advisor will decide when and how much to invest in each of those
markets. Investments may also be made in equities issued by companies in
"developing countries" or "emerging markets", such as Taiwan, Malaysia,
Indonesia, and Brazil, included in Morgan Stanley Capital International's
Emerging Markets Free Index ("EMF") Investments in the equity markets of these
countries involves exposure to economic structures that are generally less
diverse and mature, and whose political systems may have less stability than
those of "developed
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<PAGE>
countries". Subject to investment limitations stated in the Statement of
Additional Information, the International Equity Fund may invest in the shares
of open-end and closed-end investment companies that acquire equity securities
of foreign issuers in which the Fund may invest. By investing in shares of such
investment companies, the Fund would indirectly pay a portion of the operating
expenses, management expenses, and brokerage costs of such companies, as well as
those of the Fund. Federal and state securities laws impose limits on such
investments with which the Fund will comply, and may affect the ability of the
Fund to acquire or dispose of such shares.
The Advisor believes that global economic and political developments
have created new opportunities in an enlarged investment universe. In recent
years a number of economies in developed and emerging countries have grown
faster than the U.S. economy, and return on equity investments in these markets
has often been superior to similar investments in the U.S. In addition, the U.S.
stock market presently represents approximately 40% of the capitalization of the
world's stock markets compared to approximately two-thirds in 1970. Significant
growth of international capital markets, coupled with advances in technology and
lower cost of communications, have increased the globalization of securities
trading. Therefore, over the past few years, the number of investment
opportunities outside the U.S. has grown rapidly.
It is the policy of the International Equity Fund to invest primarily
in equity securities which may achieve capital appreciation by selecting
companies with superior potential based on a series of macro and micro analyses.
The International Equity Fund may select its investments from companies which
are listed on a securities exchange or from companies whose securities have an
established over-the-counter market, and may make limited investments in "thinly
traded" securities (please refer to "Investment Restrictions" in the Statement
of Additional Information).
Under normal circumstances the International Equity Fund will have at
least 65% of its assets invested in European and Pacific Basin equity
securities. The International Equity Fund intends to diversify broadly
investments among countries and normally to have represented in the portfolio
business activities of not less than three different countries. The securities
the International Equity Fund purchases may not always be purchased on the
principal market. For example, American Depository Receipts ("ADRs") may be
purchased if trading conditions make them more attractive than the underlying
security. ADRs are receipts typically issued in the U.S. by a bank or trust
company evidencing ownership of an underlying foreign security. The
International Equity Fund may invest in ADRs which are structured by a U.S. bank
without the sponsorship of the underlying foreign issuer. In addition to the
risks of foreign investment applicable to the underlying securities, such
unsponsored ADRs may also be subject to the risks that the foreign issuer may
not be obligated to cooperate with the U.S. bank, may not provide additional
financial and other information to the bank or the investor, or that such
information in the U.S. market may not be current. Please refer to the Statement
of Additional Information for more information on ADRs.
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<PAGE>
The selection of the securities in which the International Equity Fund
will invest will not be limited to companies of any particular size, or to
securities traded in any particular marketplace, and will be based only upon the
expected contribution such security will make to its investment objective.
Since the International Equity Fund seeks to achieve capital
appreciation, it will dispose of a security, regardless of the time it has been
held, to establish gains, to avoid anticipated reductions of value, or to reduce
or eliminate a position in a security which is no longer believed to offer the
potential for suitable gains. Portfolio turnover is expected not to exceed an
annual rate of 100% under normal circumstances. Such a turnover rate may reflect
substantial short term trading and corresponding brokerage costs which the
International Equity Fund must pay.
The International Equity Fund may enter into forward contracts to
purchase or sell foreign currencies, purchase and write covered call options on
foreign currencies and enter into contracts for the purchase or sale for future
delivery of foreign currencies ("foreign currency futures") as described in
"Additional Information on Policies and Investments - Strategic Transactions"
below. The International Equity Fund may assume a temporary defensive posture.
See "Additional Information on Policies and Investments - Temporary Defensive
Positions" below. For additional information regarding investments and a
description of additional permitted investments, see "Additional Information on
Policies and Investments."
Investment Strategy. Using an approach that involves top-down country
allocation combined with bottom-up stock selection, the Advisor will seek to
identify countries where economic and political factors are likely to provide
above average returns, and companies in such countries that are best positioned
in their respective industries and are attractively valued. In this regard the
Advisor will allocate the assets of the International Equity Fund principally
between the European and Pacific regions.
The Advisor's approach is governed by its belief that the principal
factors affecting an equity market's return are, on a country allocation basis,
the proportion of liquidity in the economy, and, on a stock selection basis,
consistent profit growth, a strong balance sheet and high returns on employed
capital and, in addition, that the effect of currency fluctuations on portfolio
returns can be reduced through a systematic hedging strategy.
For its country allocation, the Advisor analyzes approximately 35
international equity markets, which include the 20 markets currently comprised
in Morgan Stanley Capital International's Europe, Australia and Far East Index
("EAFE"), as well as the constituent countries of its EMF. The Advisor also
gives consideration to such factors as market liquidity, accessibility to
foreign investors, regulatory protection of shareholders, accounting and
disclosure standards, transferability of funds and foreign exchange controls, if
any.
The tendency of markets to overreact to short-term factors such as
monthly inflation data or quarterly earnings results creates market valuations
that may deviate significantly from their underlying historical values. The
country allocation process aims to determine the relative
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<PAGE>
attractiveness of the markets in the Advisor's country universe by establishing
a relationship between their current valuations and the amount of liquidity
available in their respective economies and then comparing that relationship
with its historic norm. The rigorous use of comparative historical data is
designed to reduce subjective and speculative bias.
The Advisor's country allocation process is guided by the output of a
valuation model that produces a total expected return range in local currency
for each country in the Advisor's investment universe. The data series used in
the valuation model covers extended periods of market history for the EAFE and
EMF universe. The Advisor has backtested the reliability of the principal
factors used in the valuation model which, in combination, have historically
proven to have statistically significant predictive power. These factors broadly
fall into the following categories: macroeconomic indicators, valuation
indicators and market-specific factors.
Each factor is assigned a numerical value based on a scale determined
by the historic ranges. Based on the arithmetical sum of all such values, an
attractiveness ranking for each country in the Advisor's universe is produced on
a quarterly basis. The use of three different sets of variables in combination
results in a higher degree of predictability of the valuation model's output.
Generally, the factors are equally weighted. In a few instances a double weight
is assigned if the predictive power of a particular factor has historically been
very high, like yield curve analysis, which is relevant in all markets.
The valuation model's total return expectations provide a relative
ranking in descending order of attractiveness of all countries in the Advisor's
universe. It is not the Advisor's approach to make country "bets" by, for
example, significantly overweighting those countries showing the highest
expected return based on the output of the Advisor's valuation model. Rather,
the Advisor normalizes the distribution of country weights through the use of a
proprietary risk-variance matrix that establishes for each market a
minimum/maximum weight relative to the benchmark (EAFE). Since the Advisor's
country allocation valuation model cannot take into account exogenous events
impacting country stock market returns such as political events, social unrest
and currency turmoil, this matrix serves for risk control purposes.
Before a decision is made to increase or lower a country weight based
on the quantitative output of the valuation model, the Advisor reviews the
country's fundamental economic data that are not part of the country screening
process as well as its political situation. This systematic qualitative analysis
focuses on such macroeconomic data as GDP growth, external trade balances,
current account and balance of payments, external debt position and debt service
ratios, foreign reserve position, ability to finance deficits in external
accounts, fiscal and exchange rate policies, private and public savings rates,
as well as inflationary trends.
The Advisor believes this approach to be more useful than a rigid
discipline that ties the magnitude and timing of shifts in country weights
directly to changes in the expected returns for each country produced by the
Advisor's valuation model since the Advisor does not employ portfolio
optimization techniques.
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<PAGE>
Normally, the Fund will tend to be fully invested. International equity
markets have historically demonstrated low correlation with one another, so it
is extremely unlikely that the model would produce simultaneously negative total
return expectations for a large number of countries in the Advisor's universe so
as to trigger a significant temporary defensive move to cash.
For stock selection within each country, the Advisor seeks to invest in
large- and medium-capitalization companies that have a long record of successful
operations in their core business and earnings growth through increasing market
share and unit sales volumes. Typically they occupy a leading position in their
industry, have demonstrated a high degree of self-financing and have
consistently generated free cash flow.
The Advisor's stock selection process begins by screening a universe of
approximately 3000 stocks in a market capitalization range from approximately
$500 million to approximately $100 billion. The Advisor's screens are designed
to be representative of each market and generally cover a broad cross-section of
companies which together account for about 70% of total market capitalization.
The Advisor's approach is to look at companies whose growth factors can be
measured and compared. The Advisor's data series focus on low price to sales
ratios, consistent earnings growth, consistent operating margins, high returns
on equity relative to price to cash flow, and healthy debt ratios. The Advisor
defines cash flow as recurrent net profit plus depreciation. Furthermore, the
Advisor analyzes the share price in relation to earnings before interest, taxes,
depreciation and amortization, and looks at the underlying trend of cash and
retained earnings. The screens, comprising multiple valuation ratios, are used
to ensure rigor and consistency in the Advisor's bottom-up research.
The Advisor supplements the above quantitative screening process by an
analysis of certain qualitative criteria, one of the most important of which is
to identify strong, stable and reliable management that maintains a company's
market position through consistent unit volume growth and gains in market share
rather than a reliance on price increases, exercises tight financial control and
fosters a culture of market responsiveness.
Based on the Advisor's ranking of approximately 3000 stocks in about 35
different international equity markets, the Advisor usually selects names which
appear in the top third of the quantitative screens for each country. Based on
the screening factors, these stocks typically show low historical deviations of
annual earnings, high returns on equity and low debt levels. Position size at
purchase ranges from about 0.7% to 1% of total portfolio assets. Within this
range position size varies in proportion to the market capitalization of the
company within a given country's stock market. The Advisor normally allows
positions to reach a maximum of approximately 5% of total assets.
Shifts in country weight are the principal cause for selling stocks.
Stocks are sold if a country's maximum weight based on the risk-variance matrix
has been exceeded. The Advisor may trim or sell positions if a name drops from
the top third of its quantitative screens due to price appreciation or if a
company's fundamentals have deteriorated.
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<PAGE>
Within each country, no conscious sector allocation decision is made.
Sector allocation is the result of the stock selection within each country.
The holding periods of the Fund's core holdings generally exceed one
year.
For active currency risk management, the Advisor employs a systematic
currency hedging approach based on a technical-trend-following model.
VONTOBEL EMERGING MARKETS EQUITY FUND
Investment Objective. The investment objective of the Emerging Markets
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 (including securities convertible into equity
securities, such as warrants, convertible bonds, debentures or convertible
preferred stock). The investments of the Emerging Markets Fund will consist
principally of equity securities of issuers in developing countries around the
world.
Investment Policies. The Emerging Markets Fund is designed for
individuals and institutions who wish to diversify beyond their holdings of
equities issued by companies whose principal offices are located in countries
with developed equity markets which generally includes the constituent countries
of the EAFE, each a developed market country. Investing in the Emerging Markets
Fund can provide international diversity to an investor's existing portfolio of
U.S. and international equity securities and U.S. dollar and foreign currency
denominated bonds, thereby seeking to reduce volatility or risk over time. The
Emerging Markets Fund will invest most of its assets in equity securities of
countries which are considered to have developing equity markets. The Emerging
Markets Fund considers countries having developing markets to be all countries
included in the EMF, generally considered to be developing or emerging markets
countries by the International Bank for Reconstruction and Development (more
commonly referred to as the World Bank) or the International Finance
Corporation, as well as countries that are classified by the United Nations or
otherwise regarded by their authorities as developing. Currently, the countries
not in this category include Ireland, Spain, New Zealand, Australia, the United
Kingdom, Italy, the Netherlands, Belgium, Austria, France, Canada, Germany,
Denmark, the United States, Sweden, Finland, Norway, Japan, Iceland, Luxembourg
and Switzerland. In addition, as used in this prospectus, emerging markets
equity securities means (i) equity securities of companies that the principal
securities trading market for which is an emerging market country, as defined
above, (ii) equity securities traded in any market, of companies that derive a
substantial portion of their total revenue or potential revenue from either
goods or services produced in developing countries or sales made in emerging
market countries, or (iii) equity securities of companies organized under the
laws of, and with a principal office in, an emerging market country. Subject to
investment limitations stated in the Statement of Additional Information, the
Emerging Markets Fund may invest in shares of open and closed-end investment
companies that acquire equity securities of issuers in emerging markets in which
the Fund may invest. By investing in shares of such investment companies, the
Fund would indirectly pay a portion of the operating expenses, management
expenses, and brokerage costs
-26-
<PAGE>
of such companies, as well as those of the Fund. Federal securities laws impose
limits on such investments with which the Fund will comply, and may affect the
ability of the Fund to acquire or dispose of such shares.
The Advisor believes that global economic and political developments
have helped to create new investment opportunities. In recent years some
economies in developing countries have grown faster than economies in
industrialized countries, and some returns on equity investments in some of
these countries have been superior to similar investments in the U.S. or
industrialized countries. In addition, the share of global stock market
capitalization accounted for by emerging markets currently amounts to
approximately 15% which compares to currently 40% for the U.S. equity markets
and about 45% for the developed countries.
It is the policy of the Emerging Markets Fund to invest primarily in
equity securities which may achieve capital appreciation by selecting companies
with superior potential based on a series of macro and micro economic analyses.
The Emerging Markets Fund may select its investments from companies which are
listed on a securities exchange or from companies whose securities have an
established over-the-counter market, and may make limited investments in "thinly
traded" securities. (Please refer to "Investment Restrictions" in the Statement
of Additional Information).
Under normal circumstances the Emerging Markets Fund will have at least
65% of its total assets invested in developing countries around the globe. The
Emerging Markets Fund intends to diversify investments broadly among countries
and normally to have represented in the portfolio business activities of not
less than three different countries. It is anticipated that the Emerging Markets
Fund will invest in three or more of the countries in the following list, which
is meant to be representative and not exhaustive:
Argentina
Brazil
Chile
China
Colombia
Czech Republic
Egypt
Ghana
Greece
Hong Kong
Hungary
India
Indonesia
Israel
Malaysia
Mexico
Pakistan
Panama
Peru
Philippines
Poland
Portugal
Russia
Singapore
South Africa
South Korea
Sri Lanka
Taiwan
Thailand
Turkey
Venezuela
The securities the Emerging Markets Fund purchases may not always be
purchased on the principal market of the country. For example, ADRs, European
Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") or Registered
Depository Certificates ("RDC")
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<PAGE>
may be purchased if trading conditions make them more attractive than the
underlying security. ADRs are described above in the "Vontobel International
Equity Fund" section. Similar to ADRs, EDRs, GDRs and RDCs represent receipts
for a foreign security issued in a location outside the U.S., and may involve
risks comparable to ADRs, as well as the fact that the EDR, GDR or RDC is itself
issued outside the U.S. RDCs involve risks associated with Russian securities
transactions. Please refer to the Statement of Additional Information for more
information on ADRs, EDRs, GDRs and RDCs.
The selection of the securities in which the Emerging Markets Fund will
invest will not be limited to companies of any particular size, or to securities
traded in any particular marketplace, and will be based only upon the expected
contribution such security will make to its investment objective.
Since the Emerging Markets Fund seeks to achieve long-term capital
appreciation, it will dispose of a security, regardless of the time it has been
held, to establish gains, to avoid anticipated reductions in value, or to reduce
or eliminate a position in a security which is no longer believed to offer the
potential for suitable gains.
The Emerging Markets Fund may invest in securities that are neither
listed on a stock exchange nor traded over-the-counter, including privately
placed securities. Such unlisted equity securities may involve a higher degree
of business and financial risk that can result in substantial losses. As a
result of the absence of a public trading market for these securities, they may
be less liquid than publicly traded securities. The Fund may not invest in such
securities that are deemed to be illiquid in excess of 15% of the Fund's net
assets. Securities that are restricted from sale to the public without
registration ("Restricted Securities") under the Securities Act of 1933, as
amended (the "1933 Act"), are deemed illiquid, except that Restricted Securities
that can be offered and sold to qualified institutional buyers pursuant to Rule
144A under the 1933 Act may be deemed liquid under guidelines adopted by the
Board of Directors of the Company. The Fund may assume a temporary defensive
posture. See "Additional Information on Policies and Investments - Temporary
Defensive Positions" below. For additional information regarding investments and
a description of additional permitted investments, see "Additional Information
on Policies and Investments."
Investment Strategy. The investment objective of the Emerging Markets
Fund reflects the Advisor's belief that investment opportunities may result from
an evolving long-term international trend favoring more market-oriented
economies, a trend that may especially benefit certain countries having emerging
markets. This trend may be facilitated by local or international political,
economic or financial developments that could benefit the capital markets of
such countries. Certain such countries, which may be in the process of
developing more market-oriented economies, may experience relatively high rates
of economic growth. Other countries, although having relatively mature emerging
markets, may also be in a position to benefit from local or international
developments encouraging greater orientation and diminishing governmental
intervention in economic affairs.
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<PAGE>
The Advisor's emerging markets equity approach is governed by its
belief that the principal factors affecting an equity market's returns are, on a
country allocation basis, the proportion of liquidity in the economy, and on a
stock selection basis, the growth of recurrent cash flow from operations. The
Advisor's investment approach involves two steps: (i) top-down country
allocation; and (ii) bottom-up stock selection. The Advisor does not currently
actively manage currency risk.
The Advisor currently analyzes the equity markets of developing or
emerging markets countries as described above in "Investment Policies". The
Advisor also gives consideration to such factors as liquidity, accessibility to
foreign investors, regulatory protection of shareholders, accounting and
disclosure standards, transferability of funds and exchange controls, if any.
The tendency of markets to overreact to short-term factors such as
monthly inflation data or quarterly earnings results creates market valuations
that may deviate significantly from their underlying historical values. The
country allocation process aims to determine the relative attractiveness of the
markets in the Advisor's country universe by establishing a relationship between
their current valuations and the amount of liquidity available in their
respective economies, and then comparing that relationship with its historical
norm. The rigorous use of comparative historical data tends to reduce subjective
and speculative bias.
The Advisor's country allocation process is guided by the output of a
valuation model that produces a total expected return range in local currency
for each country in the Advisor's investment universe. The data series used in
the valuation model covers extended periods of market history for the EMF
universe. These factors broadly fall into the following categories:
macroeconomic indicators, valuation indicators and market-specific factors. The
Advisor has backtested the reliability of the principal factors which, in
combination, have historically proven to have statistically significant
predictive power.
The Advisor supplements the quantitative analysis by an analysis of a
country's current and expected level of economic activity based on the conduct
of monetary and fiscal policy combined with ongoing evaluation of the underlying
economic dynamics created by short- and long-term investment flows.
The valuation model's total return expectations produce a relative
ranking in descending order of attractiveness of all countries in the Advisor's
universe.
It is not the Advisor's approach to make country "bets" by, for
example, significantly overweighting those countries showing the highest
expected return based on the output of the Advisor's valuation model. Rather,
the Advisor normalizes the distribution of country weights through the use of a
proprietary risk-variance matrix that establishes for each market a
minimum/maximum weight relative to the benchmark (EMF). Since the Advisor's
country allocation valuation model cannot take into account exogenous events
impacting country stock market returns such as political events, social unrest
and currency turmoil, this matrix serves for risk control purposes.
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<PAGE>
Before a decision is made to increase or lower a country weight based
on the quantitative output of the valuation model, the Advisor reviews the
country's fundamental economic data that are not part of the country screening
process as well as its political situation. This systematic qualitative analysis
focuses on such macroeconomic data as GDP growth, external trade balances,
current account and balance of payments, external debt position and debt service
ratios, foreign reserve position, ability to finance deficits in external
accounts, fiscal and exchange rate policies, private and public savings rates,
as well as inflationary trends.
The Advisor believes this approach to be more useful than a rigid
discipline which ties the magnitude and timing of shifts in country weights
directly to changes in the expected returns for each country produced by the
Advisor's model since the Advisor does not employ portfolio optimization
techniques.
Generally, the Fund tends to be fully invested. International equity
markets have historically demonstrated low correlation with one another, so it
is extremely unlikely that the Advisor's model would produce simultaneously
negative total return expectations for a large number of the countries in the
emerging markets universe so as to trigger a significant temporary defensive
move to cash.
Within each country in the Advisor's universe, the Advisor seeks to
invest in large- to medium-capitalization companies with solid prospects for
consistent and sustainable annual earnings growth. The Advisor's focus is on
companies that have a long record of successful operations in their core
business and earnings growth through increasing market share and unit sales
volumes. Typically, these companies occupy a leading position in their industry,
have demonstrated a high degree of self-financing and have consistently
generated free cash flow.
The Advisor's stock selection process begins by screening a universe of
approximately 2500 stocks in a market capitalization range generally in excess
of US $100 million. The Advisor's screens are designed to be representative of
each market and generally cover a broad cross-section of companies which
together account for about 70% of total market capitalization. The Advisor's
approach is to look at companies whose growth factors can be reliably measured
and compared. The Advisor's data series focus on low price to sales ratios,
consistent earnings growth and operating margins, high returns on equity
relative to price to cash flow, and healthy debt ratios. The Advisor defines
cash flow as recurrent net profit plus depreciation. Furthermore, the Advisor
analyzes the share price in relation to earnings before interest, taxes,
depreciation and amortization ("EBITDA"), and looks at the underlying trend of
cash and retained earnings. The screens, comprising multiple valuation ratios,
are used to ensure rigor and consistency in the Advisor's bottom-up research.
The Advisor supplements the quantitative screening process by an
analysis of certain qualitative criteria, one of the most important of which is
to identify strong, stable and reliable management that maintains a company's
market position through consistent unit volume growth and gains in market share
rather than a reliance on price increases, exercises tight financial control and
creates a culture of market responsiveness.
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<PAGE>
Based on the Advisor's ranking of approximately 2500 stocks in emerging
markets, the Advisor concentrates the Fund's holdings on names which usually
appear in the top third of the Advisor's equity screens for each country. Based
on the Advisor's screening factors, these stocks typically show low historical
deviations of annual earnings, high returns on equity and low debt levels. At
initial purchase, the Advisor focuses on companies that are selling at a
discount to their long-term growth rate.
Shifts in country weight are the principal cause for selling stocks.
Stocks are sold if a country's maximum weight based on the risk-variance matrix
has been exceeded. The Advisor may trim positions if a name drops from the top
third of its quantitative screen due to price appreciation or if a company's
fundamentals have deteriorated.
Within each country, no conscious sector allocation decision is made.
Sector allocation is the result of the Advisor's stock selection within each
country.
Position size at purchase ranges from approximately 0.5% to 1.0% of the
Fund's total assets. Within this range position size varies in proportion to the
market capitalization of the company within a given country's stock market. The
Advisor allows positions to reach a maximum of 5% of the Fund's total assets.
VONTOBEL EASTERN EUROPEAN EQUITY FUND
Investment Objective. The investment objective of the E. European
Equity Fund is to seek to achieve capital appreciation by investing in a
carefully selected and continuously managed diversified portfolio consisting
primarily of equity securities (which are securities convertible into equity
securities, such as warrants, convertible bonds, debentures or convertible
preferred stock). The investments of the Fund will consist principally of equity
securities of Eastern European countries.
Investment Policies. The Fund is designed for individuals and
institutions who wish to diversify their investment programs in international
equities to take advantage of opportunities in the newly reorganized capital and
securities markets of Central/Eastern Europe. The Fund normally will invest at
least 65% of its assets in equity securities of companies located in or which
conduct a significant portion of their business in countries which are generally
considered to comprise Eastern Europe, i.e., the member countries of the former
Warsaw Pact, including the European successor states of the former Soviet Union.
Currently, the Fund invests principally in Hungary, the Czech Republic, Poland
and Russia. These countries are already at a relatively advanced stage in their
transition to a market-based economy. The Advisor believes that their relatively
well developed capital and stock markets can handle transactions of a large
enough size to permit fund investment. However, trading volume of the stock
exchanges of these markets may be substantially lower than that in developed
markets, and the purchase and sale of portfolio securities may not always be
made at an advantageous price. The
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<PAGE>
Advisor generally will decide when and how much to invest in these developing
markets based upon its assessment of their continuing development.
As stock markets in the region develop and more investment
opportunities emerge, the Fund will broaden its portfolio to include securities
of companies located in or which conduct a significant portion of their business
in countries in this region. As noted above, investments in equity securities
issued by companies in these "developing countries" or "emerging markets",
involve exposure to economic structures that are generally less diverse and
mature, with political systems which may have less stability than those of
"developed countries".
The Advisor believes that economic and political developments in Europe
have helped to create new opportunities. In recent years a number of economies
in developed and developing countries have grown faster than the U.S. economy,
and the return on equity investments in these markets has often been superior to
similar investments in the U.S. In addition, the U.S. stock market presently
represents approximately 40% of the capitalization of the world's stock markets
compared to approximately two-thirds in 1970. Significant growth of European
securities markets, coupled with advances in technology and lower cost of
communications, have increased the globalization of securities trading.
Therefore, over the past few years, the number of investment opportunities
outside of the U.S. has grown rapidly. Despite this trend, however, Central and
Eastern European stocks are generally underrepresented in investment portfolios.
Therefore, the Fund offers a means to achieve equity exposure to this region.
It is the policy of the Fund to invest primarily in equity securities
which may achieve capital appreciation by selecting companies with superior
potential based on a series of macro and micro economic analyses. The Fund may
select its investments from companies which are listed on a securities exchange
or from companies whose securities have an established over-the-counter market,
and may make limited investments in "thinly traded" securities (please refer to
the "Investment Restrictions" in the Statement of Additional Information).
The Fund may invest in other investment companies which invest in
Eastern European stocks. By investing in shares of such investment companies
which invest exclusively in such countries, the Fund would indirectly pay a
portion of the operating expenses, management expenses, and brokerage costs of
such companies, as well as those of the Fund. Federal and state securities laws
impose limits on such investments with which the Fund will comply, and may
affect the ability of the Fund to acquire or dispose of such shares.
The Fund intends to diversify investments broadly among countries and
normally will have represented in the portfolio business activities of not less
than three different countries. The securities the Fund purchases may not always
be purchased on the principal market. For example, ADRs, EDRs or GDRs may be
purchased if trading conditions make them more attractive than the underlying
security. ADRs are described above in the "Vontobel International Equity Fund"
section and EDRs and GDRs are described above in the "Vontobel Emerging Markets
Equity Fund" section.
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<PAGE>
For temporary defensive purposes, the Fund may hold cash or debt
obligations denominated in U.S. dollars or foreign currencies. These debt
obligations include U.S. and foreign government securities and investment grade
corporate debt securities, or bank deposits of major international institutions.
The selection of the securities in which the Fund will invest will not
be limited to companies of any particular size, or to securities traded in any
particular marketplace, and will be based only upon the expected contribution
such security will make to its investment objective.
Since the Fund seeks to achieve capital appreciation, it will dispose
of a security, regardless of the time it has been held, to establish gains, to
avoid anticipated reductions of value, or to reduce or eliminate a position in a
security which is no longer believed to offer the potential for suitable gains.
Portfolio turnover is expected not to exceed an annual rate of 100% under normal
circumstances. Such a turnover rate may reflect substantial short term trading
and corresponding brokerage costs which the Fund must pay.
The E. European Equity Fund may enter into forward contracts to
purchase or sell foreign currencies, purchase and write covered call options on
foreign currencies and enter into contracts for the purchase or sale of foreign
currency futures as, described in "Additional Information on Policies and
Investments - Strategic Transactions" below.
The E. European Equity Fund may assume a temporary defensive posture.
See "Additional Information on Policies and Investments - Temporary Defensive
Positions" below. For additional information regarding investments and a
description of additional permitted investments, see "Additional Information on
Policies and Investments."
Investment Strategy. The Advisor will seek to identify those countries
in the Central/Eastern European region where economic and political factors are
likely to produce above average long term returns, as well as those companies in
such countries that are best positioned to take advantage of such developments
or are most attractively valued. The Fund's assets will be allocated primarily
to the equity markets of those countries whose economies are likely to benefit
from strengthening macroeconomic forces as a result of their transition from a
centrally planned to a market-based economy, the orderly functioning of
democratized political institutions, flexible and viable economic policies,
persistent privatization efforts, modernized legal, banking and regulatory
frameworks, as well as from widespread domestic and foreign support for their
respective national policies.
The Advisor's approach is governed by its belief that (i) economic
growth and an improving macro economic situation in the nations of Eastern
Europe will translate into growth in the stock market; (ii) well managed
companies will outperform the markets in the long term; and (iii) assessment of
the quality of management is the key element in stock selection.
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<PAGE>
The Advisor's investment universe consists of companies that are
located in, or listed on the exchanges of, the former COMECON1 countries, as
well as companies that derive at least two-thirds of their sales from such
countries. Not all these countries have a functioning stock exchange and others
still have an illiquid securities market; consequently, the Advisor concentrates
on the markets of Hungary, Poland, Russia, the Czech Republic, Slovakia and
Croatia. In the Visegrad-4 countries,2the Advisor can invest in local shares.
Elsewhere, due to the lack of local subcustodians or liquidity, the Advisor
currently invests only through GDR or ADR programs. Currently, the Advisor
considers only about 300 stocks as investable, based upon their market
capitalization and liquidity. The Advisor expects this number to increase
dramatically in the years to come. Together, these 300 stocks represent a market
capitalization of approximately US$ 100 billion.
Financial analysis is particularly difficult in Eastern Europe for two
reasons. First, the reopening of the stock exchanges is relatively recent;
therefore, companies have short operating histories and hence no historical
record of audited financial statements. Second, in these transition economies
where the environment changes very rapidly, the problems a company faces today
can be completely different from those it encounters within a few years.
Therefore, while the Advisor's investment process begins by making and updating
assumptions on the country and the sector, the Advisor believes that qualitative
criteria are more important than quantitative ones in investing in companies in
these transition economies.
The Advisor's investment process comprises the following steps:
Country Forecasts: On an ongoing basis, the Advisor analyzes the
variables that can impact corporate results, such as consumption growth,
inflation, currency and interest rates and evolution in wage growth.
Financial statement analysis: Only a few Eastern European companies
publish financial statements of the same quality as those of their Western
peers. Therefore, the Advisor closely analyzes the published figures with a view
to answering the following questions: Is the company employing any devices in an
effort to disguise financial risks? What is the company's financial strength?
Qualitative analysis: Wherever possible, the Advisor meets with
management to ascertain the progress of the company in achieving its articulated
strategy and whether management statements correspond to the company's
financials.
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1Albania, Belarus, Bosnia, Bulgaria, Croatia, Czech Republic,
Estonia, Hungary, Latvia, Lithuania, Macedonia, Moldova, Poland,
Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine.
2Poland, Hungary, Czech Republic and Slovakia
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Company forecasts: The Advisor forecasts company earnings for the next
three years, based on country, sector and company-specific assumptions. Due to
fast-changing economic conditions, the Advisor believes that forecasting for
longer periods is a hazardous exercise. The Advisor uses its forecasts to help
to construct profit and loss, balance sheet and cash flow statements, which in
turn provide the basis for calculating the following key valuation indicators:
earnings per share, cash flow per share, book value per share and dividend
yield. The size of its investment universe precludes the Advisor from producing
its own forecasts for all 300+ companies. However, the Advisor does produce
proprietary forecasts for the Fund's 20 largest positions, the major stocks in
every market and at least one company per sector per country. Such an approach
ensures that the Advisor has a broad sectoral and country background on which to
base its company-specific analysis.
Forecast verification: The Advisor verifies its forecasts through
discussion with company management and comparison with brokers' reports. If the
Advisor's results diverge significantly from those of management or broker
firms, the Advisor seeks to identify the reason and, if it deems appropriate,
revises its forecasts.
Valuation model: The Advisor inputs its forecasts into its proprietary
valuation model in order to determine the fair value of companies that are
candidates for the Fund to invest in. The Advisor will purchase a stock if the
target price compares favorably with the current price and if the Advisor
determines that the potential return is significant enough. Although the Advisor
does not have a strict threshold for investment return, it uses a potential
upside return of 15% as an operating guide. The Advisor takes into consideration
liquidity, volatility and the degree of confidence in its forecasts to complete
the investment decision. When the stock the Fund has purchased reaches the
Advisor's target price, the Advisor starts to reduce the Fund's holding. When
the target is surpassed by more than 10%, the Advisor closes out the position. A
decline of more than 15% in the share price triggers a review of the forecasts
used in the valuation model.
Generally, the size of a position ranges from 2% to 5% of the Fund's
total assets. Within this range the size varies according to the market
capitalization of the company, the liquidity of the stock, and the degree of
confidence the Advisor has in its forecasts. The Advisor makes no conscious
country or sector allocation decisions. Both country and sector allocation are
the result of the Advisor's stock selection process. Generally, the Fund holds
core positions for longer than one year.
The Advisor does not actively manage currency risk. Expected
depreciation or appreciation of the currencies is factored into its
determination of a target price.
VONTOBEL INTERNATIONAL BOND FUND
Investment Objective. The investment objective of the Bond Fund is to
maximize total return from capital growth and income. The Bond Fund offers
investors a convenient way to
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invest in a managed portfolio of debt securities denominated in foreign
currencies ("International" securities). The Bond Fund seeks to achieve its
objective of total return by investing in a continuously managed non-diversified
portfolio consisting primarily of high-grade international bonds. International
bonds are defined as bonds issued (i) in countries other than the U.S.; (ii) by
issuers which are organized in a country other than the U.S. or have at least
50% of their assets or derive at least 50% of their revenues in such country
(notwithstanding the currency in which such bonds are denominated); or (iii) by
national or international authorities other than the U.S. The Advisor will seek
protection and possible enhancement of principal value by actively managing
currency, bond market and maturity exposure and by security selection.
The Bond Fund operates as a non-diversified fund for purposes of the 1940 Act,
but will seek to qualify as a diversified investment company for purposes of
Subchapter M of the Code.
Investment Policies. The Bond Fund is designed for individuals and
institutions who wish to diversify their investment programs to take advantage
of opportunities in bond markets outside the U.S. Direct investment in
international securities is usually impractical for most individual and smaller
institutional investors. Investors often find it difficult to purchase and sell
international bonds, to obtain current information about foreign entities, to
hold securities in foreign safekeeping and to convert the value of their
investments from foreign currencies into U.S. dollars. The Bond Fund manages
these concerns for the investor. With a single investment in the Bond Fund, a
shareholder can benefit from the income and potential capital protection and
appreciation associated with a professionally managed portfolio of high-grade
international bonds. The Advisor to the Bond Fund has had extensive experience
investing in international markets and dealing with trading, custody and
currency transactions around the world. To achieve its objective, the Bond Fund
will invest in a managed portfolio of high-grade international bonds that are
denominated in foreign currencies, including bonds denominated in the European
Currency Unit ("ECU").
In recent years, opportunities for investment in international bond
markets have become more significant. Foreign currency denominated bond markets
have grown faster than the U.S. dollar denominated bond market in terms of U.S.
dollar market value and now represent more than half of the value of the world's
developed bond markets. Participants in the markets have grown in number thereby
providing better marketability. A number of international bond markets have
reduced entry barriers to foreign investors by deregulation and by reducing
their withholding taxes.
Simultaneously with the opening of foreign markets, barriers to
international capital flows have been reduced or eliminated, freeing investment
funds to seek the highest real returns. Thus, market conditions in one economy
influence market conditions elsewhere through the channel of global capital
flows. The Bond Fund provides a convenient vehicle to participate in
international bond markets, some of which may outperform U.S. dollar denominated
bond markets in U.S. dollar terms during certain periods of time.
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Although the Bond Fund is non-diversified, investing in the Bond Fund
can provide international diversity to an investor's existing portfolio of U.S.
dollar denominated bonds ("U.S. bonds"), thereby reducing volatility or risk
over time. Historically, total returns of international bond markets have often
diverged from returns generated by U.S. bond markets. These divergences stem not
only from fluctuating exchange rates, but also from foreign interest rates not
always moving in the same direction or magnitude as interest rates in the U.S.
Investment in the Bond Fund may provide the international bond portion of an
investor's diversification program.
International bonds may provide, at times, higher investment returns than
U.S. bonds. For example, international bonds may provide higher current income
than U.S. bonds and the local price of international bonds can appreciate more
than U.S. bonds. Fluctuations in foreign currencies relative to the U.S. dollar
can potentially benefit investment returns. Of course, in each case, at any time
the opposite may also be true. Investments in the Bond Fund provide
international diversity not only to an investor's existing portfolio of U.S.
bonds but also to an investor's holdings of U.S. or international equities and
other assets.
The portfolio investments of the Bond Fund will be selected on the
basis of, among other things, yields, credit quality, and the fundamental
outlooks for currency and interest rate trends in different parts of the globe,
taking into account the ability to hedge a degree of currency or local bond
price risk. The Bond Fund will normally invest at least 65% of its total assets
in bonds denominated in foreign currencies, however, generally foreign currency
denominated bonds will constitute 90% of its portfolio.
The Bond Fund will invest in very high investment grade instruments
that will bear the rating of A or higher by S&P or A or higher by Moody's
Investors Service, Inc. ("Moody's"), or unrated securities which the Advisor
believes to be of comparable quality. The Bond Fund reserves the right, however,
to invest its assets in lower rated debt securities, that is, debt securities
rated BBB by S&P or Baa by Moody's or below, but no lower than B by S&P or
Moody's or which are unrated but are of comparable quality as determined by the
Advisor. It will do so to avail itself of the higher yields available with these
securities. The Bond Fund will invest no more than 5% of its total assets in
securities rated below investment grade or which are unrated but are of
comparable quality as determined by the Advisor. Securities rated below
investment grade (i.e., below BBB by S&P or Baa by Moody's) entail greater risks
than investment grade debt securities. Securities rated BB by S&P or Ba by
Moody's and below are commonly referred to as "junk bonds" and involve a high
degree of speculation with respect to the payment of principal and interest.
(See "Special Risk Considerations.")
The investments of the Bond Fund may include:
* Debt securities issued or guaranteed by a foreign national government,
its agencies, instrumentalities or political subdivisions;
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* Debt securities issued or guaranteed by supranational organizations
(e.g., European Investment Bank, Inter-American Development Bank, the
World Bank and other such organizations);
* Corporate foreign debt securities;
* Bank or bank holding company debt securities;
* Other debt securities, including those convertible into common stock.
The Bond Fund may purchase securities which are not publicly offered. If
such securities are purchased, they may be subject to restrictions applicable to
restricted securities. Please see "Additional Information on Policies and
Investments - Investment Restrictions."
The Bond Fund intends to select its investments from a number of
country and market sectors. It may invest substantial amounts in issuers from
one or more countries and would normally have investments in securities of
issuers from a minimum of three different countries; however, it may invest
substantially all of its assets in securities of issuers located in the U.S. for
temporary or emergency purposes. A non-governmental issuer will be considered to
be "from" a country in which it is organized, in which it has at least 50% of
its assets, or from which it derives at least 50% of its revenues.
Under normal circumstances, the Bond Fund will invest no more than 35%
of the value of its total assets in U.S. dollar debt securities, however,
generally it will invest less than 10% of its assets in U.S. dollar debt
securities. The Bond Fund may engage in strategic transactions, as described
below, for hedging purposes and to seek to increase gain.
To protect against adverse movements of interest rates and for
liquidity, the Bond Fund may also invest all or a portion of its net assets in
short-term obligations denominated in U.S. and foreign currencies such as, but
not limited to, bank deposits; bankers' acceptances; certificates of deposit;
commercial paper; short-term government, government agency, supranational agency
and corporate obligations; and repurchase agreements.
The Bond Fund does not engage in short-term trading due to the fact
that such practices would result in increased commissions and transactions
costs. The Bond Fund may assume a temporary defensive posture. See "Additional
Information on Policies and Investments Temporary Defensive Positions" below.
For additional information regarding investments and a description of additional
permitted investments, see "Additional Information on Policies and Investments."
Investment Strategy. The Bond Fund seeks to minimize credit risk and
maintain high liquidity. The Bond Fund is a "non-diversified" investment company
under Federal securities laws, and therefore may invest a larger portion of its
assets in certain issuers, including foreign governments and domestic issuers
other than the U.S. government. It may invest more than 5%
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of its assets in government debt securities of the U.S. However, because it
intends to qualify as a "regulated investment company" for purposes of
Subchapter M of the Code, at least 50% of its total assets must be invested in
cash, U.S. government securities, and securities of issuers (including foreign
governments), in which it has invested not more than 5% of its assets. In any
event, it does not intend to invest more than 5% of its assets in the securities
of any one issuer unless such securities are issued or guaranteed by a national
government and will not invest more than 25% of its total assets in the
securities of any one issuer or national government (other than the United
States). (A regulated investment company is also limited in its purchases of
voting securities of any issuer; the Bond Fund does not intend to purchase any
voting securities, except to the extent it receives such securities due to
conversion of convertible securities.)
Because the Bond Fund is intended for long-term investors who can
accept the risks associated with investing in international bonds, investors
should not rely on an investment in the Bond Fund for their short-term financial
needs and should not view it as a vehicle for playing short-term swings in the
international bond and foreign exchange markets. Shares of the Bond Fund alone
should not be regarded as a complete investment program.
Total return from investment in the Bond Fund will consist of income
after expenses, bond price gains (or losses) in terms of the local currency, and
currency gains (or losses). For tax purposes, realized gains and losses on
currency are regarded as ordinary income and loss and could, under certain
circumstances, have an impact on distributions. The value of the Bond Fund's
portfolio will fluctuate in response to various economic factors, the most
important of which are fluctuations in foreign currency exchange rates and
interest rates.
The Advisor's investment approach is governed by its belief that the
principal factors affecting the total returns of the Fund are (i) the outlook
for the currency in which the underlying securities are denominated, and (ii)
the return outlook in local currency for each bond market in the Advisor's
investment universe. The Advisor believes that quality/sector and security
selection should be aimed at reducing overall portfolio risk rather than
producing incremental return. In addition, the Advisor believes that the effect
of interest rate and foreign currency fluctuations on the Fund's returns can be
reduced by entering into interest rate and currency hedging instruments.
The management of the Fund involves several levels of decision-making:
currency exposure, interest rate sensitivity within markets, quality/sector
exposure and issue selection. The exclusion or inclusion of markets from the
Advisor's market universe and the weighting of markets relative to a benchmark
index cannot be determined without first evaluating currency exposure.
The Advisor's investment approach involves three steps: (i) top-down
currency and market allocation; (ii) management of currency risk and market
allocation; and (iii) relative value analysis (involving maturity,
quality/sector and security selection).
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The Advisor analyzes the 12 international fixed income markets which
currently constitute the J.P. Morgan World Government Bond Index (ex-U.S.) and
the markets of Switzerland and Ireland, as well as ECU fixed income markets
(effective January 1, 1999, the ECU will be replaced by the euro). To determine
currency and hence market allocation, the Advisor produces monthly forecasts for
both the currency and bond markets in each country in this market universe.
These forecasts are based upon an analysis of broad macroeconomic factors and
economic conditions, including inflation and growth expectations, monetary and
fiscal policy, balance of payments and exchange rates. Technical market
indicators and general sentiment are also assessed. Based on this macroeconomic
scenario, the Advisor develops 3-, 6- and 12-month forecasts for exchange rates
and bond market returns in local currency that form the basis of the Advisor's
investment strategy.
The Advisor's investment process begins with the calculation of total
local currency returns along the yield curve (including yields on short-term
investments) for each market in the Advisor's universe. These projected local
currency returns are translated into U.S. dollar total returns. The Advisor then
establishes a relative attractiveness ranking based on each market's forecasted
U.S. dollar returns, which forms the basis for the Advisor's currency and market
exposure decision.
The Advisor seeks to maximize total return by overweighting those
markets and currencies showing the highest total expected U.S. dollar return
based on the Advisor's ranking. These total returns are adjusted for individual
market risk based on historical volatility and the manager's experience. This
may result in significant over- or underweighting of individual fixed income
markets as well as the underlying currency exposure.
The Fund's currency and bond market weightings are reviewed on an
ongoing basis and compared against the monthly ranking of the markets in the
Advisor's universe according to their total return outlook in U.S. dollars.
Shifts in bond market weights are driven by changes in the relative
attractiveness ranking and tend to be gradual. Since it is possible to increase
or reduce currency and bond market exposure by using derivatives, it is not
uncommon for a specific bond market's weighing to differ from the weighing of
its corresponding currency. Futures may also be employed to adjust portfolio
risk in anticipation of foreign currency devaluations, political turmoil in
countries to whose currency and interest rate policy the Fund's portfolio is
exposed, or to address expected downgrades of an issuer's credit rating.
If the need for rapid adjustment of market exposure manifests itself,
exchange-traded derivative instruments are used (i) as hedging instruments or
(ii) as instruments for tactical asset allocation, as described below.
Hedging against negative return impact caused by rising interest rates
takes place through the sale of interest rate futures contracts or the purchase
of put options on interest rate futures contracts. The hedge ratio is derived
from the duration of the underlying fixed income investment(s). These techniques
are employed as anticipatory hedges to gain time to allow for
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the orderly sale of underlying securities in response to a negative assessment
of market conditions. The need to hedge currency risk in this context is
assessed separately.
Due to changes in the Advisor's market return forecasts, it may become
necessary from time to time to adjust the duration of certain fixed income
investments held in the Fund which are denominated in one or various foreign
currencies. In this event, the Fund's cash positions can be converted into
synthetic bond positions through the purchase of interest rate futures contracts
or the purchase of call options thereon. As a result, portfolio duration is
lengthened. This technique allows the Fund to make an immediate adjustment to
portfolio duration pending the purchase of underlying positions. Alternatively,
bond positions can be converted into synthetic cash positions by means of
selling interest rate futures contracts or the purchase of put options thereon,
thereby shortening portfolio duration. In all such cases, the portfolio's
currency allocation does not change.
If the U.S. dollar shows strength relative to a currency in which the
Fund holds investments in excess of that projected in the Advisor's currency
forecast, the Advisor may from time to time hedge positions by buying U.S.
dollars against the foreign currency in the interbank forward foreign exchange
market or by selling the currency in the futures and options markets. Currency
hedging decisions are driven by a systematic currency hedging approach based on
a technical- trend-following model, combined with fundamental analysis.
Cash may be held in U.S. dollars and/or in any of the major trading
currencies. The Fund's cash position is first and foremost a function of the
Advisor's currency allocation decision and secondarily a function of the
Advisor's duration selection. If the outlook for U.S. dollar cash returns is
more attractive than that for cash and bond returns in all other currencies, the
Fund will hold a U.S. dollar cash position generally not in excess of 25% of its
total assets. Conversely, if the outlook for foreign currency cash returns is
more attractive, the Fund will hold foreign cash positions not in excess of
approximately 25% of its total assets.
Maturity selection is based on the Advisor's total return forecasts,
i.e., the Advisor focuses on investment that the Advisor expects to produce the
highest total return in local currency along the yield curve in each market in
the Advisor's universe for the planned holding period. Maturity selection or,
more precisely, duration selection, is the second most important factor in the
Advisor's process. Duration is the expected life of a fixed-income security,
taking into account its coupon yield, interest payments, maturity and call
features. Duration attempts to measure actual maturity, as opposed to final
maturity, by measuring the average time required to collect all payments of
principal and interest. The duration of a callable bond, also called its
effective duration, may be considerably shorter than its stated maturity in a
period of rising interest rates. Thus, as market interest rates rise, the
duration of a financial instrument decreases. For example, a 30-year
conventional mortgage may have an effective duration of only 11 to 12 years,
which means the loan will probably be paid off in about one-third of the time it
is supposedly carried by the originating lender as an earning asset. Duration
differs from other measurements such as average life and half life. Duration
measures the time required to recover a dollar of price in present value terms
(including principal and interest), whereas
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average life computes the average time needed to collect one dollar of
principal. The Advisor's selection of duration is based on the Advisor's total
return forecasts. Particular yield curve shapes and/or anomalies are also taken
into account. As indicated in the preceding paragraph, U.S. dollar and/or
foreign cash positions are a function of both currency allocation and duration
selection decisions.
Foreign government, governmental agency and supranational agency
obligations and foreign currency Eurobond issues represent the most common types
of investment used in the Fund's portfolio construction. Credit quality of most
issuers in these markets tends to be very high. Quality and sector management
are therefore not as complex as for domestic U.S. bonds. The Advisor focuses its
issue selection on the highest credit quality since opportunities to achieve
significant incremental returns in sector selection are limited.
Issue selection within the quality constraints referred to above is
principally aimed at achieving duration and yield curve targets determined in
accordance with the Advisor's top-down market allocation decisions. The Advisor
is conscious of the need for liquidity and therefore invests only in issues
within a sector that have the greatest future marketability, as determined by
quality of issuer, issue size, number of market makers, and bid/offer spreads.
Since in most markets the Advisor purchases government bonds, the liquidity of
portfolio holdings is usually very high.
The Advisor's aim is to buy those fixed income securities that are most
reasonably priced as measured in terms of the yield spread against a comparable
government bond or, in the case of a government bond, if the Advisor believes
that it is undervalued relative to its peers. At purchase the Advisor
establishes positions of up to a maximum of 5% of the Fund's total assets. The
Advisor also gives consideration to such factors as liquidity (tradability),
legal protection of bondholders, accounting and disclosure standards,
transferability of funds and the risk of imposition of exchange controls, as
well as the tax treatment of interest and capital gains.
Positions are sold (i) as a result of shifts in currency and market
weights, (ii) as a result of duration adjustments, (iii) if the underlying bonds
become expensive relative to the government bond, (iv) in response to sector
selection, (v) based on a negative credit review of an issuer, or (vi) if cash
becomes a more attractive investment alternative.
The most critical determinants of performance (total return in U.S.
dollars) are strategic decisions as to currency exposure and duration. The
Advisor therefore refrains from switching among issues to boost portfolio
return; any incremental benefit would likely be offset by trading costs since
bid/ask spreads in international fixed income markets can be wider than in U.S.
domestic markets. Trading activity is usually governed by implementation of
strategic changes in portfolio composition, which are usually infrequent, so
portfolio turnover is generally low.
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VONTOBEL EASTERN EUROPEAN DEBT FUND
Investment Objective. The investment objective of the E. European Debt
Fund is to maximize total return from capital growth and income. The Fund will
seek to achieve this objective 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
Advisor will seek protection and possible enhancement of principal value by
actively managing debt market and maturity exposure and by security selection.
The Fund operates as a non-diversified fund for purposes of the 1940
Act, but will seek to qualify as a diversified investment company for purposes
of Subchapter M of the Code. As a "non-diversified" investment company under
Federal securities laws, the Fund may invest a larger portion of its assets in
certain issuers, including foreign governments and domestic issuers other than
the U.S. government. It may invest more than 5% of its assets in government debt
securities of the U.S. However, because it intends to qualify as a "regulated
investment company" for purposes of Subchapter M of the Code, at least 50% of
its total assets must be invested in cash, U.S. government securities, and
securities of issuers (including foreign governments), in which it has invested
not more than 5% of its assets.
Investment Policies. The Fund is designed for individuals and
institutions that wish to diversify their investment programs to take advantage
of opportunities in the developing debt markets of Eastern Europe. Direct
investment in these markets is generally impractical for most individual and
smaller institutional investors. Investors often find it difficult to purchase
and sell debt instruments in this region, to obtain current information about
borrowers located in the countries of Eastern Europe, to hold securities in
foreign safekeeping and to convert the value of their investments from foreign
currencies into U.S. dollars. The Fund manages these concerns for the investor.
With a single investment in the Fund, shareholders can benefit from the income
and potential capital appreciation associated with a professionally managed
portfolio of Eastern European debt instruments. The Advisor has had extensive
experience investing in international markets and dealing with trading, custody
and currency transactions around the world. To achieve its objective, the Fund
will invest in a managed portfolio of debt instruments that are denominated in
Eastern European currencies, including bonds denominated in Deutsche Marks, U.S.
dollars and ECUs.
In recent years, some of the Eastern European countries have made
significant progress in their efforts to become market-oriented economies. Those
nations making the most successful transitions include Poland, the Czech
Republic, Hungary, Slovakia, Slovenia, the Baltic states and to a lesser extent
Russia. The transformation from centrally planned economies to market oriented
economies has led to the creation of financial markets in all of these
countries. The opening of these markets has led to the reduction or elimination
of barriers to international capital flows, presenting investors with
opportunities for investment seeking the highest real returns. The Fund provides
a convenient vehicle to participate in the emerging debt markets of Eastern
European countries, some of which may outperform U.S. dollar denominated bond
markets and the bond markets of other developed countries during certain periods
of time.
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The Fund can provide international diversity to an investor's existing
portfolio of U.S. dollar denominated bonds and U.S. and international equities,
thereby reducing volatility or risk over time. Debt instruments issued by
Eastern European borrowers may provide, at time, higher investment returns than
U.S. bonds. For example, such bonds may provide higher current income than U.S.
bonds and the local price of such bonds can appreciate more than U.S. bonds.
Fluctuations in foreign currencies relative to the U.S. dollar can potentially
benefit investment returns. Of course, in each case, at any time the opposite
may also be true.
The portfolio investments of the Fund will be selected on the basis of,
among other things, yields, credit quality, and the fundamental outlooks for
currency and interest rate trends in the different Eastern European countries.
The Fund will normally invest at least 65% of its total assets in debt
instruments denominated in foreign currencies. Generally, however, foreign
currency denominated debt instruments will constitute 90% of its portfolio.
The Fund will invest principally in instruments that bear the rating of
BB- or better by S&P or Baa3 or higher by Moody's, or unrated securities that
the Advisor believes to be of comparable quality to such instruments with
ratings of BBB- or higher by S&P or Baa3 or higher by Moody's. Due to the
relative scarcity and small size of many securities offerings in the Eastern
European market, the number of securities that are rated by S&P and Moody's is
limited. The Advisor reserves the right to determine that certain securities are
of comparable quality where such securities have not been rated due to the small
size of the offering or other factors. The Fund will invest no more than 5% of
its total assets in securities rated below investment grade or which are unrated
but are of comparable quality to such securities rated below investment grade as
determined by the Advisor. Securities rated below investment grade (i.e., below
BBB- by S&P or Baa3 by Moody's) entail greater risks than investment grade debt
securities. Securities rated BB+ by S&P or Ba1 by Moody's and below are commonly
referred to as "junk bonds" and involve a high degree of speculation with
respect to the payment of principal and interest.
The investments of the Fund may include:
* Debt securities issued or guaranteed by an Eastern European national
government, its agencies, instrumentalities or political subdivisions;
* Corporate debt instruments issued by borrowers in Eastern European
countries; and
* Eastern European Bank or bank holding company debt securities.
The Fund may purchase securities that are not publicly offered. If such
securities are purchased, they may be subject to restrictions applicable to
restricted securities.
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The Fund intends to select its investments from a number of country and
market sectors. The Fund may invest substantial amounts in issuers from one or
more countries and will normally have investments in securities of issuers from
a minimum of three different countries; it may, however, invest substantially
all of its assets in securities of issuers located in the U.S. for temporary or
emergency purposes. A non-governmental issuer will be considered to be "from" a
country in which it is organized, in which it has at least 50% of its assets, or
from which it derives at least 50% of its revenues.
Under normal circumstances, the Fund will invest no more than 35% of
the value of its total assets in U.S. dollar debt securities. Generally,
however, the Fund will invest less than 10% of its assets in U.S. dollar debt
securities.
Short-term investments. To protect against adverse movements of
interest rates and for liquidity, the Fund may also invest all or a portion of
its net assets in short-term obligations denominated in U.S. and foreign
currencies, such as, but not limited to, bank deposits; bankers' acceptances;
certificates of deposit; commercial paper; short-term government, government
agency, supranational agency and corporate obligations; and repurchase
agreements.
The Fund may occasionally engage in short-term trading, which can
result in increased commissions and transaction costs. The Fund may assume a
temporary defensive position. See "Additional Information on Policies and
Investments - Temporary Defensive Positions" below. For additional information
regarding investments and a description of additional permitted investments, see
"Additional Information on Policies and Investments."
Investment Strategy. The Advisor's Eastern European fixed income
approach is governed by the Advisor's belief that the principal factors
affecting the U.S. dollar total returns of an emerging markets debt portfolio
are (1) the macroeconomic fundamentals in each country which are reflected in
the currency and fixed income yield outlook, and (2) the credit quality of
sovereign risk in each country. Quality/sector and security selection are aimed
at reducing overall portfolio risk rather than producing incremental return. In
addition, because fixed income markets of emerging market countries are more
susceptible to abrupt and significant interest rate and currency fluctuations
than their counterparts in more mature economies, the Advisor may from time to
time attempt to reduce the adverse effects on portfolio returns of such
fluctuations by entering into interest rate and currency hedging contracts.
The Advisor's Eastern European fixed income approach involves four
steps:
- Evaluation of country risk
- Top-down currency and market allocation
- Management of currency risk and market allocation
- Relative value analysis (involving maturity, quality/
sector and security selection)
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Market selection from the Advisor's country universe and the weighting
of markets relative to a benchmark index cannot be determined without first
evaluating the credit risk of each country's market.
In each country in the Advisor's market universe, the Advisor analyzes
GDP growth, inflation, current account, and foreign exchange and monetary
policy, as well as the political situation, International Monetary Fund ("IMF")
stance, degree of liberalization of foreign exchange and fixed income markets,
liquidity and transaction costs.
Countries will not or no longer qualify for inclusion in the Advisor's
market universe, if
- there is a lack of co-operation with the IMF;
- a borrower defaults on its debt instruments issued in
local currency or in Eurocurrencies;
- there is no effective legislation, or history of
interpretation of existing laws on taxation of
foreign holders of local currency debt;
- trade settlement risks and procedures are not
acceptable to the Advisor; and
- the country's debt service capacity shows a declining
trend.
In addition, each country must have liberalized its foreign currency
markets to allow foreign holders of local currency debt to convert all debt
service payments into foreign currency and repatriate such foreign currency.
In order for Eastern European debt markets to be included in the
Advisor's investment universe, the markets must pass the Advisor's qualitative
country risk screen.
The Advisor's investment universe encompasses two distinct markets: (1)
the local currency debt markets of Eastern Europe, the Russian market and the
markets of the newly formed countries that belonged to the former Soviet Union,
and (2) the Eurocurrency markets that are used by public and private sector
borrowers in the Advisor's market universe to raise capital in the major trading
currencies, including the U.S. dollar. For investments in local currency debt
instruments, the Advisor's core markets are the Czech Republic, Slovakia,
Hungary, Poland, Slovenia, the Baltic states, Croatia, Romania and Russia.
To determine market allocation, the Advisor employs proprietary
forecasts with which the Advisor produces a quarterly matrix of projected total
returns in U.S. dollars of debt instruments denominated in local currency for
each country in the Advisor's investment universe, as well as Eurocurrency
instruments issued by borrowers in those countries. These projected returns are
produced on the basis of official forecasts published by the European Bank for
Reconstruction and Development ("EBRD"), projections prepared by the research
departments of large international brokerage houses, as well as the Advisor's
proprietary projections.
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For local currency markets, and for instruments denominated in
Eurocurrencies, the Advisor produces on a quarterly basis total return forecasts
in U.S. dollars across the available maturity spectrum. On the basis of these
total return forecasts, the Advisor determines which instruments and which
maturities are the most attractive for investment in each country.
Market weights are generally determined by positioning the portfolio so
as to produce what the Advisor expects to be an optimal risk/reward profile on
the basis of the total return forecasts adjusted for expected volatilities.
Since data series of a sufficiently long duration to produce statistically
meaningful correlation coefficients of intermarket total returns are not yet
available, the Advisor has at all times at least three markets represented in
the Advisor's portfolio, each weighted with at least 15% of the Fund's total
assets in order to achieve a minimum level of diversification.
Eastern European debt markets are characterized by limited liquidity,
high transaction costs and restricted availability of hedging instruments. The
Advisor therefore positions the Fund at all times to reflect these circumstances
through rigid security selection and by constructing a maturity profile that
provides adequate liquidity. Generally, short-term instruments issued in local
currency are held to maturity.
If the qualitative criteria of a country's fixed income market in
combination are expected to produce a negative trend for the country's fixed
income markets, the Advisor increases the risk factor (volatility) used in the
total return forecast matrix for that country. This causes a downward adjustment
of the weight assigned to the country's fixed income markets in the Fund. Events
that give rise to such adjustments include upward revisions in projected
inflation rates, downward revisions of GDP growth rates, upward adjustments of
projected budget deficits and deterioration of a country's foreign exchange
reserve position.
If the U.S. dollar shows strength relative to a currency in which the
Fund holds investments in excess of that projected in the Advisor's currency
forecast, the Advisor hedges positions by buying U.S. dollars against the
foreign currency in the interbank forward foreign currency exchange contract
market or by selling the currency in the futures and options markets (if such
instruments are available in the different markets). The Advisor also employs
proxy hedges in instances where direct hedges are difficult to establish. A
proxy hedge is a hedge against another currency or basket of currencies which
are closely correlated to the currency in which the Fund holds a position.
The Advisor attempts to protect the Fund against negative return impact
caused by rising interest rates by selling interest rate future contracts or by
purchasing put options on interest rate futures contracts in those markets where
such instruments are available. This hedging technique is used mostly for
Eurocurrency instruments because effective interest rate risk management tools
for local currency debt instruments have not yet evolved.
Cash may be held in U.S dollars, deutsche marks and/or in any of the
Eastern European currencies. The Fund's cash position is first and foremost
a function of the Advisor's deutsche marks currency
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allocation decisions and secondarily a function of the Advisor's duration
selections. If the outlook for U.S. dollar cash returns is more attractive than
that for cash and bond returns in all other currencies, the Fund will hold a
U.S. dollar cash position of up to 35% of the Fund's total assets. Conversely,
if the outlook for Eastern European currency cash returns is more attractive,
the Fund will hold foreign cash positions of up to 25% of the Fund's total
assets. From time to time, the Advisor may hold up to 90% of the Fund's total
assets in securitized money market instruments, such as government short-term
paper, treasury bills issued by governments of Eastern European countries,
commercial paper and corporate short-term paper with maturities of up to one
year.
Maturity selection is based on the Advisor's total return forecasts.
Currently, most local currency debt instruments tend to have short-term
maturities of one year or less. Eurocurrency instruments, on the other hand,
that have short- to intermediate-term maturities, generally are priced at a
spread over the interest rate applicable to the same-maturity government bond of
the country in whose currency the debt instrument is issued.
The Advisor focuses on issuers of the highest available credit quality
and uses international and supranational issuers with credit ratings at least
equal to those of local borrowers. Quality and sector management are therefore
not as complex as for domestic U.S. bonds. Because the Advisor focuses its issue
selection on the highest available credit quality, opportunities to achieve
significant incremental returns in sector selection are limited.
Issue selection within the quality constraints referred to above is
principally aimed at achieving duration and yield curve targets determined in
accordance with the Advisor's top-down market allocation decision. The Advisor
is conscious of the need for liquidity and therefore invests only in issues
within a sector which the Advisor deems to have the greatest future
marketability.
The Advisor's aim is to buy those debt securities that are most
reasonably priced as measured in terms of the yield spread against a comparable
government bond or, in the case of Eastern European local currency instruments,
if the Advisor believes that the instrument is undervalued relative to its
peers. At purchase the Advisor establishes positions of up to a maximum of 10%
of the Fund's total assets. Given that the Advisor's investment universe
consists of newly emerging markets, the Advisor pays particular attention to
such factors as liquidity (tradability), legal protection of bondholders,
accounting and disclosure standards, transferability of funds, the risk of
imposition of exchange controls and settlement risks, as well as the tax
treatment of interest and capital gains.
Positions are sold (1) as a result of market disruptions that lead to a
change in the country allocation weight, (2) as a result of shifts in currency
and market weights, (3) in the case of Eurocurrency debt instruments, due to
valuation reasons, (4) due to deterioration of credit quality, or (5) if cash
becomes a more attractive investment alternative. The Advisor determines
high/low price target ranges for each position in the Fund's portfolio, which
are reviewed
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monthly. Such targets are based on historical volatilities of the underlying
debt instruments and serve as profit and stop-loss targets.
The most critical determinants of performance (total return in U.S.
dollars) are strategic decisions as to country allocation and currency exposure.
The Advisor therefore refrains from switching among issues to boost portfolio
return. Given generally lower levels of market liquidity and relatively high
transaction costs, the Advisor tends to hold short-term issues denominated in
local currency to maturity. Trading activity is usually governed by
implementation of strategic changes in portfolio composition, which are usually
infrequent, and consequently, portfolio turnover is generally low.
ADDITIONAL INFORMATION ON POLICIES AND INVESTMENTS
Repurchase Agreements. As a means of earning income for periods as
short as overnight, the Funds may without limit enter into repurchase
agreements, which are collateralized by U.S. government securities in which it
may otherwise invest, with selected banks and broker/dealers. Under a repurchase
agreement, a Fund acquires securities, subject to the seller's agreement to
repurchase at a specified time and price. The Fund requires the party obligated
to repurchase the securities to provide it with collateral for that obligation.
Repurchase agreements are considered to be loans under the 1940 Act. The Fund
may enter into repurchase commitments for investment purposes for periods of 30
days or more. Such commitments involve investment risk similar to that of debt
securities in which it invests. For purposes of the tax diversification test
under Subchapter M of the Code, repurchase agreements are likely to be treated
as securities issued by the seller and subject to the "5% per issuer"
requirement noted above. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of the securities may be restricted. In
the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs
before being able to sell the securities. Also, the value of such securities may
decline before it is able to dispose of them.
Reverse Repurchase Agreements. As a means of enhancing income, the Bond
and E. European Debt Funds may enter into reverse repurchase agreements with
selected banks and broker/dealers. Under a reverse repurchase agreement, a fund
sells securities subject to an obligation to repurchase those securities at a
specified time and price. In order to comply with U.S. regulatory conditions
applicable to investment companies, the Fund will recognize gains or losses on
such obligations each day, and will segregate cash, U.S. government securities,
or other high-grade debt instruments in an amount sufficient to satisfy its
repurchase obligation, will mark the value of the assets to market daily, and
post additional collateral if necessary. The Fund may invest the payment
received for such securities prior to fulfilling its obligation to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings
under the 1940 Act. Therefore, the Fund's investment in reverse repurchase
agreements is subject to the borrowing limitations of the 1940 Act (See
"Investment Restrictions" in the Statement of Additional Information). If the
buyer under a repurchase agreement becomes insolvent, the
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Fund's right to reacquire its securities may be impaired. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the buyer
of the securities before repurchase of the securities under a reverse repurchase
agreement, it may encounter delay and incur costs before being able to apply the
cash held to purchase replacement securities. Also, the value of such securities
may increase before it is able to purchase them.
When-issued Securities. The Emerging Markets and Bond Funds may
purchase securities on a when-issued or forward delivery basis, for payment and
delivery at a later date. The price and yield are generally fixed on the date of
commitment to purchase. During the period between purchase and settlement, no
interest accrues to the Fund. At the time of settlement, the market value of the
security may be more or less than the purchase price. The Fund reflects gains or
losses on such commitments each day, and segregates assets sufficient to meet
its obligation pending payment for the securities.
Strategic Transactions. Each of the Funds may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific fixed-income market movements), to manage the maturity or duration of
fixed-income securities, or to enhance potential gain. Such strategies are
generally accepted as modern portfolio management and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as forward foreign currency contracts,
foreign currency futures as defined below, currency swaps or options on
currencies (collectively, all the above are called "Strategic Transactions").
Interest rate swaps involve the exchange by a fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
The Advisor does not, as a general rule, intend regularly to enter into
strategic transactions for the purpose of reducing currency and market risk, for
two reasons. First, for the E. European Equity Fund, since financial derivatives
in Eastern European markets currently must be tailor-made to the Fund's
specifications, they are extremely costly and illiquid instruments, and as such
do not offer a cost-effective way to reduce currency and market risk. Second,
each of the Funds is intended for investors with a long-term investment horizon
and it
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is the Advisor's view that any short-term losses due to fluctuations in local
currencies or stock market values will be compensated over the long term by the
capital appreciation of the portfolio securities. Notwithstanding the foregoing,
the Advisor may, from time to time as circumstances dictate, engage in strategic
transactions as described herein.
Currency risk is assessed separately from equity analysis. To balance
undesirable currency risk, each of the International Equity Fund, E. European
Equity Fund and Bond Fund (each, an "International Fund") may enter into forward
contracts to purchase or sell foreign currencies in anticipation of the
International Fund's currency requirements, and to protect against possible
adverse movements in foreign exchange rates. Although such contracts may reduce
the risk of loss due to a decline in the value of the currency which is sold,
they also limit any possible gain which might result should the value of the
currency rise. Foreign investments which are not U.S. dollar denominated may
require the International Fund to convert assets into foreign currencies or
convert assets and income from foreign currencies to dollars. Normally, exchange
transactions will be conducted on a spot or cash basis at the prevailing rate in
the foreign exchange market. However, the investment policies permit the
International Fund to enter into forward foreign currency exchange contracts in
order to provide protection against changes in foreign exchange rates. Any
transactions in foreign currencies will be designed to protect the dollar value
of the assets composing or selected to be acquired or sold for the investment
portfolio of the International Fund; the International Fund will not speculate
in foreign currencies. In addition, because the exchange rate of some Eastern
European currencies may be linked to a basket of convertible currencies
including the U.S. dollar and the deutschemark, the Advisor may elect, from time
to time as circumstances dictate, to reduce the effect of currency fluctuations
on the value of existing or anticipated holdings or sales proceeds of portfolio
securities by proxy hedging. For more information, see sections on forward
foreign currency contracts and proxy hedging in the Statement of Additional
Information.
Each International Fund may purchase and write covered call options on
foreign currencies for the purpose of protecting against declines in the dollar
value of foreign securities. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium plus related transaction costs. In
connection with such transactions, the Fund will segregate assets sufficient to
meet its obligations: when the Fund's obligation is denominated in a foreign
currency, the Fund will own that currency or assets denominated in that
currency, or a currency or securities which the Advisor determines will move
along with the hedged currency or portfolio securities.
Each International Fund may enter into contracts for the purchase or
sale for future delivery of foreign currencies ("foreign currency futures").
This investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the portfolio securities or adversely affect the prices of securities that the
Fund intends to purchase or sell at a later date. The successful use of currency
futures will usually depend on the Advisor's ability to forecast currency
exchange rate movements
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correctly. Should exchange rates move in an unexpected manner, the Fund may not
achieve the anticipated benefits of foreign currency futures or may realize
losses.
Each International Fund is authorized to use financial futures,
currency futures, and options on such futures for certain hedging purposes
subject to conditions of regulatory authorities (including margin requirements)
and limits established by the Company's Board of Directors to avoid speculative
use of such techniques.
Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for a Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect its unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of its portfolio, to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities, or as a means to efficiently change country
and/or currency allocation. Some Strategic Transactions may also be used to
enhance potential gain although no more than 5% of a Fund's assets will be
committed to futures and options on future entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Bond Fund to utilize
these Strategic Transactions successfully will depend on the Advisor's ability
to predict pertinent market movements, which cannot be assured. The Bond Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
See "Special Risk Considerations - Strategic Transactions" for
additional information. Strategic Transactions also are likely to involve
"Section 988 transactions," at least in part. As such, the foreign currency
component must be segregated for tax purposes and treated as ordinary interest
income or loss and distributed. See "Taxation", also.
Temporary Defensive Positions. When the Advisor believes that
investments should be deployed in a temporary defensive posture because of
economic or market conditions, each of the Funds may invest up to 100% of its
assets in U.S. Government securities (such as bills, notes, or bonds of the U.S.
Government and its agencies) or other forms of indebtedness such as bonds,
certificates of deposits or repurchase agreements (for the risks involved in
repurchase agreements see the Statement of Additional Information). For
temporary defensive or emergency purposes, however, the Bond Fund may invest
without limit in investment grade U.S. debt securities, including short-term
money market securities. For temporary defensive purposes, the International
Funds may hold cash or debt obligations denominated in U.S. dollars or foreign
currencies. These debt obligations include U.S. and foreign government
securities and investment grade corporate debt securities, or bank deposits of
major international institutions. When a Fund is in a temporary defensive
position, it is not pursuing its stated
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investment policies. The Advisor decides when it is appropriate to be in a
defensive position. It is impossible to predict for how long such alternative
strategies will be utilized.
SPECIAL RISK CONSIDERATIONS
Foreign Securities and Currencies. Since investments in each
International Fund are normally primarily denominated in foreign currencies,
exchange rates are likely to have a significant impact on its total performance.
For example, a fall in the U.S. dollar's value relative to the Japanese yen will
increase the U.S. dollar value of a Japanese bond held in the portfolio, even
though the price of that bond in yen terms remains unchanged. Conversely, if the
U.S. dollar rises in value relative to the yen, the U.S. dollar value of a
Japanese bond will fall. Investors should be aware that exchange rate movements
can be significant and endure for long periods of time. The Advisor attempts to
control exchange rate risks through active portfolio management.
In addition, for the Bond Fund, the Advisor attempts to mitigate
interest rate risks through management of currency, bond market and maturity
exposure and security selection which will vary based on available yields and
the Advisor's outlook for the interest rate cycle in various countries and
changes in foreign currency exchanges rates. In any of the markets in which the
Fund invests, longer maturity bonds tend to fluctuate more in price as interest
rates change than shorter-term instruments - again providing both opportunity
and risk.
In addition to the risks outlined above, an investor should be aware
that investing in foreign securities involves risks which are not normally
associated with investing in U.S. securities, such as, exchange control
regulations; costs incurred in connection with conversions between various
currencies; availability of less financial information than comparable U.S.
companies; lack of uniform accounting, auditing and financial reporting
requirements; less liquidity and more volatility than securities listed on U.S.
security markets due to substantially lower trading volume; possibly lower sales
prices in the event of forced liquidation of securities in order to meet
unanticipated cash requirements; fixed commissions on foreign security markets
which are generally higher than negotiated commissions on U.S. security markets,
in addition to less supervision and regulation of such security markets;
difficulty in enforcing judgments abroad; and the possibility of expropriation
of assets, confiscatory taxation, imposition of withholding of taxes prior to
payment of dividends or other distributions, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Communications between the U.S. and foreign countries may be less reliable than
within the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. It may be more
difficult for an International Fund's agents to keep currently informed about
corporate actions which may affect the prices of portfolio securities.
Newly Developed Markets. The Emerging Markets, E. European Equity and E.
European Debt Funds invest, and the International Equity Fund may invest, in
securities which
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trade in newly developed markets which do not have a lengthy operating history.
These markets may be subject to substantial volatility and securities traded on
these markets may be subject to greater fluctuations in price than securities
traded on more developed markets. An investment in securities trading in these
types of markets should be considered risky and they pose greater risk than
investments in more developed markets. In cases of extreme volatility, obtaining
accurate quotes on securities may be difficult and in some instances the fund
will rely on security prices which are determined by procedures set by the Board
of Directors to determine "fair value".
Non-Diversified Fund. While each of the Value, Bond and E. European
Debt Funds will seek to qualify as a "diversified" investment company under
provisions of Subchapter M of the Code, none of such Funds will be diversified
under the 1940 Act. Thus, while at least 50% of the total assets of each such
Fund will be represented by cash, cash items, and other securities limited in
respect of any one issuer to an amount not greater than 5% of its total assets,
the Fund will not satisfy the 1940 Act requirement in this respect, which
applies that test to 75% of the Funds assets. A non-diversified Fund is subject
to greater risk because adverse effects on the Fund's security holdings may
affect a larger portion of the Fund's overall assets.
Strategic Transactions. Strategic Transactions have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation it can realize on its investments or cause it
to hold a security it might otherwise sell. The use of currency transactions can
result in the Fund incurring losses as a result of a number of factors including
the imposition of exchange controls, suspension of settlements, or the inability
to deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degrees of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. The Strategic Transactions that
the Fund may use and some of their risks are described more fully in the
Statement of Additional Information. Investments in debt securities
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issued by foreign governments and foreign corporations domiciled in such
countries could result in the imposition of withholding taxes on interest and
capital gains by the country of domicile or residence of the issuer. The amount
of tax withheld, if any, will depend on the domestic tax law of the country of
domicile or residence of the issuer and/or the availability of a bilateral
income tax treaty between such country and the United States. If a withholding
tax is imposed, the rate of return on the foreign investments could be adversely
affected.
INVESTMENT RESTRICTIONS
The investments of each Fund are subject to investment limitations
which may not be changed without the approval of at least a majority of the
outstanding voting securities of that fund, as that term is defined in the 1940
Act. (See the Statement of Additional Information for the specific definition.)
Certain of these policies are detailed below, while other policies
which prohibit or limit particular practices are set forth in the Statement of
Additional Information. The investment restrictions of each Fund specifically
provide, except as noted otherwise, that it may not:
* Except for the Value, Bond and E. European Debt Funds, as to 75% of its
assets, purchase the securities of any issuer (other than obligations
issued or guaranteed as to principal and interest by the Government of
the United States or any agency or instrumentality thereof) if, as a
result of such purchase, more than 5% of its total assets would be
invested in the securities of such issuer.
* Except for the Value, Bond and E. European Debt Funds, purchase stock
or securities of an issuer (other than the obligations of the United
States or any agency or instrumentality thereof) if such purchase would
cause the Fund to own more than 10% of any class of the outstanding
voting securities of such issuer or, except for the Emerging Markets
Fund, more than 10% of any class of the outstanding stock or securities
of such issuer.
* Act as an underwriter of securities of other issuers, except that each
of the International Equity and E. European Equity Funds may invest up
to 10% of the value of its total assets (at time of investment) in
portfolio securities which the Fund might not be free to sell to the
public without registration of such securities under the Securities Act
of 1933, as amended, or any foreign law restricting distribution of
securities in a country of a foreign issuer.
* Buy or sell commodities or commodity contracts, provided that each of
the International Equity and E. European Equity Funds may utilize not
more than 1% of its assets for deposits or commissions required to
enter into, for the International Equity Fund, forward foreign currency
contracts, and for the E. European Equity Fund, financial futures
contracts, for hedging purposes as described under "Investment
Policies" and
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"Additional Information on Policies and Investments - Strategic
Transactions." (Such deposits or commissions are not required for
forward foreign currency contracts.)
* As to the International Equity and E. European Equity Funds, borrow
money except for temporary or emergency purposes and then only in an
amount not in excess of 5% of the lower of value or cost of its total
assets, in which case the Fund may pledge, mortgage or hypothecate any
of its assets as security for such borrowing but not to an extent
greater than 5% of its total assets. As to the Value, Emerging
Markets, Bond and E. European Debt Funds, borrow money, except as a
temporary measure for extraordinary or emergency purposes, or except in
connection with reverse repurchase agreements, provided that the Fund
maintains asset coverage of 300% in connection with the issuance
of senior securities. Notwithstanding the foregoing, to avoid the
untimely disposition of assets to meet redemptions, the Value, Emerging
Markets and E. European Debt Funds may borrow up to 33 1/3%, and the
Bond Fund may borrow up to 20%, of the value of the Fund's assets to
meet redemptions, provided that the Fund may not make other investments
while such borrowings are outstanding.
* Make loans, except that a Fund may (1) lend portfolio securities; and
(2) enter into repurchase agreements secured by U.S. Government
securities and, with respect to the Bond and E. European Debt Funds,
except to the extent that the entry into repurchase agreements and the
purchase of debt securities in accordance with its investment objective
and policies may be deemed to be loans.
* Invest more than 25% of a Fund's total assets in securities of one or
more issuers having their principal business activities in the same
industry, with certain qualifications with respect to the Emerging
Markets, Bond and E. European Debt Funds described in the Statement of
Additional Information.
Percentage limitations in the foregoing description of the Funds'
investments and policies and this "Investment Restrictions" section are
determined at the time a Fund makes a purchase or loan subject to such
percentage.
PERFORMANCE TERMS AND COMPUTATIONS
From time to time each of the Funds may advertise information regarding
its performance. All performance figures are historical, show the performance of
a hypothetical investment and are not intended to indicate future performance.
Advertising may include the following performance measurements.
"Yield" is the ratio of income per share derived from the portfolio
investments to the current maximum offering price expressed in terms of a
percentage.
"Distribution rate" is the amount of distribution per share made over a
twelve-month period divided by a current maximum offering price.
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<PAGE>
"Total return" is the total of all income and capital gains paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
"Average annual total return" refers to the average annual compound
rate of return of an investment in the Fund assuming that the investment has
been held for one-, five- and ten-year periods, as applicable, and/or the life
of the Fund.
"Cumulative total return" represents the cumulative change in value of
an investment in the Bond Fund for various periods. These calculations assume
that dividends and capital gains distributions were reinvested.
"Capital change" measures return from capital, including reinvestment
of any capital gains distributions but not reinvestment of dividends.
Performance will vary based upon, among other things, changes in market
conditions and the level of the Funds' expenses. Please refer to the Statement
of Additional Information for more information on Performance.
THE COMPANY'S MANAGEMENT
The Board of Directors of the Company is responsible for the
supervision of the general business of the Company. The Directors act as
fiduciaries for shareholders under the laws of the State of Maryland. The Board
has appointed John Pasco, III to serve as President of the Company. The Company
employs the following persons to provide it with investment advice and to
conduct its ongoing business:
Investment Advisor - Vontobel USA Inc. (the "Advisor") manages the
investment of the assets of each Fund pursuant to an Investment Advisory
Agreement (each, an "Advisory Agreement"). The Advisory Agreements of the
Emerging Markets and E. European Debt Funds are effective for a period of two
years from August 18, 1997, and the Advisory Agreement of each of the other
Funds may be renewed, only so long as such renewal and continuance is
specifically approved at least annually by the Company's Board of Directors or
by vote of a majority of the outstanding voting securities of the applicable
Fund, provided the continuance is also approved by a majority of the Directors
who are not "interested persons" of the Company or the Advisor by vote cast in
person at a meeting called for the purpose of voting on such approval. The
address of the Advisor is 450 Park Avenue, New York, N.Y. 10022.
The Advisor is a wholly owned and controlled subsidiary of Vontobel
Holding Ltd., a Swiss bank holding company, having its registered offices in
Zurich, Switzerland. As of December 31, 1997, the Advisor manages in excess of
$1.9 billion. The Advisor also acts as the advisor to three series of a
Luxembourg fund organized by an affiliate of the Advisor. That fund does not
accept investments from the U.S.
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Mr. Edwin Walczak is the Senior Vice President of the Advisor, and has
been the President and portfolio manager of the Value Fund since its inception
in March 1990. Mr. Mark Robertson, who is a Vice President of the Advisor, is
the associate portfolio manager of the Value Fund and joined the Advisor in
September 1991.
Mr. Fabrizio Pierallini, who is a Senior Vice President of the
Advisor, has been the President and portfolio manager of the International
Equity Fund since May 1994 and the Emerging Markets Fund since its inception
on August 18, 1997. From May 1991 to April 1994 Mr. Pierallini was an Associate-
Director/Portfolio Manager with Swiss Bank Corporation in New York where he was
responsible for, among other things, international asset allocation. Mr.
Rajiv Jain, who is a Vice President of the Advisor, is the associate portfolio
manager of the International Equity and Emerging Markets Funds and joined the
Advisor in November 1994. From 1993 to 1994 Mr. Jain worked as an analyst with
Swiss Bank Corporation, New York and, for the prior two years, managed a
private trust for international investors in Florida.
Mr. Luca Parmeggiani, who is a Vice President of the Advisor, has been the
portfolio manager of the E. European Equity Fund since October 1, 1997. Mr.
Parmeggiani was formerly a Vice President of Lombard Odier & Cie, Geneva, which
he joined in 1992 as a quantitative analyst. Mr. Parmeggiani was the portfolio
manager of Lombard Odier's closed-end Polish Investment Fund and its
Luxembourg-based Eastern Europe Fund. He is an EFFAS certified financial analyst
(European Federation of Financial Analysts and Statisticians).
Mr. Sven Rump, who is a Vice President of the Advisor, has been the
President and portfolio manager of the Bond Fund since its inception on March 1,
1994. Mr. Rump is also a Vice President and the head of fixed income management
at Vontobel Asset Management Ltd., Switzerland, which he joined in October 1991.
Mr. Rump is a Chartered Financial Analyst.
Mr. Volker Wehrle, who is a Vice President of the Advisor, has been the
President and portfolio manager of the E. European Debt Fund since its inception
on August 18, 1997. Mr. Wehrle is currently (since October 1994) a Vice
President of Vontobel Asset Management, Switzerland, where he is deputy head of
fixed income management. From January 1989 to September 1994 he managed fixed
income investments for the Group Treasury Department of Sandoz AG in Basel,
Switzerland. and he was responsible for setting up the Sandoz Investment Trust
in London.
Pursuant to the Advisory Agreements, the Advisor provides the Funds
with investment management services, subject to the supervision of the Board of
Directors of the Company, and with office space, and pays the ordinary and
necessary office and clerical expenses relating to investment research,
statistical analysis, supervision of the Funds' portfolios and certain other
costs. The Advisor also bears the cost of fees, salaries and other remuneration
of the Company's Directors, officers or employees who are officers, Directors,
or employees of the Advisor. Each Fund is responsible for all other costs and
expenses, such as, but not limited to, brokerage fees and commissions in
connection with the purchase and sale of securities, legal, auditing,
bookkeeping and record keeping services, custodian and transfer agency fees and
fees
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and other costs of filing notice of or registration of its shares for sale under
various state and Federal securities laws. All expenses of each Fund not
specifically assumed by the Advisor are assumed by the Fund.
Under the Advisory Agreement with each Fund, the Advisor is entitled to
monthly compensation accrued daily at an annual rate equal to the percentage of
the average daily net assets of the Funds as set forth below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
=========================================================================================================================
Value International Emerging E. European Bond E. European
Amount of Assets Managed Fund Equity Fund Markets Fund Equity Fund Fund Debt Fund
- -------------------------------------------------------------------------------------------------------------------------
$0-$100 million 1.00% 1.00% 1.25% 1.25% 1.00% 1.25%
- -------------------------------------------------------------------------------------------------------------------------
More than $100 million to 0.75% 0.75% 1.25% 1.25% 1.00% 1.25%
$500 million
- -------------------------------------------------------------------------------------------------------------------------
More than $500 million 0.75% 0.75% 1.00% 1.00% 1.00% 1.00%
=========================================================================================================================
These fees are higher than those charged to most other investment companies, but
are comparable to fees paid by investment companies with investment objectives
and policies similar to the Funds' investment objectives and policies. The fee
is paid monthly, within five business days after the end of the month.
The Advisory Agreements contemplate the authority of the Advisor to
place orders for each of the Funds pursuant to its investment determinations
</TABLE>
either directly with the issuer or with any broker or dealer. The Advisor may
allocate brokerage to an affiliated dealer in accordance with written policies
and procedures adopted by the Company's Board of Directors. In placing orders
with brokers or dealers, the Advisor will attempt to obtain the best price and
execution for the Fund's orders. The Advisor may purchase and sell securities to
and from brokers and dealers who provide the Advisor with research advice or
statistical services, and may be authorized to pay a commission for such
transactions which is higher than the commission that would be charged by
another broker. From time to time, and subject to the Advisor obtaining the best
price and execution for each Fund, the Board of Directors may authorize the
Advisor to allocate brokerage transactions to a broker in consideration of: (1)
the sale of Fund shares, or (2) payment of an obligation otherwise payable by
the Funds.
Administrator - Commonwealth Shareholder Services, Inc. ("CSS"), serves
as Administrator to each Fund pursuant to Administrative Services Agreements.
CSS provides certain recordkeeping and shareholder servicing functions required
of registered investment companies, and will assist each Fund in preparing and
filing certain financial and other reports and performs certain daily functions
required for ongoing operations. CSS may furnish personnel to act as the
Company's officers to conduct the Company's business subject to the supervision
and instructions of the Company's Board of Directors.
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The Administrative Services Agreements provide that CSS will be paid
monthly: (1) 0.20% of the average daily net assets of the Funds on the first
$500 million and 1.5% on assets in excess of $500 million (which includes
regulatory matters, backup of the pricing of shares of each Fund, administrative
duties in connection with the execution of portfolio trades, and certain
services in connection with Fund accounting); (2) an hourly fee for shareholder
servicing and state securities law matters; and (3) certain out-of-pocket
expenses. The address of CSS is 1500 Forest Avenue, Suite 223, Richmond, VA
23229.
Custodian and Accounting Services Agents - Brown Brothers Harriman &
Co. ("BBH") is the Company's custodian and accounting services agent for the
Vontobel Funds. BBH collects income when due and holds all the portfolio
securities and cash of the International Funds. (BBH, with the consent of the
Company, has designated The Depository Trust Company of New York, as its agent
to secure some of the assets of the International Funds.) BBH is authorized to
appoint other entities to act as sub-custodians to provide for the custody of
foreign securities which may be acquired and held by the International Funds
outside the U.S. Such appointments are subject to appropriate review by the
Company's Board of Directors. BBH, as the accounting services agent of the
International Funds, maintains and keeps current the books, accounts, records,
journals or other records of original entry relating to such Funds' business.
The address of BBH is 40 Water Street, Boston, Massachusetts 02109.
Transfer and Dividend Disbursing Agent - Fund Services, Inc. ("FSI" or
the "Transfer Agent") is the transfer and dividend disbursing agent for the
Company. John Pasco, III, Chairman of the Board of the Company owns one third of
the stock of FSI, and, therefore, FSI may be deemed to be an affiliate of the
Company. FSI provides all the necessary facilities, equipment and personnel to
perform the usual and ordinary services of the transfer and dividend disbursing
agent, including administrative receipt and processing of orders and payments
for purchases of shares, opening shareholder accounts, preparing shareholder
meeting lists, mailing proxy material, receiving and tabulating proxies, mailing
shareholder reports and prospectuses, withholding certain taxes on non-resident
alien accounts, disbursing income dividends and capital distributions, preparing
and filing U.S. Treasury Department Form 1099 (or equivalent) for all
shareholders, preparing and mailing confirmation forms to shareholders for all
purchases and redemptions of the Company's shares and all other confirmable
transactions in shareholders' accounts, recording reinvestment of dividends and
distribution of the Company's shares. Under the Agreement between the Company
and FSI, as in effect on May 1, 1991, FSI is compensated pursuant to a schedule
of services, and is reimbursed for out-of-pocket expenses. The schedule calls
for a minimum payment of $16,500 per year. The address of the Transfer Agent is
P.O.
Box 26305, Richmond, VA 23260.
Principal Underwriter/Distributor - Vontobel Fund Distributors, a division
of First Dominion Capital Corp. (the "Distributor"), acts as the principal
underwriter for the Company pursuant to an agreement effective August 18, 1997.
Mr. John Pasco, III, who owns 100% of the outstanding stock of the Distributor,
is the President, Treasurer and a Director of the
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<PAGE>
Distributor. Mr. Pasco is also the Chairman and a Director of the Company. The
address of the Distributor is 1500 Forest Avenue, Suite 223, Richmond, VA 23229.
HOW TO INVEST
Shares of the Funds may be purchased directly from the Distributor or
through brokers or dealers who are members of the National Association of
Securities Dealers, Inc. who are registered, if required, in the state where the
purchase is made and who have a sales agreement with the Distributor. After a
shareholder account is established, subsequent orders for shares may be mailed
directly to the Transfer Agent. The offering price per share is equal to the net
asset value per share next determined after receipt of a purchase order. A
minimum initial investment of $1,000 is required to open a shareholder account
in each Fund, and each subsequent investment must be $50 or more. Under certain
circumstances the Company may waive the minimum initial investment for purchases
by officers, Directors and employees of the Company and its affiliated entities
and for certain related advisory accounts and retirement accounts (such as
IRAs).
When an investor acquires shares of a Fund from a securities broker or
dealer, the investor may be charged a transaction fee for shares purchased
and/or redeemed at net asset value through that broker or dealer.
To facilitate the handling of transactions with shareholders, the
Company uses an open account plan. The Transfer Agent will automatically
establish and maintain an open account for the Funds' shareholders. Under the
open account plan your shares are reflected in your open account. This service
facilitates the purchase, redemption or transfer of shares, eliminates the need
to issue or safeguard certificates and reduces time delays in executing
transactions. Stock certificates are not required and are not normally issued.
Stock certificates for full shares will be issued by the Transfer Agent upon
written request but only after payment for the shares is collected by the
Transfer Agent.
Purchase by Mail - For initial purchases the account application form
(the "Account Application") which accompanies this Prospectus should be
completed, signed, and mailed to the Transfer Agent, together with your check or
other negotiable bank draft drawn on and payable by a U.S. Bank payable to the
applicable Fund. For subsequent purchases include with your check the tear-off
stub from a prior purchase confirmation, or otherwise identify the name(s) of
the registered owner(s) and the social security numbers.
Investing by Wire - You may purchase shares by requesting your bank to
transmit "Federal Funds" by wire directly to the Transfer Agent. To invest by
wire please call the Transfer Agent for instructions, then notify the
Distributor by calling 800-776-5455. Your bank may charge you a small fee for
this service. The Account Application which accompanies this Prospectus should
be completed and promptly forwarded to the Transfer Agent. This application is
required to complete the Funds' records in order to allow you access to your
shares. Once your account is opened by mail or by wire, additional investments
may be made at any time
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through the wire procedure described above. Be sure to include your name and
account number in the wire instructions you provide your bank.
HOW TO REDEEM SHARES
Subject to certain exigencies described below, shares of the Funds may
be redeemed at any time and in any amount by mail or telephone. For your
protection, the Transfer Agent will not redeem your shares until it has received
all information and documents necessary for your request to be in "proper
order". (See "Signature Guarantees".) You will be notified promptly by the
Transfer Agent if your redemption request is not in proper order.
If a shareholder redeems shares of the Emerging Markets Fund, E.
European Equity Fund or E. European Debt Fund that have been held less than six
months (including shares to be exchanged), the Company will deduct from the
proceeds a redemption charge of 2% of the amount of the redemption. This amount
is retained by the applicable Fund to offset the Fund's costs of purchasing or
selling securities.
The Company's procedure is to redeem shares at the net asset value next
determined after receipt by the Transfer Agent of the redemption request in
proper order as described herein. Payment will be made promptly, but no later
than the seventh day following receipt of the request in proper order. Please
note that (1) the Transfer Agent cannot accept redemption requests which specify
a particular date for redemption, or which specify any special conditions; and
(2) if the shares you are redeeming were purchased by you less than 15 days
prior to the receipt of your redemption request, the Transfer Agent must
ascertain that your check in payment of the shares you are redeeming has cleared
prior to disbursing the redemption proceeds. If you anticipate that you may need
to redeem sooner than 15 days after purchase, you should make your purchase by
Federal Funds wire, or by a certified, treasurer's or cashier's check.
The Company may suspend the right to redeem shares for any period
during which the New York Stock Exchange is closed or the Securities and
Exchange Commission determines that there is an emergency. In such circumstances
you may withdraw your redemption request or permit your request to be held for
processing at the net asset value per share next computed after the suspension
is terminated.
Redemption by Mail - To redeem shares by mail, send the following
information to the Transfer Agent: (1) a written request for redemption signed
by the registered owner(s) of the shares, exactly as the account is registered;
(2) the stock certificates for the shares you are redeeming, if any stock
certificates were issued; (3) any required signature guarantees (see "Signature
Guarantees"); and (4) any additional documents that might be required for
redemption by corporations, executors, administrators, trustees, guardians, etc.
The Transfer Agent will mail the proceeds to your currently registered address,
payable to the registered owner(s) unless you specify otherwise in your
redemption request. There is no charge to shareholders for redemptions by mail.
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Redemption by Telephone - You may redeem your shares by telephone if
you request this service on your Account Application at the time you complete
your initial Account Application. If you do not request this service at that
time, you must request approval of telephone redemption privileges in writing
(sent to the Company's Transfer Agent) with a signature guarantee (see
"Signature Guarantee") before you can redeem shares by telephone. Once your
telephone authorization is in effect, you may redeem shares by calling the
Transfer Agent at (800) 628-4077. By establishing this service, you authorize
the Transfer Agent to act upon any telephone instructions it believes to be
genuine, to (1) redeem shares from your account and (2) mail or wire redemption
proceeds. There is no charge for establishing this service, but the Transfer
Agent will charge your account a $10.00 service fee each time you make a
telephone redemption. The amount of this service charge may be changed at any
time, without notice, by the Transfer Agent.
You cannot redeem shares by telephone if you hold a stock certificate
representing the shares you are redeeming or if you paid for the shares with a
personal, corporate, or government check and your payment has been on the books
of the Company for less than 15 days.
If it should become difficult to reach the Transfer Agent by telephone
during periods when market or economic conditions lead to an unusually large
volume of telephone requests, a shareholder may send a redemption request to the
Transfer Agent by overnight mail.
The Company employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if it does not,
it may be liable for any losses due to unauthorized or fraudulent transactions.
As a result of this policy, a shareholder authorizing telephone redemption bears
the risk of loss which may result from unauthorized or fraudulent transactions
which the Company believes to be genuine. When you request a telephone
redemption or transfer, you will be asked to respond to certain questions
designed to confirm your identity as a shareholder of record. Your cooperation
with these procedures will protect your account and the Company from
unauthorized transactions.
Redemption by Wire - If you request by mail or telephone that your
redemption proceeds be wired to you, please call your bank for instructions
prior to writing or calling the Transfer Agent. Be sure to include your name,
Fund account number, your account number at your bank and wire information from
your bank in your request to redeem by wire.
Signature Guarantees - To help to protect you and the Company from
fraud, signature guarantees are required for: (1) all redemptions ordered by
mail if you require that the check be payable to another person or that the
check be mailed to an address other than the one indicated on the account
registration; (2) all requests to transfer the registration of shares to another
owner; and (3) all authorizations to establish or change telephone redemption
service, other than through your initial Account Application.
In the case of redemption by mail, signature guarantees must appear on
either: (a) the written request for redemption; or (b) a separate instrument of
assignment (usually referred to
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<PAGE>
as a "stock power") specifying the total number of shares being redeemed. The
Company may waive these requirements in certain instances.
The following institutions are acceptable signature guarantors: (a)
participants in good standing of the Securities Transfer Agents Medallion
Program ("STAMP"); (b) commercial banks which are members of the Federal Deposit
Insurance Corporation ("FDIC"); (c) trust companies; (d) firms which are members
of a domestic stock exchange; (e) eligible guarantor institutions qualifying
under Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended, that are
authorized by charter to provide signature guarantees (e.g., credit unions,
securities dealers and brokers, clearing agencies and national securities
exchanges); and (f) foreign branches of any of the above. In addition, the
Company will guarantee your signature if you personally visit its offices at
1500 Forest Avenue, Suite 223, Richmond, VA 23229. The Transfer Agent cannot
honor guarantees from notaries public, savings and loan associations, or savings
banks.
Small Accounts - Due to the relatively higher cost of maintaining small
accounts, the Company may deduct $10 per year from an account of a Fund or may
redeem the Fund's shares in the account, if as a result of redemption or
transfer of shares the total investment remaining in the account for the Fund,
has a value of less than $1,000. Shareholders will receive 60 days' written
notice to increase the account value above $1,000 before the fee begins to be
deducted or the shares are redeemed. A decline in the market value of your
account alone would not require you to bring your investment up to the minimum.
HOW TO TRANSFER SHARES
If you wish to transfer shares to another owner, send a written request
to the Transfer Agent. Your request should include (1) the name of the Fund and
existing account registration; (2) signature(s) of the registered owner(s); (3)
the new account registration, address, Social Security Number or taxpayer
identification number and how dividends and capital gains are to be distributed;
(4) any stock certificates which have been issued for the shares being
transferred; (5) signature guarantees (See "Signature Guarantees"); and (6) any
additional documents which are required for transfer by corporations,
administrators, executors, trustees, guardians, etc. If you have any questions
about transferring shares, call the Transfer Agent at (800) 628-4077.
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS
Each time you purchase, redeem or transfer shares of a Fund, you will
receive a written confirmation. You will also receive a year-end statement of
your account if any dividends or capital gains have been distributed, and an
annual and a semi-annual report.
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SPECIAL SHAREHOLDER SERVICES
The Company offers the following four services for its shareholders:
Regular Account - allows shareholders to make voluntary additions and
withdrawals to and from their account as often as they wish;
Invest-A-Matic Account - permits automatic monthly investments into a
Fund from your checking account on a fixed schedule;
Individual Retirement Accounts (IRA's); and
Exchange Privileges Account - allows the shareholder to exchange his or
her shares for shares of certain other Funds having different investment
objectives provided the shares of the Fund the shareholder is exchanging into
are noticed for sale in the shareholder's state of residence. A shareholder's
account may be charged a $10.00 telephone exchange fee. An exchange is treated
as a redemption and a purchase, and may result in the realization of a gain or
loss on the transaction. More information on any of these services is available
upon written request to the Company.
HOW NET ASSET VALUE IS DETERMINED
The net asset value ("NAV") of the shares of each Fund is determined by
its custodian as of the close of trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern Time) on each business day from Monday to Friday
or on each day (other than a day during which no Fund share was tendered for
redemption and no order to purchase or sell a Fund share was received by the
Company) in which there is a sufficient degree of trading in the portfolio
securities that the current NAV of the shares might be materially affected by
changes in the value of such portfolio security. Each Fund's NAV is calculated
at such 4:00 p.m. time set by the Company's Board of Directors based upon the
Board's determination that this is the most appropriate time to price the
securities.
NAV per share for each Fund is determined by dividing the total value
of the Fund's assets, less its liabilities, by the total number of shares of
that Fund then outstanding. Generally, securities owned by a Fund are valued at
market value.
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 debt securities (less than 60 days to maturity) are valued
at their fair market value using amortized cost pricing procedures set, and
determined to be fair, by the Board of
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Directors. Other assets for which market prices are not readily available are
valued at their fair value as determined in good faith under procedures set by
the Board of Directors.
ADRs, EDRs, and GDRs will be valued at the closing price of the
instrument last determined prior to the valuation time unless the Company is
aware of a material change in value. Items for which such a value cannot be
readily determined on any day will be valued at the closing price of the
underlying security adjusted for the exchange rate.
The Company's management may compute the NAV per share more frequently
in order to protect shareholders' interests.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends from net investment income, if any, are declared annually.
Each of the Funds intends to distribute annually realized net capital gains,
after utilization of capital loss carryforwards, if any, to prevent application
of a federal excise tax. However, a Fund may make an additional distribution any
time prior to the due date, including extensions, of filing its tax return, if
necessary to accomplish this result. Any dividends or capital gains distributed
pursuant to a dividend declaration declared in October, November or December
with a record date in such a month and paid during the following January will be
treated by shareholders for federal income tax purposes as if received on
December 31 of the calendar year declared. Unless you elect otherwise, dividends
and capital gains distributions will be reinvested in additional shares of the
Fund at no charge. Changes in your election regarding receipt of dividends and
distributions must be sent to the Transfer Agent. Shareholders will be subject
to tax on all dividends and distributions whether paid to them or reinvested in
shares of the Fund. If an investment in Fund shares is made by a retirement
plan, all dividends and capital gains distributions must be reinvested into an
account of such plan.
Generally, dividends from net investment income are taxable to
investors as ordinary income. Certain gains or losses on the sale or retirement
of international securities held by a Fund, to the extent attributable to
fluctuations in currency exchange rates, as well as certain other gains or
losses attributable to exchange rate fluctuations, must be treated as ordinary
income or loss. Such income or loss may increase or decrease (or possibly
eliminate) the income available for distribution to shareholders. If, under the
rules governing the tax treatment of foreign currency gains and losses, the
income available for distribution is decreased or eliminated, all or a portion
of the dividends declared by a Fund may be treated for federal income tax
purposes as a return of capital or, in some circumstances, as capital gain.
Generally, a shareholder's tax basis in Fund shares will be reduced to the
extent that an amount distributed to the shareholder is treated as a return of
capital.
Long-term capital gains distributions, if any, are taxable as net
long-term capital gains when distributed regardless of the length of time
shareholders have owned their shares. Net short-term capital gains and any other
taxable income distributions are taxable as ordinary income.
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Each Fund sends detailed tax information about the amount and type of
its distributions to its shareholders by January 31 of the year following the
distributions.
TAXES
Each Fund will seek to qualify as a regulated investment company under
Subchapter M of the Code. As a regulated investment company under the Code, a
Fund is not liable for federal income taxes on income or net capital gains that
are distributed to its shareholders or imputed to shareholders under the Code,
or for any excise tax, to the extent its earnings are distributed as provided in
the Code, and assuming it meets the tax diversification test, and the 90%
gross income test as required by the Code.
Each Fund will act and invest so as to comply with the requirements of
Subchapter M which are described in the Statement of Additional Information.
This may mean, for example, that it will be required to hold an investment
longer than it otherwise would, or not engage in a hedging transaction which it
otherwise would, in order to avoid violating one of the tests outlined above.
The distribution to shareholders each year of investment income and
capital gains will represent taxable income to the shareholders, who will be
advised of such amounts by the Fund. The Company is a series corporation. Each
Fund is treated as a separate taxable entity under the Code.
Each International Fund may be subject to foreign withholding taxes on
income from certain of its foreign securities. These withholding taxes will
reduce the return on the shareholder's investment. If more than 50% of the value
of a Fund's assets at the close of its taxable year consists of stock or
securities in foreign corporations, it may elect to pass through to its
shareholders the amount of foreign withholding taxes it paid. If this election
is made, shareholders will be (i) required to include in their gross income
their pro rata share of foreign source income (including any foreign taxes paid
by the Fund), and (ii) entitled to either deduct (as an itemized deduction in
the case of individuals) their share of such foreign taxes in computing their
taxable income or to claim a credit for such taxes against their U.S. income
tax, subject to certain limitations under the Code. The Fund will notify its
shareholders of such election within 60 days of the close of its tax year.
Shareholders may decide whether to utilize such flow through amount as either a
deduction or a tax credit. Individual shareholders will usually find that the
credit is more favorable. Tax-exempt investors, such as pension plans and
individual retirement accounts, will not benefit from this pass through.
On the account application, the shareholder must provide the
shareholder's taxpayer identification number ("TIN"), certify that it is correct
and certify that the shareholder is not subject to backup withholding under
Internal Revenue Service ("IRS") rules. If the shareholder fails to provide a
correct TIN or the proper certifications, the Fund will withhold 31% of all
distributions and redemption proceeds payable to the shareholder. The Fund will
also begin
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backup withholding on a shareholder's Fund account if the IRS instructs the Fund
to do so. The Fund reserves the right not to open a shareholder's account or, if
an account is already opened, to redeem a shareholder's shares at the current
NAV, less any taxes withheld, if the shareholder fails to provide a correct TIN,
fails to provide the proper certifications, or the IRS advises the Fund to begin
backup withholding on the shareholder's Fund account.
GENERAL INFORMATION ABOUT THE COMPANY
The Company is authorized to issue up to 500,000,000 shares of common
stock, par value $0.01 per share, of which it has presently allocated 50,000,000
shares to each of the Funds. The Board of Directors can allocate the remaining
authorized but unissued shares to any series of the Company or may create
additional series and allocate shares to such series.
A share of a Fund has priority in the assets of that fund in the event
of a liquidation. The shares of a Fund will be fully paid and nonassessable,
will have no preference over other shares of the Fund as to conversion,
dividends, or retirement, and will have no preemptive rights. Shares of a Fund
will be redeemable from the assets of that Fund at any time, as described above.
Each outstanding share of a Fund is entitled to one vote for each full
share of stock and a fractional vote for fractional shares of stock. All
shareholders vote on matters which concern the Company as a whole. The Company
is not required to hold a meeting of shareholders each year, and may elect not
to hold a meeting in years when no meeting is necessary. The shareholders of a
Fund shall vote separately on matters that affect only such Fund's interest. The
Funds' shares do not have cumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election of Directors can elect
all of the Directors if they choose to do so. Shareholders may utilize
procedures described in the Statement of Additional Information to call a
meeting.
The name of the Company was changed from The World Funds, Inc. to Vontobel
Funds, Inc. effective on February 28, 1997, as approved by the Board of
Directors of the Company.
Limitation on Use of Name - The Advisory Agreement for each Fund
authorizes the Company to utilize the name "Vontobel". The Company agrees that
if an Advisory Agreement is terminated it will submit to shareholders a proposal
that the related Fund redesignate its name to eliminate any reference to the
name "Vontobel" or any derivation thereof unless the Advisor waives this
requirement in writing.
TO OBTAIN MORE INFORMATION
For further information on the Funds, please contact Commonwealth
Shareholder Services, Inc., P.O. Box 8687, Richmond, VA 23226, telephone: (800)
527-9500.
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<PAGE>
Additional information may also be obtained by requesting a copy of the
Statement of Additional Information.
Investment Advisor: Vontobel USA Inc.
450 Park Avenue
New York, NY 10022
Distributor: Vontobel Fund Distributors,
a division of First Dominion Capital Corp.
1500 Forest Avenue, Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
8 Penn Center Plaza
Suite 800
Philadelphia, PA 19103
Marketing Services: For general information on the Funds and
marketing services, call the Distributor at
(800) 776-5455 toll free.
Transfer Agent: For account information, wire purchase or
redemptions, call or write to the Company's
Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260-6305
(800) 628-4077 Toll Free
More Information: For 24-hour, 7-days-a-week price information call
1-800-527-9500.
For information on any series of the Company,
investment plans, or other shareholder services,
call 1-800-527-9500 during normal business hours,
or write the Company at 1500 Forest Avenue, Suite
223, Richmond, VA 23229.
No dealer, sales representative or any other person has been authorized
to give any information or to make any representations, other than those
contained in this Prospectus, in connection with the offer made by this
Prospectus and, if given or made, such other information or representations must
not be relied upon as having been authorized by the Fund or the Distributor.
This Prospectus does not constitute an offer by the Fund or the Distributor to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
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VONTOBEL FUNDS, INC.
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
VONTOBEL EMERGING MARKETS EQUITY FUND
VONTOBEL EASTERN EUROPEAN EQUITY FUND
VONTOBEL INTERNATIONAL BOND FUND
VONTOBEL EASTERN EUROPEAN DEBT FUND
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1998
Vontobel Funds, Inc. (the "Company") is an open-end, management
investment company commonly known as a "mutual fund." This Statement of
Additional Information ("SAI") is not a prospectus but supplements the
information contained in the current Prospectus of the Vontobel U.S. Value Fund,
Vontobel International Equity Fund (formerly named Vontobel EuroPacific Fund),
Vontobel Emerging Markets Equity Fund, Vontobel Eastern European Equity Fund,
Vontobel International Bond Fund and Vontobel Eastern European Debt Fund (each,
a "Fund"), dated May 1, 1998. It should be read in conjunction with the
Prospectus, and has been designed to provide you with further information which
is not contained in the Prospectus. The Prospectus of the Funds may be obtained
at no charge upon request to the Company.
Please retain this SAI for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS STATEMENT OF ADDITIONAL INFORMATION. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
Vontobel Funds, Inc............................................ 1
Investment Policies............................................ 1
Additional Investments and Investment Techniques............... 10
Strategic Transactions................................ 10
Options............................................... 10
Futures............................................... 16
Currency Transactions................................. 18
Combined Transactions................................. 20
Eurocurrency Instruments.............................. 21
Use of Segregated and Other Special Accounts.......... 21
U.S. Government Securities............................ 23
Repurchase Agreements................................. 23
Reverse Repurchase Agreements......................... 25
Special Investment Considerations of the Funds................. 26
Investment Restrictions........................................ 28
Taxes.......................................................... 34
Dividends and Distributions.................................... 41
Portfolio Transactions......................................... 41
Valuation and Calculation of Net Asset Value................... 43
Directors and Officers......................................... 47
Investment Advisor............................................. 50
Transfer Agent................................................. 51
Administrator.................................................. 52
Eligible Benefit Plans......................................... 52
Distribution................................................... 52
Fund Expenses.................................................. 53
Special Shareholder Services................................... 53
General Information and History................................ 55
Performance.................................................... 57
Financial Statements........................................... 62
Appendix - Bond Ratings........................................ 63
<PAGE>
VONTOBEL FUNDS, INC.
The Funds are series of Vontobel Funds, Inc. (the "Company"), a
Maryland corporation which is an open-end, management investment company,
commonly known as a "mutual fund." Each of the Funds is a no-load series of the
Company. The Vontobel International Equity Fund ("International Equity Fund")
(formerly named, Vontobel EuroPacific Fund), Vontobel Emerging Markets Equity
Fund ("Emerging Markets Fund") and Vontobel Eastern European Equity Fund ("E.
European Equity Fund") are diversified series, and the Vontobel U.S. Value Fund
("Value Fund"), Vontobel International Bond Fund ("Bond Fund") and Vontobel
Eastern European Debt Fund ("E. European Debt Fund") are non-diversified series.
A diversified series has investment restrictions that require that, with respect
to 75% of its total assets, the series may invest no more than 5% of its total
assets in the securities of a single issuer, with certain exceptions, as
described in the "Investment Restrictions" sections of the Prospectus and SAI.
Each of the International Equity Fund, Emerging Markets Fund, E. European Equity
Fund, Bond Fund and E. European Debt Fund (each, an "International Fund") may or
does invest a large percentage of its assets in foreign securities, as described
in the Prospectus and below.
There is some market risk inherent in any investment, due in part to
changes in general economic and market conditions. The investment policies of
each Fund, however, are intended to provide the flexibility to take advantage of
opportunities while accepting only what Vontobel USA Inc. (the "Advisor")
believes to be reasonable risks. Changes in holdings of portfolio securities are
made on the basis of investment considerations, and it is against the policy of
management to make changes for trading purposes. The Funds cannot guarantee a
gain or eliminate the risk of loss. Each Fund's net asset value per share will
increase or decrease with changes in the market price of the Fund's investments.
Each Fund's investments will be subject to the risks which are inherent in all
investments. Although the Advisor will seek to attain the Fund's stated
investment objective, there can be no assurance that the investment objective
will be achieved.
Investment Policies
Vontobel U.S. Value Fund
Under normal circumstances, the Value Fund will have at least 65% of
its assets invested in common stocks or securities convertible into common
stocks. The Fund may also acquire fixed income investments where these fixed
income securities are convertible into equity securities (and which may
therefore reflect appreciation in the underlying equity security), and where
anticipated interest rate movements, or factors affecting the degree of risk
inherent in a fixed income security are
<PAGE>
expected to change significantly so as to produce appreciation in the security
consistent with the Fund's objective. The fixed income securities in which the
Fund may invest will be rated at the time of purchase Baa or higher by Moody's
Investors Service, Inc. ("Moody's"), or BBB or higher by Standard and Poor's
Ratings Group ("S&P"), or if they are foreign securities which are not subject
to standard credit ratings the fixed income securities will be "investment
grade" issues (in the judgement of the Advisor) based on available information.
Securities rated as BBB are regarded as having adequate capacity to pay interest
and repay principal.
The Fund will select its non-equity investments from among securities
and obligations of all kinds including preferred stocks, warrants, rights, bonds
(of any class or rating), repurchase agreements, money market investments (such
as U.S. Government securities (see "Additional Investments and Investment
Techniques - U.S. Government Securities") issued by the U.S. Treasury, agencies
or other instrumentalities) and other evidences of indebtedness.
The Fund will enter into only repurchase agreements
involving U.S. Government securities in which it may otherwise
invest. See "Additional Investments and Investment Techniques -
Repurchase Agreements" and "- U.S. Government Securities" below.
The Fund may lend its portfolio securities.
Vontobel International Equity Fund
Under normal circumstances, the International Equity Fund will have at
least 65% of its assets invested in a portfolio of common stocks or securities
convertible into common stocks of issuers principally from European and Pacific
Basin countries. The Fund will normally be invested in not less than three
countries. However, when the Advisor believes that investments should be
deployed in a temporary defensive posture because of economic or market
conditions, the Fund may invest up to 100% of its assets in U.S. Government
securities (such as bills, notes, or bonds of the U.S. Government and its
agencies) or other forms of indebtedness such as bonds, certificates of deposit
or repurchase agreements.
The Fund may also acquire fixed income investments where these fixed
income securities are convertible into equity securities (and which may
therefore reflect appreciation in the underlying equity security), and where
anticipated interest rate movements, or factors affecting the degree of risk
inherent in a fixed income security are expected to change significantly so as
to produce appreciation in the security consistent with the Fund's objective.
The fixed income securities in which the Fund may invest will be rated at the
time of purchase Baa or higher by
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Moody's or BBB or higher by S&P, or if they are foreign securities which are not
subject to standard credit ratings the fixed income securities will be
"investment grade" issues (in the judgement of the Advisor) based on available
information. Securities rated as BBB are regarded as having adequate capacity to
pay interest and repay principal.
The Fund will select its non-equity investments from among securities
and obligations of all kinds including preferred stocks, warrant rights, bonds
(of any class or rating), repurchase agreements, money market investments (such
as U.S. Government securities (see "Additional Investments and Investment
Techniques - U.S. Government Securities") issued by the U.S. Treasury, agencies
or other instrumentalities) and other evidences of indebtedness.
The Fund will enter into only repurchase agreements
involving U.S. Government securities in which it may otherwise
invest. See "Additional Investments and Investment Techniques -
Repurchase Agreements" and "- U.S. Government Securities" below.
The Fund is designed to take advantage of the opportunities provided by
the ability to invest overseas, and therefore may be subject to some of the
special risks described below.
As noted in the Prospectus, the Fund has the right to invest in
securities which may be considered to be "thinly traded" if they are deemed to
offer the potential for appreciation, but it does not presently intend to invest
more than 5% of its assets in such securities. The trading volume of such
securities is generally lower and their prices may be more volatile as a result,
and such securities are less likely to be exchange-listed securities. The Fund
may also invest, subject to certain restrictions described below, in options
(puts and calls) and, to a limited extent, in restricted securities.
The Fund may invest in the shares of closed-end investment companies
which acquire equity securities of countries in which the Fund may invest. By
investing in shares of such investment companies, the Fund would indirectly pay
a portion of the operating expenses, management expenses, and brokerage costs of
such an investment company as well as the expenses of the Fund. The Advisor will
recommend such investments when it believes that this would allow the Fund to
achieve a greater diversification at an economically more advantageous price
than through the acquisition of individual securities, or when such company is
able to achieve an investment in a country which the Fund cannot acquire for
legal or economic reasons.
The Fund may utilize American Depositary Receipts ("ADRs")
and European Depositary Receipts ("EDRs"). Generally, ADRs are
dollar denominated securities issued in registered form and
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<PAGE>
designed for use in the United States securities markets. They represent and may
be converted into the underlying foreign security. EDRs, in bearer form, are
similarly designed for use in the European securities markets. For purposes of
determining the country of origin, ADRs and closed-end investment companies will
not be deemed to be domestic securities.
The Fund may lend its portfolio securities.
Hedging with Forward Foreign Currency Contracts, Futures and
Options on Futures
The Fund's investment objective (as described in the Prospectus)
contemplates investment in securities of issuers domiciled or operating outside
of the United States. Such foreign investments may require the Fund temporarily
to hold funds in foreign currencies prior to, during or following the completion
of investment programs. In such circumstances the value of the Fund's assets, as
measured in U. S. dollars, may be affected favorably or unfavorably by changes
in foreign currency exchange rates and exchange control regulations.
The Fund will conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
market or, when deemed necessary to "hedge" the Fund's anticipated cash
movements, through entering into forward foreign currency exchange contracts to
purchase or sell foreign currencies, futures or options on futures. See
"Additional Investments and Investment Techniques" below.
Covered Call and Put Options
The Fund may write (sell) "covered" call options and purchase put
options, and purchase call and write put options to close out options previously
written by it. The Fund may purchase put options in the following two
circumstances: (1) when it holds a position in the security (that is, the put is
covered), or (2) a put option on a market index when, in the opinion of the
Advisor, such index is representative of the securities held in the portfolio,
and therefore, the index will move in the same direction as the securities held
in the portfolio. The purpose of writing covered call options and purchasing put
options will be to reduce the effect of price fluctuations of selected
securities owned by it on the net asset value per share. The hedging activities
on portfolio securities using options are separate and different from the
foreign currency hedging transactions (see above) entered into by the Fund.
Although additional revenues may be generated through the use of covered call
options, the Advisor does not consider the additional revenues which may be
generated as the primary reason for writing covered call options, which is
undertaken to hedge
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<PAGE>
the investments in a particular security. Similarly, foreign currency hedging is
intended to hedge currency movements, not to speculate on currency gains or
generate commission income. There is no assurance that the Fund's portfolio will
be hedged, or that the hedge will be complete or in exact correlation with
market movement. In order to hedge its investment the Fund will generally give
up opportunities to gain from market movement.
The Fund will write only covered call options and purchase put options.
It will write covered call options and purchase put options in standard
contracts which are quoted on national securities exchanges or similar
instruments in comparable markets in the countries in which it invests and holds
its portfolio securities. See "Additional Investments and Investment Techniques"
below.
Vontobel Emerging Markets Equity Fund
Under normal circumstances, the Emerging Markets Fund will have at
least 65% of its total assets invested in common stocks, or securities
convertible into common stocks, of issuers in developing countries around the
globe. The Fund may also acquire fixed income investments where these fixed
income securities are convertible into equity securities (and which may
therefore reflect appreciation in the underlying equity security), and where
anticipated interest rate movements, or factors affecting the degree of risk
inherent in a fixed income security are expected to change significantly so as
to produce appreciation in the security consistent with the Fund's objective.
The fixed income securities in which the Fund may invest will be rated at the
time of purchase Baa or higher by Moody's, or BBB or higher by S&P, or if they
are foreign securities which are not subject to standard credit ratings the
fixed income securities will be "investment grade" issues (in the judgement of
the Advisor) based on available information. Securities rated as BBB are
regarded as having adequate capacity to pay interest and repay principal.
The Fund will select its non-equity investments from among securities
and obligations of all kinds including preferred stocks, warrants, rights, bonds
(of any class or rating), repurchase agreements, money market investments (such
as U.S. Government securities (see "Additional Investments and Investment
Techniques - U.S. Government Securities") issued by the U.S. Treasury, agencies
or other instrumentalities) and other evidences of indebtedness.
The Fund will enter into only repurchase agreements
involving U.S. Government securities in which it may otherwise
invest. See "Additional Investments and Investment Techniques -
Repurchase Agreements" and "- U.S. Government Securities" below.
The Fund may lend its portfolio securities.
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<PAGE>
Vontobel Eastern European Equity Fund
Under normal circumstances the E. European Equity Fund will have at
least 65% of its assets invested in a portfolio of common stocks or securities
convertible into common stocks of issuers from not less than three countries.
However, when the Advisor believes that investments should be deployed in a
temporary defensive posture because of economic or market conditions, the Fund
may invest up to 100% of its assets in U.S. Government securities (such as
bills, notes, or bonds of the U.S. Government and its agencies) or other forms
of indebtedness such as bonds, certificates of deposit or repurchase agreements.
The Fund may also acquire fixed income investments where these fixed
income securities are convertible into equity securities (and which may
therefore reflect appreciation in the underlying equity security), and where
anticipated interest rate movements, or factors affecting the degree of risk
inherent in a fixed income security are expected to change significantly so as
to produce appreciation in the security consistent with the Fund's objective.
The fixed income securities in which the Fund may invest will be rated at the
time of purchase Baa or higher by Moody's, or BBB or higher by S&P, or if they
are foreign securities which are not subject to standard credit ratings the
fixed income securities will be "investment grade" issues (in the judgement of
the Advisor) based on available information. Securities rated as BBB are
regarded as having adequate capacity to pay interest and repay principal.
The Fund will select its non-equity investments from among securities
and obligations of all kinds including preferred stocks, warrant rights, bonds
(of any class or rating), repurchase agreements, money market investments (such
as U.S. Government securities (see "Additional Investments and Investment
Techniques - U.S. Government Securities") issued by the U.S. Treasury, agencies
or other instrumentalities) and other evidences of indebtedness.
The Fund may enter into repurchase agreements (which enables it to
employ its assets pending investment) during very short periods of time.
Ordinarily these agreements permit the Fund to maintain liquidity and earn
higher rates of return than would normally be available from other short-term
money market instruments. The Fund will enter into only repurchase agreements
involving U.S. Government securities in which it may otherwise invest. See
"Additional Investments and Investment Techniques Repurchase Agreements" and "-
U.S. Government Securities" below.
The Fund is designed to take advantage of the opportunities provided by
the ability to invest overseas, and therefore may be subject to some of the
special risks described below.
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<PAGE>
As noted in the Prospectus, the Fund has the right to invest in
securities which may be considered to be "thinly traded" if they are deemed to
offer the potential for appreciation, but it does not presently intend to invest
more than 15% of its assets in such securities. The trading volume of such
securities is generally lower and their prices may be more volatile as a result,
and such securities are less likely to be exchange-listed securities. The Fund
may also invest, subject to certain restrictions described below, in options
(puts and calls) and, to a limited extent, in restricted securities.
The Fund may invest in the shares of closed-end investment companies
which acquire equity securities of Eastern/Central European countries in which
the Fund may invest. By investing in shares of such investment companies, the
Fund would indirectly pay a portion of the operating expenses, management
expenses, and brokerage costs of such an investment company as well as the
expenses of the Fund. The Advisor will recommend such investments when it
believes that this would allow the Fund to achieve a greater diversification at
an economically more advantageous price than through the acquisition of
individual securities, or when such company is able to achieve an investment in
a country which the Fund cannot acquire for legal or economic reasons.
The Fund may utilize ADRs, EDRs and Global Depositary Receipts
("GDRs"). Generally, ADRs are dollar denominated securities issued in registered
form and designed for use in the United States securities markets. They
represent and may be converted into the underlying foreign security. EDRs and
GDRs, in bearer form, are similarly designed for use in the European securities
markets. For purposes of determining the country of origin, ADRs and closed-end
investment companies will not be deemed to be domestic securities.
It is the Fund's policy not to lend its portfolio securities at the
present time, although it is not restricted from so doing.
Hedging with Forward Foreign Currency Contracts, Futures and
Options or Futures
The Fund's investment objective (as described in the Prospectus)
contemplates investment in securities of issuers domiciled or operating outside
the United States. Such foreign investments may require the Fund to temporarily
hold funds in foreign currencies prior to, during or following the completion of
investment programs. In such circumstances the value of the Fund's assets, as
measured in U.S. dollars, may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations.
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<PAGE>
The Fund will conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
market or, when deemed necessary to "hedge" the Fund's anticipated cash
movements, through entering into forward contracts to purchase or sell foreign
currencies, currency futures or options on currency futures. See "Additional
Investments and Investment Techniques" below.
Vontobel International Bond Fund
The Bond Fund offers investors a convenient way to invest in a managed
portfolio of foreign currency denominated debt securities. It seeks to achieve
its objective of total return primarily by investing in a managed portfolio of
high-grade bonds denominated in foreign currencies. It will seek protection and
possible enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
To achieve its objective, the Fund will primarily invest in
international bonds that are denominated in foreign currencies, including bonds
denominated in the European Currency Unit ("ECU"). International bonds are
defined as bonds issued in countries other than the United States. The Fund's
investments may include debt securities issued or guaranteed by a foreign
national government, its agencies, instrumentalities or political subdivisions,
debt securities issued or guaranteed by supranational organizations, corporate
debt securities, bank or holding company debt securities and other debt
securities including those convertible into common stock.
Because of the Fund's investment considerations discussed above and its
investment policies, investments in the Fund are not intended to provide a
complete investment program for an investor.
Debt Securities. The Fund may purchase "investment-grade" bonds, which
are those rated Baa or higher by Moody's or BBB or higher by S&P, or unrated
securities which the Advisor believes are of comparable quality. Bonds rated Baa
or BBB may have speculative elements as well as investment-grade
characteristics. The Fund reserves the right, however, to invest its assets in
lower rated securities (including unrated securities which the Advisor believes
to be of such lower quality). (See the Appendix for Bond Ratings). The Fund will
invest no more than 5% of its assets in securities rated below investment grade
(i.e., below BBB by S&P or Baa by Moody's) or which are unrated but are of
comparable quality as determined by the Advisor. (See "Special Risk
Considerations" in the Fund's Prospectus.) The Fund may invest in debt
securities which are rated as low as C by Moody's
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<PAGE>
or D by S&P. Such securities may be in default with respect to
payment of principal or interest.
Vontobel Eastern European Debt Fund
The E. European Debt Fund offers investors a convenient way to invest
in a managed portfolio of foreign currency denominated debt securities of
issuers in Eastern Europe, as described below. It seeks to achieve its objective
of total return primarily by investing in a managed portfolio of bonds of
issuers in Eastern Europe. It will seek protection and possible enhancement of
principal value by actively managing currency, bond market and maturity exposure
and by security selection.
To achieve its objective, the Fund will primarily invest in bonds of
issuers in Eastern Europe that are denominated in foreign currencies, including
bonds denominated in the ECU. The Fund's investments may include debt securities
issued or guaranteed by a foreign national government, its agencies,
instrumentalities or political subdivisions, debt securities issued or
guaranteed by supranational organizations, corporate debt securities, bank or
holding company debt securities and other debt securities including those
convertible into common stock.
Because of the Fund's investment considerations discussed above and its
investment policies, investments in the Fund are not intended to provide a
complete investment program for an investor.
Debt Securities. The Fund may purchase "investment-grade" bonds, which
are those rated Baa3 or higher by Moody's or BBB- or higher by S&P, or unrated
securities which the Advisor believes are of comparable quality. The Fund
reserves the right, however, to invest its assets in lower rated securities
(including unrated securities which the Advisor believes to be of such lower
quality). (See the Appendix for Bond Ratings). The Fund will invest no more than
5% of its assets in securities rated below investment grade (i.e., below BBB- by
S&P or Baa3 by Moody's) or which are unrated but are of comparable quality as
determined by the Advisor. (See "Special Risk Considerations" in the Fund's
Prospectus.) Bonds rated Baa3 or BBB- may have speculative elements as well as
investment-grade characteristics. The Fund may invest in debt securities which
are rated as low as C by Moody's or D by S&P. Such securities may be in default
with respect to payment of principal or interest.
Additional Investments and Investment Techniques
Strategic Transactions. Each of the Funds may, but is not
required to, utilize various other investment strategies
described below to hedge various market risks (such as interest
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<PAGE>
rates, currency exchange rates, and broad specific equity or fixed-income market
movements), to manage the effective maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are generally accepted
as modern portfolio management and are regularly utilized by many mutual funds
and other institutional investors. Techniques and instruments may change over
time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing these investment strategies, each Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions").
Risks of Strategic Transactions Outside the United States. When
conducted outside the United States, Strategic Transactions may not be regulated
as rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in a Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.
Options. Each of the Funds may purchase and sell options as
described in the Prospectus and herein.
General Characteristics of Options. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular types
of options discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of the Fund's assets in
special accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other
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instrument at the exercise price. For instance, the Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. Such protection is, of course, only provided
during the life of the put option when the Fund, as the holder of the put
option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. By using
put options in this manner, the Fund will reduce any profit it might otherwise
have realized in its underlying security by the premium paid for the put option
and by transaction costs.
A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument. When writing a covered call option, the Fund, in return for the
premium, gives up the opportunity for profit from a price increase in the
underlying security above the exercise price, but conversely retains the risk of
loss should the price of the security decline. If a call option which it has
written expires, it will realize a gain in the amount of the premium; however,
such gain may be offset by a decline in the market value of the underlying
security during the option period. If the call option is exercised, the Fund
will realize a gain or loss from the sale of the underlying security.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option, or, which it will pay when
purchasing a put option, will reflect, among other things, the current market
price of the underlying security, the relationship of the exercise price to such
market price, the historical price volatility of the underlying security, the
length of the option period, the general supply of and demand for credit
conditions, and the general interest rate environment. The premium received by
the Fund for writing covered call options will be recorded as a liability in its
statement of assets and liabilities. This liability will be adjusted daily to
the option's current market value, which will be the latest sale price at the
time at which the Fund's net asset value per share is computed (close of the New
York Stock Exchange ("NYSE")), or, in the absence of such sale, the latest asked
price. The liability will be extinguished upon expiration of the option, the
purchase of an identical option in a closing transaction, or delivery of the
underlying security upon the exercise of the option.
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The premium paid by the Fund when purchasing a put option will be
recorded as an asset in its statement of assets and liabilities. This asset will
be adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the Fund's net asset value per share is computed
(close of the NYSE), or, in the absence of such sale, the latest bid price. The
asset will be extinguished upon expiration of the option, the selling (writing)
of an identical option in a closing transaction, or the delivery of the
underlying security upon the exercise of the option.
The purchase of a put option will constitute a short sale for federal
tax purposes. The purchase of a put at a time when the substantially identical
security held long has not exceeded the long term capital gain holding period
could have adverse tax consequences. The holding period of the long position
will be cut off so that even if the security held long is delivered to close the
put, short term gain will be recognized. If substantially identical securities
are purchased to close the put, the holding period of the securities purchased
will not begin until the closing date. The holding period of the substantially
identical securities not delivered to close the short sale will commence on the
closing of the short sale.
The Fund will purchase a call option only to close out a covered call
option it has written. It will write a put option only to close out a put option
it has purchased. Such closing transactions will be effected in order to realize
a profit on an outstanding call or put option, to prevent an underlying security
from being called or put, or, to permit the sale of the underlying security.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option, or purchase another put option, on the underlying security
with either a different exercise price or expiration date or both. If the Fund
desires to sell a particular security from its portfolio on which it has written
a call option, or purchased a put option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security. There is,
of course, no assurance that the Fund will be able to effect such closing
transactions at a favorable price. If it cannot enter into such a transaction,
it may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security. This could
result in higher transaction costs, including brokerage commissions. The Fund
will pay brokerage commissions in connection with the writing or purchase of
options to close out previously written options. Such brokerage commissions are
normally higher than those applicable to purchases and sales of portfolio
securities.
Options written by the Fund will normally have expiration dates between
three and nine months from the date written. The exercise price of the options
may be below, equal to, or above
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the current market values of the underlying securities at the time the options
are written. From time to time, the Fund may purchase an underlying security for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security from its portfolio. In such cases
additional brokerage commissions will be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option; however, any loss so incurred in a
closing purchase transaction may be partially or entirely offset by the premium
received from a simultaneous or subsequent sale of a different call or put
option. Also, because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurocurrency instruments are cash settled for the net amount, if any, by which
the option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions
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imposed with respect to particular classes or series of options or underlying
securities including reaching daily price limits; (iv) interruption of the
normal operations of the OCC or an exchange; (v) inadequacy of the facilities of
an exchange or OCC to handle current trading volume; or (vi) a decision by one
or more exchanges to discontinue the trading of options (or a particular class
or series of options), in which event the relevant market for that option on
that exchange would cease to exist, although outstanding options on that
exchange would generally continue to be exercisable in accordance with their
terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Advisor must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with United States government securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers," or broker dealers, domestic or
foreign banks or other financial institutions which have received (or the
guarantors of the obligation of which have received) a short-term credit rating
of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
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other nationally recognized statistical rating organization ("NRSRO"). The staff
of the SEC currently takes the position that OTC options purchased by a Fund and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a fund's limitation on investing no
more than 10% of its assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Funds may purchase and sell call options on securities, including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, and Eurocurrency instruments (see "Eurocurrency Instruments" below
for a description of such instruments) that are traded in U.S. and foreign
securities exchanges and in the over-the-counter markets, and futures contracts.
The International Funds may purchase and sell call options on currencies. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Funds may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, convertible securities, and
Eurocurrency instruments (whether or not it holds the above securities in its
portfolio), and futures contracts (except for the Bond Fund and E. European Debt
Fund, not futures contracts on individual corporate debt securities.) The
International Funds may purchase and sell put options on currencies. The Fund
will not sell put options if, as a result, more than 50% of the Fund's assets
would be required to be segregated to cover its potential obligations under such
put options other than those with respect to futures and options thereon. In
selling put options, there is a risk that the Fund may be required to buy the
underlying security at a disadvantageous price above the market price. For tax
purposes, the purchase of a put is treated as a short sale which may cut off the
holding period for the security so it is treated as generating gain on
securities held less than three months or
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short term capital gain (instead of long term) as the case may
be.
Options on Securities Indices and Other Financial Indices. Each of the
Funds may also purchase and sell call and put options on securities indices and
other financial indices and in so doing can achieve many of the same objectives
it would achieve through the sale or purchase of options on individual
securities or other instruments. Options on securities indices and other
financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call or is less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to the excess of the closing price of the
index over the exercise price of the option, which also may be multiplied by a
formula value. The seller of the option is obligated, in return for the premium
received, to make delivery of this amount. The gain or loss on an option on an
index depends on price movements in the instruments making up the market, market
segment, industry or any other composite on which the underlying index is based,
rather than price movements in individual securities, as is the case with
respect to options on securities.
Futures. Each of the International Funds may enter into financial
futures contracts or purchases or sell put and call options on such futures as a
hedge against anticipated interest rate or currency market changes and for risk
management purposes, and for the Bond and E. European Debt Funds, for duration
management. The use of futures for hedging is intended to protect the
International Fund from (i) the risk that the value of its portfolio of
investments in a foreign market may decline before it can liquidate its
interest, or (ii) the risk that a foreign market in which it proposes to invest
may have significant increases in value before it can cause its cash to be
invested in that market. In the first instance, the International Fund will sell
a future based upon a broad market index which it is believed will move in a
manner comparable to the overall value of securities in that market. In the
second instance, the International Fund will purchase the appropriate index as
an "anticipatory" hedge until it can otherwise acquire suitable direct
investments in that market. As with the hedging of foreign currencies, the
precise matching of financial futures on foreign indices and the value of the
cash or portfolio securities being hedged may not have a perfect correlation.
The projection of future market movement and the movement of appropriate indices
is difficult, and the successful execution of this short-term hedging strategy
is uncertain.
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General Characteristics of Futures. Regulatory policies governing the
use of such hedging techniques require the International Fund to provide for the
deposit of initial margin and the segregation of suitable assets to meet its
obligation under futures contracts. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by the International Fund, as seller, to deliver to the buyer
the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurocurrency instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The International Fund's use of financial futures and options thereon
will in all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the Commodity Futures Trading Commission
and will be entered into only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the
International Fund to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the International Fund. If the International Fund exercises an
option on a futures contract it will be obligated to post initial margin (and
potential subsequent variation margin) for the resulting futures position just
as it would for any position. Futures contracts and options thereon are
generally settled by entering into an offsetting transaction but there can be no
assurance that the position can be offset prior to settlement at an advantage
price, nor that delivery will occur.
The International Fund will not enter into a futures
contract or related option (except for closing transactions) if
immediately thereafter, the sum of the amount of its initial
margin and premiums on open futures contracts and options thereon
would exceed 5% of the International Fund's total assets (taken
at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. The
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segregation requirements with respect to futures contracts and options thereon
are described below.
Currency Transactions. Each of the International Funds may engage in
currency transactions with Counterparties in order to hedge the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward foreign currency contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A currency swap is an agreement
to exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below. The International Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations of
which have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO or (except for OTC
currency options) are determined to be of equivalent credit quality by the
Advisor.
The International Fund's dealings in forward currency contracts and
other currency transactions such as futures, options on futures, options on
currencies and swaps will be limited to hedging involving either specific
transactions ("Transaction Hedging") or portfolio positions ("Position
Hedging").
Transaction Hedging. Transaction hedging is entering into a currency
transaction with respect to specific assets or liabilities of the International
Fund, which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. The International Fund
may enter into Transaction Hedging out of a desire to preserve the United States
dollar price of a security when it enters into a contract for the purchase or
sale of a security denominated in a foreign currency. The International Fund
will be able to protect itself against possible losses resulting from changes in
the relationship between the United States dollar and foreign currencies during
the period between the date the security is purchased or sold and the date on
which payment is made or received by entering into a forward contract for the
purchase or sale, for a fixed amount of dollars, of the amount of
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the foreign currency involved in the underlying security
transactions.
Position Hedging. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency. The International Fund may use Position
Hedging when the Advisor believes that the currency of a particular foreign
country may suffer a substantial decline against the United States dollar, the
International Fund may enter into a forward foreign currency contract to sell,
for a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of its portfolio securities denominated in such foreign
currency. The precise matching of the forward foreign currency contract amount
and the value of the portfolio securities involved may not have a perfect
correlation since the future value of the securities hedged will change as a
consequence of market movements between the date the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is difficult, and the successful execution of this short-term hedging
strategy is uncertain.
The International Fund will not enter into a transaction to hedge
currency exposure to an extent greater, after netting all transactions intended
wholly or partially to offset other transactions, than the aggregate market
value (at the time of entering into the transaction) of the securities held in
its portfolio that are denominated or generally quoted in or currently
convertible into such currency, other than with respect to proxy hedging as
described below.
Cross Hedging. The International Fund may also cross-hedge currencies
by entering into transactions to purchase or sell one or more currencies that
are expected to decline in value relative to other currencies to which the Fund
has or in which the Fund expects to have portfolio exposure.
Proxy Hedging. To reduce the effect of currency fluctuations on the
value of existing or anticipated holdings of portfolio securities, the
International Fund may also engage in proxy hedging. Proxy hedging is often used
when the currency to which a fund's portfolio is exposed is difficult to hedge
or to hedge against the dollar. Proxy hedging entails entering into a forward
contract to sell a currency whose changes in value are generally considered to
be linked to a currency or currencies in which some or all of the fund's
portfolio securities are or are expected to be denominated, and to buy U.S.
dollars. The amount of the contract would not exceed the value of the
International Fund's securities denominated in linked currencies. For example,
if the Advisor considers that the Austrian schilling is linked to the German
deutschemark (the "D-mark"), the Fund holds securities denominated in schillings
and the Advisor believes that the value
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of schillings will decline against the U.S. dollar, the Advisor
may enter into a contract to sell D-marks and buy dollars.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Furthermore, there is the risk that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Fund is engaging in proxy hedging. If
a Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below. Cross currency hedges may not be
considered "directly related" to the International Fund's principal business of
investing in stock or securities (or options and futures thereon), resulting in
gains therefrom not qualifying under the less than 30% of gross income" test of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Risks of Currency Transactions. Currency transactions are subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be negatively affected by government exchange controls,
blockages, and manipulations or exchange restrictions imposed by governments.
These can result in losses to an International Fund if it is unable to deliver
or receive currency or funds in settlement of obligations and could also cause
hedges the International Fund has entered into to be rendered useless, resulting
in full currency exposure as well as incurring transaction costs. Buyers and
sellers of currency futures are subject to the same risks that apply to the use
of futures generally. Furthermore, settlement of a currency futures contract for
the purchase of most currencies must occur at a bank based in the issuing
nation. Trading options on currency futures is relatively new, and the ability
to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy. Although forward foreign currency contracts and currency futures tend
to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time they tend to limit any potential gain which might
result should the value of such currency increase.
Combined Transactions. The Funds may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward foreign currency contracts) and
multiple interest rate transactions and any combination of futures, options,
currency
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and interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Advisor, it is in the best interests of a Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Advisor's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Eurocurrency Instruments. The International Funds may make investments
in Eurocurrency instruments. Eurocurrency instruments are futures contracts or
options thereon which are linked to the London Interbank Offered Rate ("LIBOR")
or to the interbank rates offered in other financial centers. Eurocurrency
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. An International Fund
might use Eurocurrency futures contracts and options thereon to hedge against
changes in LIBOR and other interbank rates, to which many interest rate swaps
and fixed income instruments are linked.
Use of Segregated and Other Special Accounts. Many transactions, in
addition to other requirements, require that a Fund segregate liquid high grade
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through the ownership of the underlying security, financial
instruments or currency. In general, either the full amount of any obligation by
a Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by a Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by a Fund on an index will require the
Fund to own portfolio securities which correlate with the index or segregate
liquid high grade assets equal to the excess of the index value over the
exercise priceindustry or oth on a current basis. A put option written by a Fund
requires the Fund to segregate liquid, high grade assets equal to the exercise
price.
A currency contract which obligates an International Fund to buy or
sell currency will generally require the Fund to hold an
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amount of that currency or liquid securities denominated in that currency equal
to the Fund's obligations or to segregate liquid high grade assets equal to the
amount of the Fund's obligation.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
generally settle with physical delivery, and the Fund will segregate an amount
of liquid assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating liquid assets sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. Such assets may consist of cash, cash
equivalents, liquid debt securities or other liquid assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. An International Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the International Fund could purchase a put
option if the strike price of that option is the same or higher than the strike
price of a put option sold by the Fund. Moreover, instead of segregating assets
if the International Fund
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held a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offered in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to such time, liquid assets equal to any remaining obligation would need to be
segregated.
An International Fund's activities involving Strategic Transactions may
be limited by the requirements of Subchapter M of the Code for qualification as
a regulated investment company.
(See "Taxes.")
U.S. Government Securities. The term "U.S. Government securities"
refers to a variety of securities which are issued or guaranteed by the United
States Treasury, by various agencies of the U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government. U.S. Treasury securities are backed by the full faith and credit of
the United States. Securities issued or guaranteed by U.S. Government agencies
or U.S. Government sponsored instrumentalities may or may not be backed by the
full faith and credit of the United States. In the case of securities not backed
by the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. An instrumentality of the U.S. Government is a government
agency organized under Federal charter with government supervision.
Repurchase Agreements. Each of the Funds may enter into repurchase
agreements with member banks of the Federal Reserve System, any foreign bank or
with any domestic or foreign broker/dealer which is a reporting government
securities dealer or its equivalent which may be a foreign bank whose
creditworthiness is equal to the standards set for the Fund's direct investment
in debt obligations, if the creditworthiness of the bank or broker/dealer has
been determined by the Advisor to be at least as high as that of other
obligations the Fund may purchase.
A repurchase agreement provides a means for a Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., a Fund) acquires a debt security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. Securities subject to a repurchase agreement are held in a segregated
account and the value of such securities is kept at least equal to the
repurchase price on a daily basis. The
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<PAGE>
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the Obligation itself. Obligations will be physically held by the Fund's
custodian or in the Federal Reserve Book Entry system. Repurchase agreements are
considered securities issued by the seller for purposes of the diversification
test under Subchapter M of the Code, and not cash, a cash item or a U.S.
Government security.
For purposes of the Investment Company Act of 1940, as amended (the
"1940 Act"), a repurchase agreement is deemed to be a loan from a Fund to the
seller of the Obligation subject to the repurchase agreement and is therefore
subject to that Fund's investment restrictions applicable to loans. It is not
clear whether a court would consider the Obligation purchased by a Fund subject
to a repurchase agreement as being owned by the Fund or as being collateral for
a loan by the Fund to the seller. In the event of the commencement of bankruptcy
or insolvency proceedings with respect to the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, a Fund may encounter
delay and incur costs before being able to sell the security. Delays may involve
loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and a Fund has not perfected a security
interest in the Obligation, the Fund may be required to return the Obligation to
the seller's estate and be treated as an unsecured creditor of the seller. As an
unsecured creditor, a Fund would be at risk of losing some or all of the
principal and income involved in the transaction. As with any unsecured debt
instrument purchased for the Fund, the Advisor seeks to minimize the risk of
loss through repurchase agreements by analyzing the creditworthiness of the
obligor, in this case the seller of the Obligation. Apart from the risk of
bankruptcy or insolvency proceedings, there is also the risk that the seller may
fail to repurchase the security. However, if the market value of the Obligation
subject to the repurchase agreement becomes less than the repurchase price
(including interest), the Fund will direct the seller of the Obligation to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement will equal or exceed the repurchase price. It is
possible that the Fund will be unsuccessful in seeking to enforce the seller's
contractual obligation to deliver additional securities. A repurchase agreement
with foreign banks may be available with respect to government securities of the
particular foreign jurisdiction, and such repurchase agreements involve risks
similar to repurchase agreements with U.S. entities.
It is the practice of each Fund to enter into repurchase agreements
with selected banks and securities dealers, depending
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<PAGE>
upon the availability of the most favorable yields. The Fund will always seek to
perfect its security interest in the collateral. If the seller of a repurchase
agreement defaults, the Fund may incur a loss if the value of the collateral
securing the repurchase agreement declines. The Advisor monitors the value of
the collateral to ensure that its value always equals or exceeds the repurchase
price and also monitors the financial condition of the issuer of the repurchase
agreement. If the seller defaults, the Fund may incur disposition costs in
connection with liquidating the collateral of that seller. If bankruptcy
proceedings are commenced with respect to the seller, realization upon the
collateral by the Fund may be delayed or limited.
Each of the Bond and E. European Debt Funds may also enter into
repurchase commitments with any party deemed creditworthy by the Advisor, if the
transaction is entered into for investment purposes and the counterparty's
creditworthiness is at least equal to that of issuers of securities that the
Fund may purchase. Such transactions may not provide the Fund with collateral
which is marked-to-market during the term of the commitment.
Reverse Repurchase Agreements. The Bond Fund and E. European Debt Fund
may enter into reverse repurchase agreements. A reverse repurchase agreement is
an arrangement under which the seller (i.e., a Fund) sells an Obligation to a
buyer, and agrees, at the time of sale, to repurchase the Obligation at a
specified time and price. The Bond Fund and E. European Debt Fund may enter into
reverse repurchase agreements with member banks of the Federal Reserve System,
any foreign bank or any domestic or foreign broker/dealer which is a reporting
government securities dealer or its equivalent which may be a foreign bank whose
creditworthiness is equal to the standards set for the Fund's direct investment
in debt obligations.
A reverse repurchase agreement provides a means for the Bond Fund and
E. European Debt Fund to earn income on funds which would otherwise be invested
in debt securities, for periods as short as overnight. Securities subject to a
repurchase agreement are held by the purchaser, and the seller holds, and may
invest, the price received for the security. The repurchase price may be higher
than the purchase price, the difference being an expense to the Fund, or the
purchase and repurchase prices may be the same, with interest at a stated rate
payable by the Fund together with the repurchase price on repurchase. In either
case, the income paid by the Fund is unrelated to the interest rate on the
Obligation itself. When the Fund is subject to repurchase an Obligation under a
reverse repurchase agreement, it will segregate with its custodian cash, U.S.
government securities, or other high quality debt instruments equal in value to
the amount payable by it under the agreement.
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<PAGE>
The Bond Fund and E. European Debt Fund incur the risk that if the
buyer does not resell the Obligations to the Fund, the Fund may encounter
expense or delay in applying the cash held by it to acquire replacement
securities. If the market price of the securities to be acquired rises, the Fund
may have to bear an additional cost when making such a purchase. If the buyer is
in bankruptcy, the Fund may face claims of the Trustee seeking the assets held
by the Fund.
Special Investment Considerations of the Funds
Each of the International Funds, is intended to provide individual and
institutional investors with an opportunity to invest a portion of their assets
in a globally and/or internationally oriented portfolio, according to the
International Fund's objective and policies, and is designed for long-term
investors who can accept international investment risk. The Advisor believes
that allocation of assets on a global or international basis decreases the
degree to which events in any one country, including the United States, will
affect an investor's entire investment holdings. In the period since World War
II, many leading foreign economies have grown more rapidly than the United
States economy, thus providing investment opportunities, although there can be
no assurance that this will be true in the future. As with any long-term
investment, the value of the International Fund's shares when sold may be higher
or lower than when purchased.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in United States securities and
which may favorably or unfavorably affect the performance of each of the
International Funds. As foreign companies are not generally subject to the same
uniform standards, practices and requirements, with respect to accounting,
auditing and financial reporting, as are domestic companies, there may be less
publicly available information about a foreign company than about a domestic
company. Many foreign securities markets, while growing in volume of trading
activity, have substantially less volume in the U.S. market, and securities of
some foreign issuers are less liquid and more volatile than securities of
domestic issuers. Similarly, volume and liquidity in most foreign bond markets
is less than in the United States and, at times, volatility of price can be
greater than in the United States. Furthermore, foreign markets have different
clearance and settlement procedures and in certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of a fund are
uninvested and no return is earned thereon. The inability of an International
Fund to make intended security purchases due to settlement problems
-26-
<PAGE>
could cause a fund to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems either could result
in losses to an International Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Fixed commissions
on some foreign securities exchanges and bid to asked spreads in foreign bond
markets are generally higher than negotiated commissions on U.S. exchanges and
bid to asked spreads in the U.S. bond market, although the International Fund
will endeavor to achieve the most favorable net results on its portfolio
transactions. Furthermore, an International Fund may encounter difficulties or
be unable to pursue legal remedies and obtain judgments in foreign courts. There
is generally less government supervision and regulation of business and industry
practices, securities exchanges, brokers and listed companies than in the United
States. Communications between the United States and foreign countries may be
less reliable than within the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect United States
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. The International
Funds' Advisor seeks to mitigate the risks associated with the foregoing
considerations through continuous professional management.
Investments in foreign securities usually will involve currencies of
foreign countries. Because of the considerations discussed above, the value of
the assets of each of the International Funds, as measured in U.S. dollars, may
be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. Although the
International Fund values its assets daily in terms of U.S. dollars, it does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a fund at one
rate, while offering a lesser rate of exchange should the International Fund
desire to resell that currency to the dealer. Each of the International Funds
will conduct its foreign currency
-27-
<PAGE>
exchange transactions either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or through entering into the
forward or futures contracts (or option thereon) to purchase or sell foreign
currencies. Each of the International Funds may, for hedging purposes, purchase
foreign currencies in the form of bank deposits.
Because each International Fund may be invested in both U.S. and
foreign securities markets, changes in its share price may have a low
correlation with movements in the U.S. markets. The International Fund's share
price will reflect the movements of the bond markets in which it is invested and
of the currencies in which the investments are denominated; the strength or
weakness of the U.S. dollar against foreign currencies may account for part of
the Fund's investment performance. Foreign securities such as those purchased by
an International Fund may be subject to foreign government taxes which could
reduce the yield on such securities, although a shareholder of the Fund may,
subject to certain limitations, be entitled to claim a credit or deduction for
U.S. federal income tax purposes for his or her proportionate share of such
foreign taxes paid by the Fund (see "Taxes"). U.S. and foreign securities
markets do not always move in step with each other and the total returns from
different markets may vary significantly. Each of the International Funds
intends to invest in many securities markets around the world in an attempt to
take advantage of opportunities wherever they may arise.
Investment Restrictions
The policies set forth below that are identified as fundamental
policies of a Fund, along with the investment objective of such Fund, may not be
changed without approval of a majority of the outstanding voting securities of
such Fund. As used in this SAI a "majority of the outstanding voting securities
of a Fund" means the lesser of (1) 67% or more of the voting securities present
at such meeting, if the holders of more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy; or (2) more than 50%
of the outstanding voting securities of the Fund.
As a matter of fundamental policy, a Fund will not:
* Except for the Value, Bond and E. European Debt Funds, as to 75% of its
assets, purchase the securities of any issuer (other than obligations
issued or guaranteed as to principal and interest by the Government of
the United States or any agency or instrumentality thereof) if, as a
result of such purchase, more than 5% of its total assets would be
invested in the securities of such issuer.
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<PAGE>
* Except for the Value, Bond and E. European Debt Funds,
- - ------------------------------------------------------
purchase stock or securities of an issuer (other than the
---------------------------------------------------------
obligations of the United States or any agency or
-------------------------------------------------
instrumentality thereof) if such purchase would cause the
---------------------------------------------------------
Fund to own more than 10% of any class of the outstanding
---------------------------------------------------------
voting securities of such issuer or, except for the Emerging
------------------------------------------------------------
Markets Fund, more than 10% of any class of the outstanding
-----------------------------------------------------------
stock or securities of such issuer.
-----------------------------------
* Act as an underwriter of securities of other issuers, except
- - ------------------------------------------------------------
that each of the International Equity and E. European Equity
------------------------------------------------------------
Funds may invest up to 10% of the value of its total assets
-----------------------------------------------------------
(at time of investment) in portfolio securities which the
---------------------------------------------------------
Fund might not be free to sell to the public without
----------------------------------------------------
registration of such securities under the Securities Act of
-----------------------------------------------------------
1933, as amended, or any foreign law restricting
------------------------------------------------
distribution of securities in a country of a foreign issuer.
------------------------------------------------------------
* Buy or sell commodities or commodity contracts, provided
- - --------------------------------------------------------
that each of the International Equity and E. European Equity
------------------------------------------------------------
Funds may utilize not more than 1% of its assets for
----------------------------------------------------
deposits or commissions required to enter into, for the
-------------------------------------------------------
International Equity Fund, forward foreign currency
---------------------------------------------------
contracts, and for the E. European Equity Fund, financial
---------------------------------------------------------
futures contracts, for hedging purposes as described under
----------------------------------------------------------
"Investment Policies" and "Additional Information on
----------------------------------------------------
Policies and Investments - Strategic Transactions." (Such
----------------------------------------------------------
deposits or commissions are not required for forward foreign
------------------------------------------------------------
currency contracts.)
--------------------
* As to the International Equity and E. European Equity Funds,
- - ------------------------------------------------------------
borrow money except for temporary or emergency purposes and
-----------------------------------------------------------
then only in an amount not in excess of 5% of the lower of
----------------------------------------------------------
value or cost of its total assets, in which case the Fund
---------------------------------------------------------
may pledge, mortgage or hypothecate any of its assets as
--------------------------------------------------------
security for such borrowing but not to an extent greater
--------------------------------------------------------
than 5% of its total assets. As to the Value, Emerging
-------------------------------------------------------
Markets, Bond and E. European Debt Funds, borrow money,
-------------------------------------------------------
except as a temporary measure for extraordinary or emergency
------------------------------------------------------------
purposes, or except in connection with reverse repurchase
---------------------------------------------------------
agreements, provided that the Fund maintains asset coverage
-----------------------------------------------------------
of 300% in connection with the issuance of senior
-------------------------------------------------
securities. Notwithstanding the foregoing, to avoid the
--------------------------------------------------------
untimely disposition of assets to meet redemptions, the
-------------------------------------------------------
Value, Emerging Markets and E. European Debt Funds may
------------------------------------------------------
borrow up to 33 1/3%, and the Bond Fund may borrow up to
--------------------------------------------------------
20%, of the value of the Fund's assets to meet redemptions,
-----------------------------------------------------------
provided that the Fund may not make other investments while
-----------------------------------------------------------
such borrowings are outstanding.
--------------------------------
* Make loans, except that a Fund may (1) lend portfolio
securities; and (2) enter into repurchase agreements secured
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<PAGE>
by U.S. Government securities and, with respect to the Bond and E.
European Debt Funds, except to the extent that the entry into
repurchase agreements and the purchase of debt securities in accordance
with its investment objective and policies may be deemed to be loans.
* Invest more than 25% of a Fund's total assets in securities
- - -----------------------------------------------------------
of one or more issuers having their principal business
------------------------------------------------------
activities in the same industry, provided that, for the
-------------------------------------------------------
Emerging Markets Fund, Bond Fund and E. European Debt Fund,
-----------------------------------------------------------
there is no limitation with respect to investments in
-----------------------------------------------------
obligations issued or guaranteed by the U.S. Government, its
------------------------------------------------------------
agencies or instrumentalities, and, for the Bond Fund and E.
------------------------------------------------------------
European Debt Fund, for the purpose of this restriction:
--------------------------------------------------------
telephone companies are considered to be in a separate
------------------------------------------------------
industry from gas and electric public utilities, and wholly
-----------------------------------------------------------
owned finance companies are considered to be in the industry
------------------------------------------------------------
of their parents if their activities are primarily related
----------------------------------------------------------
to financing the activities of their parents.
---------------------------------------------
* Except for the Emerging Markets Fund, Bond Fund and E. European Debt
Fund, invest in securities of other investment companies except by
purchase in the open market involving only customary broker's
commissions, or as part of a merger, consolidation, or acquisition of
assets.
* Invest in interests in oil, gas, or other mineral
explorations or development programs.
* Issue senior securities.
* Participate on a joint or a joint and several basis in any
securities trading account.
* Purchase or sell real estate (except that the Fund may invest in (i)
securities of companies which deal in real estate or mortgages, and
(ii) securities secured by real estate or interests therein, and that
the Fund reserves freedom of action to hold and to sell real estate
acquired as a result of the Fund's ownership of securities).
* Invest in companies for the purpose of exercising control.
* Purchase securities on margin, except that it may utilize such
short-term credits as may be necessary for clearance of purchases or
sales of securities.
* Engage in short sales.
The Directors of the Company have voluntarily adopted certain policies
and restrictions which are observed in the conduct of the Funds' affairs. These
represent intentions of the
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<PAGE>
Directors based upon current circumstances. They differ from fundamental
investment policies in that they may be changed or amended by action of the
Directors without requiring prior notice to or approval of shareholders.
As a matter of non-fundamental policy, a Fund may not:
1. Invest more than 15% of its net assets in illiquid
securities.
Restrictions with respect to repurchase agreements shall be construed
to be for repurchase agreements entered into for the investment of available
cash consistent with the Fund's repurchase agreement procedures, not repurchase
commitments entered into for general investment purposes.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Other Investment Policies" above
is adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of the Fund's assets will
not be considered a violation of the restriction.
Taxes
Each of the Funds will seek to maintain its qualification as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code").
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax (assuming the Fund meets the 90%
and 30% of gross income tests and the tax diversification test of Subchapter M)
to the extent that it distributes annually its investment company taxable income
and net realized capital gains in the manner required under the Code. The Fund
intends to distribute at least annually all of its investment company taxable
income and net realized capital gains and therefore generally does not expect to
pay federal income taxes.
In order to meet the tax diversification test, at the close of each
quarter of its fiscal year, (i) at least 50% of the value of each Fund's total
assets must be represented by cash and cash items including receivables (for
these purposes, currency and demand deposits denominated in a currency other
than the U.S. dollar will not be considered cash, a cash item or a receivable),
U.S. Government securities, and securities of other regulated investment
companies, and other securities limited in respect of any one issuer to an
amount not greater than 5% of the value of its total assets, and to not more
than 10% of the outstanding
-31-
<PAGE>
voting securities of such issuer; and (ii) not more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and the securities of other regulated investment
companies).
Each Fund will meet the 90% of gross income test if 90% of its gross
income is derived from dividends, interest, payments with respect to certain
securities loans, and gain from the sale or disposition of stock or securities
or foreign currencies, or other income (including, but not limited to, gains
from options, futures, or forward contracts) derived with respect to its
business of investing in such stock, securities, or currencies.
Each Fund is subject to a 4% nondeductible excise tax on amounts
required to be but which are not distributed under a prescribed formula. The
formula requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's investment company taxable income for
the calendar year, at least 98% of the excess of its capital gains over capital
losses (adjusted for certain ordinary losses prescribed by the Code) realized
during the one-year period ending October 31 during such year, and all ordinary
income and capital gains for prior years that were not previously distributed.
Investment company taxable income generally includes dividends,
interest, net short-term capital gains in excess of net long-term capital
losses, and net foreign currency gains, if any, less expenses. Realized net
capital gains for a fiscal year are computed by taking into account any capital
loss carryforward of the Fund.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim his/her share of federal income taxes paid by the
Fund on such gains as a credit against his/her own federal income tax liability,
and will be entitled to increase the adjusted tax basis of his/her Fund shares
by the difference between his/her pro rata share of such gains and his/her tax
credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the Fund have been held by such
shareholders. Such distributions are not eligible for a dividends-received
deduction
-32-
<PAGE>
for corporate investors. Any loss realized upon the redemption of shares held at
the time of redemption for six months or less from the date of their purchase
will be treated as a long-term capital loss to the extent of any amounts treated
as distributions of long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and realized net
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Fund, may
result in tax consequences (gain or loss) to the shareholder and are also
subject to information reporting requirements.
Individual Retirement Account ("IRA"). Shares of the Fund may be
purchased as an investment for an IRA account. Information concerning an IRA
account, including fees charged for maintaining an IRA, more detailed
information and disclosures made pursuant to requirements of the Internal
Revenue Code (the "Code"), and assistance in opening an IRA may be obtained from
the the Administrator. The following discussion is intended as a general and
abbreviated summary of the applicable provisions of the Code and related
Treasury regulations currently in effect. It should not be relied upon as a
substitute for obtaining personal tax or legal advice.
Deductible IRA. Generally, a person may make deductible contributions out
of earned income to an IRA up to $2,000 each year. However, persons who are
active participants in employer sponsored pension plans ("Employer Plans") are
subject to certain restrictions on deductibility under the Internal Revenue
Code of 1986, as amended by the Taxpayer Relief Act of 1997 (the "Code"). The
restrictions for the calendar year, 1998, applicable to active participants in
Employer Plans are as follows:
A singler person who has an adjusted gross income of $30,000 or more, but not
exceeding $40,000, is also allowed to deduct a portion of their IRA contribu-
tion. That portion decreases proportionately to the extent the individual's
income excee0ds $30,000. No deduction is allowed where the single person's
adjusted gross income exceeds $40,000.
A married couple filing a joint return with adjusted gross income of $50,000
or more, but not exceeding $60,000, is also allowed to deduct a portion of their
IRA contributions. That portion decreases proportionately to the extent the
couple's adjusted gross income exceeds $50,000. No deduction is allowed when
the couple's adjusted gross income exceeds $60,000.
A married couple filing jointly where one spouse does not participate and the
other spouse does participate in an Employer Plan, the spouse who does not
participate may deduct IRA contributions up to $2,000, but this deduction is
phased out where the couple's adjusted gross income ranges from $150,000 to
$160,000. No deduction is allowed where the couple's adjusted gross income
exceeds $160,000.
Nondeductible Roth IRA. Effective for tax years beginning after
December 31, 1997, the new Roth IRA allows individuals to contribute up to
$2,000 ($4,000 for joint filers) annually out of earned income. Eligibility
to contribute toa Roth IRA is phased out as adjusted gross income rises from
$95,000 to $110,000 for single filers and from $150,000 to $160,000 for joint
filers.
Rollover to Roth IRA. Amounts from existing deductible or nondeductible
described below, unless the Taxpayer's adjusted gross income exeeds 400,000.
However, regular income tax will be due on any existing taxable amounts that
are roller over from a current IRA. If the rollover is done during 1998, the
resulting taxable income may be spread out ratably over a four year period
beginning in 1998.
Taxation of IRAs Upon Distribution. An investment in Fund shares through
IRA deductible or nondeductible contributions is advantageous because the
deductible contributions, income, dividends and capital gains distributions
earned on your Fund shares are generally not taxable to you as long as the
Funds remain in your IRA, but may be taxable to you when distributed.
Distributions from IRAs are generally taxable as ordinary income when
distributed to the extent of earnings and deductible contributions. Non-
deductible contributions are not taxable. Because Roth IRA distributions are
considered to come from nondeductible contributions first, no tax or penalty
will generally result until all nondeductible contributions have been withdrawn.
Distributions rolled over into another IRA ("Rollover Contributions") in
accordance with certain rules under Section 408(d)(3) of the Code are tax-free.
In addition, earnings which accumulated tax-free on a Roth IRA are distributed
tax-free to the extent that they are made with respect to Qualifieid Distribu-
tions. Qualified Distributions are distributions that are made (1) at least
five years after the first year that a contribuion was made to the Roth IRA and
(2) after the age of 59-1/2, after the death or disability of an individual, or
for qualified first-time home purchase expenses subject to a $10,000 lifetime
maximum.
Most distributions from IRAs made before age 59-1/2 are subject to an early
distribution penalty tax equal to 105 of the distribution (in addition to any
regular income tax which may be due). Nondeductible contributions are not
subject to the penalty. Penalty-free distributions are allowed for up to
$10,000 of first-time home buying e xpenses. Penalty-free distributions are
also allowed for money used to pay qualified higher education expenses
(including graduate level course expenses) of the taxpayer, the taxpayer's
spouse, or a child or grandchild of the taxpayer (or of the taxpayer's
spouse). Qualified expenses include tuition, fees, books, supplies, required
equipment, and room and board at a post-secondary educational institution.
Qualified expenses are reduced by certain scholarships and veteran's benefits
and the excluded income on qualifying U.S. savings bonds. Penalty-free
distributions are also allowed for Rollover COntributions, in the cas of death
or disability, made in the form of certain periodic payments, used to pay
certain medical expenses or used to purchase health insurance for an unemployed
individual. You will incur other penalties if you fail to begin distribution
of accumulated IRA amounts by April 1 following the year in which you attain age
70-1/2, but this does not apply to the Roth Ira.
Distributions by each Fund result in a reduction in the net asset value
of such Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Each of the International Funds intends to qualify for and may make the
election permitted under Section 853 of the Code so that shareholders may
(subject to limitations) be able to claim a credit or deduction on their federal
income tax returns for, and may be required to treat as part of the amounts
distributed to them, their pro rata portion of qualified taxes paid by the Fund
to foreign countries (which taxes relate primarily to investment income). The
International Fund may make an election under Section 853 of the Code, provided
that more than 50% of the value of the total assets of the Fund at the close of
the taxable year consists of securities in foreign corporations. The foreign tax
credit available to shareholders is subject to certain limitations imposed by
the Code.
If an International Fund invests in stock of certain foreign investment
companies, the Fund may be subject to U.S. federal income taxation on a portion
of any "excess distribution" with respect to, or gain from the disposition of,
such stock. The tax would be determined by allocating such distribution or gain
ratably to each day of the International Fund's holding period for the stock.
The distribution or gain so allocated to any taxable year of the International
Fund, other than the taxable year of the excess distribution or disposition,
would be taxed to the Fund at the highest ordinary income rate in effect for
such year, and the tax would be further increased by an interest charge to
reflect the value of the tax deferral deemed to have resulted from the ownership
of the foreign company's stock. Any amount of distribution or gain allocated to
the taxable year of the distribution or disposition would be included in the
International Fund's investment company taxable income and, accordingly, would
not be taxable to the Fund to the extent distributed by the Fund as a dividend
to its shareholders.
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<PAGE>
Each of the International Funds may be able to make an election, in
lieu of being taxable in the manner described above, to include annually in
income its pro rata share of the ordinary earnings and net capital gain of the
foreign investment company, regardless of whether it actually received any
distributions from the foreign company. These amounts would be included in the
International Fund's investment company taxable income and net capital gain
which, to the extent distributed by the Fund as ordinary or capital gain
dividends, as the case may be, would not be taxable to the Fund. In order to
make this election, the International Fund would be required to obtain certain
annual information from the foreign investment companies in which it invests,
which in many cases may be difficult to obtain. The International Fund may make
an election with respect to those foreign investment companies which provide the
Fund with the required information.
Many futures contracts (including foreign currency futures contracts)
entered into by a Fund, certain forward foreign currency contracts, and all
listed nonequity options written or purchased by the Fund (including options on
debt securities, options on futures contracts, options on securities indices and
options on broad-based stock indices) will be governed by Section 1256 of the
Code. Absent a tax election to the contrary, gain or loss attributable to the
lapse, exercise or closing out of any such position generally will be treated as
60% long-term and 40% short-term capital gain or loss, and on the last trading
day of the Fund's fiscal year, all outstanding Section 1256 positions will be
marked to market (i.e., treated as if such positions were closed out at their
closing price on such day), with any resulting gain or loss recognized as 60%
long-term and 40% short-term capital gain or loss. Under certain circumstances,
entry into a futures contract to sell a security may constitute a short sale for
federal income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in a Fund's portfolio.
Under Section 988 of the Code, discussed below, foreign currency gains or losses
from foreign currency related forward contracts, certain futures and similar
financial instruments entered into or acquired by the Fund will be treated as
ordinary income or loss.
Positions of a Fund which consist of at least one stock and at least
one stock option or other position with respect to a related security which
substantially diminishes a Fund's risk of loss with respect to such stock could
be treated as a "straddle" which is governed by Section 1092 of the Code, the
operation of which may cause deferral of losses, adjustments in the holding
periods of stock or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for any
"qualified covered call options" on stock written by the Fund.
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<PAGE>
Positions of a Fund which consist of at least one position not governed
by Section 1256 and at least one futures contract or forward contract or
nonequity option governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such other position will be treated as a
"mixed straddle." Although mixed straddles are subject to the straddle rules of
Section 1092 of the Code, certain tax elections exist for them which reduce or
eliminate the operation of these rules. The Fund will monitor its transactions
in options and futures and may make certain tax elections in connection with
these investments.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues interest or other
receivables, or accrues expenses or other liabilities, denominated in a foreign
currency and the time the Fund actually collects such receivables, or pays such
liabilities, generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain futures and forward contracts, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition are also
treated as ordinary gain or loss. These gains or losses, referred to under the
Code as "Section 988" gains or losses, may increase or decrease the amount of
the Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.
A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to a Fund each year, even though the Fund will not receive cash interest
payments from these securities. The original issue discount imputed income will
comprise a part of the Fund's investment company taxable income which must be
distributed to shareholders in order to maintain the Fund's qualification as a
regulated investment company and to avoid federal income tax.
Each Fund will be required to report to the IRS all distributions of
investment company taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt shareholders. Under the backup withholding provisions of Section 3406 of
the Code, distributions of investment company taxable income and capital gains
and proceeds from the redemption or exchange of the shares of a regulated
investment company may be subject to withholding of federal income tax at the
rate of 31% in the case of non-exempt shareholders who fail to furnish the
investment company with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax law.
Withholding may also be required if the
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<PAGE>
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld. Amounts withheld are applied against the shareholder's tax liability
and a refund may be obtained from the Internal Revenue Service, if withholding
results in overpayment of taxes. A shareholder should contact the Fund or the
Transfer Agent if the shareholder is uncertain whether a proper Taxpayer
Identification Number is on file with the series.
Shareholders of each Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each investor should consult his or her own tax adviser as to the applicability
of these taxes.
In January of each year, the Company's Transfer Agent issues to each
shareholder a statement of the federal income tax status of all distributions.
Non-U.S. Shareholders. The foregoing discussion of U.S.
federal income tax law relates solely to the application of that
law to U.S. persons, i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates. Each shareholder
who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of Fund shares. Each shareholder who
is not a U.S. person should also consider the U.S. estate tax
implications of holding Fund shares at death. The U.S. estate
tax may apply to such holdings if an investor dies while holding
shares of a Fund. Each investor should consult his or her own
tax adviser about the applicability of these taxes.
Distributions of net investment income to non-resident aliens and
foreign corporations that are not engaged in a trade or business
in the U.S. to which the distribution is effectively connected,
will generally be subject to a withholding tax imposed at the rate of 30%
upon the gross amount of the distribution in the absence of a Tax
Treaty providing for a reduced rate or exemption from U.S.
taxation. Distributions of net long-term capital gains realized
by the Fund are generally not subject to tax unless the distribution is
effectively connected with the conduct of the shareholder's trade
or business within the United States, or the foreign shareholder
is a non-resident alien individual who was physically present in
the U.S. during the tax year for more than 182 days.
The foregoing is a general abbreviated summary of present Federal
income taxes on dividends and distributions. Shareholders should consult their
tax advisers about the application of the provisions of the tax law described in
this SAI in light of their particular tax situations and about any
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<PAGE>
state and local taxes applicable to dividends and distributions
received.
Dividends and Distributions
As stated previously, it is the policy of each Fund to distribute
substantially all of its net investment income and net realized capital gains,
if any, shortly before the close of the fiscal year (December 31st).
All dividend and capital gains distributions, if any, will be
reinvested in full and fractional shares based on net asset value (without a
sales charge) as determined on the ex-dividend date for such distributions.
Shareholders may, however, elect to receive all such payments, or the dividend
or distribution portion thereof, in cash, by sending written notice to this
effect to the Transfer Agent. This written notice will be effective as to any
subsequent payment if received by the Transfer Agent prior to the record date
used for determining the shareholders' entitlement to such payment. Such an
election will remain in effect unless or until the Transfer Agent is notified by
the shareholder in writing to the contrary.
Portfolio Transactions
It is the policy of the Advisor, in placing orders for the purchase and
sale of each Fund's securities, to seek to obtain the best price and execution
for securities transactions taking into account such factors as price,
commission, where applicable, (which is negotiable in the case of U.S. national
securities exchange transactions but which is generally fixed in the case of
foreign exchange transactions), size of order, difficulty of execution and skill
required of the executing broker/dealer. After a purchase or sale decision is
made by the Advisor, the Advisor then arranges for execution of the transaction
in a manner deemed to provide the best price and execution for the Fund.
Exchange-listed securities are generally traded on their principal
exchange unless another market offers a better result. Securities traded only in
the over-the-counter market may be executed on a principal basis with primary
market makers in such securities except for fixed price offerings and except
where the Fund may obtain better prices or executions on a commission basis or
by dealing with other than a primary market maker.
The Fund has authorized the Advisor to allocate a portion of its
brokerage commissions to persons or firms providing the Advisor with investment
recommendations, statistical, research or similar services useful to the
Advisor's investment decision-making process for the Fund or other clients. The
term "investment recommendations, statistical, research or similar
-38-
<PAGE>
services" means advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, and furnishing analysis and
reports concerning issuers, industries, securities, economic factors and trends,
and portfolio strategy. Such services are one of the many ways the Advisor can
keep abreast of the information generally circulated among institutional
investors by broker-dealers. While this information is useful in varying
degrees, its value is indeterminable. Such services received on the basis of
transactions for a Fund may be used by the Advisor for the benefit of other
clients, and the Fund may benefit from such transactions effected for the
benefit of other clients. While there is no specific agreement or formula to do
so, and subject to obtaining best price and execution, a Fund may consider sales
of its shares as a factor in the selection of brokers to execute portfolio
transactions. The Advisor may be authorized, when placing portfolio transactions
for a Fund, to pay a brokerage commission in excess of that which another broker
might have charged for executing the same transaction solely on account of the
receipt of research, market or statistical information. Except for implementing
the policy stated above, there is no intention to place portfolio transactions
with particular brokers or dealers or groups thereof.
The Advisor has been instructed not to place transactions with a
broker-dealer with which it is affiliated unless that broker-dealer, Vontobel
Securities Ltd., stands ready to demonstrate to the Company that each Fund will
receive (1) a price and execution no less favorable than that available from
unaffiliated persons, and (2) a price and execution equivalent to that offered
to unaffiliated persons by that broker-dealer, in each case on transactions of a
like size and nature. In this regard, the Board of Directors of the Company (the
"Board") has adopted policies and procedures which govern such allocation of
brokerage transactions, and the Board reviews at its meetings details of all
transactions which have been placed pursuant to those policies and procedures.
When two or more Funds managed by the Advisor are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated in a manner deemed equitable to each Fund. It is recognized that in
some cases the procedure could have a detrimental effect on the price or volume
of the security as far as a Fund is concerned. In other cases, however, it is
believed that the ability of such Fund to participate in volume transactions
will be beneficial for the Fund. It is the opinion of the Board that these
advantages, when combined with the other benefits available because of the
Advisor's organization, outweigh the disadvantages that may be said to exist
from this treatment of transactions.
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<PAGE>
The Funds paid brokerage commissions as follows:
<TABLE>
<CAPTION>
<S> <C>
Years Ended December 31,
Fund 1995 1996 1997
- ---- ---- ---- ----
Value Fund $171,098 $198,787 $290,165.40
-------- -------- -----------
International Equity Fund 587,813 1,185,252 292,194.38
Emerging Markets Fund N/A N/A 4,603.92
E. European Equity Fund N/A 344,275 932,732.62
Bond Fund 0 0 0
- - -
E. European Debt Fund N/A N/A 0
--- --- -
The Funds paid brokerage commissions to Vontobel Securities,
Ltd. (an affiliated broker-dealer) as follows:
Years Ended December 31,
Fund 1995 1996 1997
- ---- ---- ---- ----
Value Fund 0 0 0
- - -
International Equity Fund 0 0 0
- - -
Emerging Markets Fund N/A N/A 0
--- --- -
E. European Equity Fund N/A N/A 0
--- --- -
Bond Fund 0 0 0
- - -
E. European Debt Fund N/A N/A 0
--- --- -
</TABLE>
Average annual portfolio turnover rate is the ratio of the lesser of
sales or purchases to the monthly average value of the portfolio securities
owned during the year, excluding from both the numerator and the denominator all
securities with maturities at the time of acquisition of one year or less. A
higher rate involves greater transaction expenses to a Fund and may result in
the realization of net capital gains, which would be taxable to shareholders
when distributed. Purchases and sales are made for a Fund's portfolio whenever
necessary, in the Advisor's opinion, to meet the Fund's objective. The Advisor
anticipates that the average annual portfolio turnover rate of each of the Funds
will be less than 100%.
Valuation and Calculation of Net Asset Value
Each Fund's net asset value ("NAV") per share is calculated daily from
Monday through Friday on each business day on which the New York Stock Exchange
(the "NYSE") is open. The NYSE is currently closed on weekends and on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day (day observed), July 4th, Labor Day, Thanksgiving
Day and Christmas Day, and the preceding Friday or subsequent Monday when any of
these holidays falls on a Saturday or Sunday, respectively. Each Fund's NAV is
calculated at the time set by the Board based upon a determination of the most
appropriate time to price the Fund's securities.
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<PAGE>
The Board has determined that each Fund's NAV be calculated as of the
close of trading of the NYSE (currently 4:00 p.m., Eastern Time) on each
business day from Monday to Friday or on each day (other than a day during which
no security was tendered for redemption and no order to purchase or sell such
security was received by the Fund) in which there is a sufficient degree of
trading in the Fund's portfolio securities that the current NAV of the Fund's
shares might be materially affected by changes in the value of such portfolio
security.
NAV per share is determined by dividing the total value of a Fund's
securities and other assets, less liabilities (including proper accruals of
taxes and other expenses), by the total number of shares then outstanding, and
rounding the result to the nearer cent.
Each Fund may compute its NAV per share more frequently if necessary to
protect shareholders' interests.
Generally, securities owned by each Fund are valued at market value. In
valuing a Fund's assets, portfolio securities, including ADRs and EDRs, which
are traded on the NYSE, will be valued at the last sale price prior to the close
of regular trading on the NYSE. Lacking any sales, the security will be valued
at the last bid price prior to the close of regular trading on the NYSE. ADRs
and EDRs for which such a value cannot be readily determined on any day will be
valued at the closing price of the underlying security adjusted for the exchange
rate. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated in accordance with procedures
approved by the Board as the primary market.
Unlisted securities which are quoted on the NASD's National Market
System, for which there have been sales of such securities, shall be valued at
the last sale price reported on such system. If there are no such sales, the
value shall be the high or "inside" bid, which is the bid supplied by the NASD
on its NASDAQ Screen for such securities in the over-the-counter market. The
value of such securities quoted on the NASDAQ System, but not listed on the
NASD's National Market System, shall be valued at the high or "inside" bid.
Unlisted securities which are not quoted on the NASDAQ System and for which the
over-the-counter market quotations are readily available will be valued at the
last reported bid price for such securities in the over-the-counter market.
Other unlisted securities (and listed securities subject to restriction on sale)
will be valued at their fair value as determined in good faith by the Board.
Open futures contracts are valued at the most recent settlement price, unless
such price does not reflect the fair value of the contract, in which case such
positions will be valued by or under the direction of the Board.
-41-
<PAGE>
The value of a security traded or dealt in upon an exchange may be
valued at what the Company's pricing agent determines is fair market value on
the basis of all available information, including the last determined value, if
the pricing agent determines that the last bid does not represent the value of
the security, or if such information is not available. For example, the pricing
agent may determine that the price of a security listed on a foreign stock
exchange that was fixed by reason of a limit on the daily price change does not
represent the fair market value of the security. Similarly, the value of a
security not traded or dealt in upon an exchange may be valued at what the
pricing agent determines is fair market value if the pricing agent determines
that the last sale does not represent the value of the security, provided that
such amount is not higher than the current bid price.
Notwithstanding the foregoing, money market investments with a
remaining maturity of less than sixty days shall be valued by the amortized cost
method; debt securities are valued by appraising them at prices supplied by a
pricing agent approved by the Company, which prices may reflect broker-dealer
supplied valuations and electronic data processing techniques and are
representative of market values at the close of the NYSE; options on securities,
futures contracts and options on futures listed or admitted to trading on a
national exchange shall be valued at their last sale on such exchange prior to
the time of determining NAV; or if no sales are reported on such exchange on
that day, at the mean between the most recent bid and asked price; and forward
contracts shall be valued at their last sale as reported by the Company's
pricing service, or lacking a report by the service, at the value of the
underlying currencies at the prevailing currency rates.
U.S. Treasury bills, and other short-term obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, with
original or remaining maturities in excess of 60 days are valued at the mean of
representative quoted bid and asked prices for such securities or, if such
prices are not available, are valued at the mean of representative quoted bid
and asked prices for securities of comparable maturity, quality and type.
Short-term securities, with 60 days or less to maturity, are amortized to
maturity based on their cost if acquired within 60 days of maturity or, if
already held, on the 60th day, based on the value determined on the 61st day.
The value of a security which is subject to legal or contractual delays
in or restrictions on resale by a Fund shall be taken to be the fair value
thereof as determined in accordance with procedures established by the Board, on
the basis of such relevant factors as the following: the cost of such security
to the Fund, the market price of unrestricted securities of the same class at
the time of purchase and subsequent changes in such
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<PAGE>
market price, potential expiration or release of the restrictions affecting such
security, the existence of any registration rights, the fact that the Fund may
have to bear part or all of the expense of registering such security, and any
potential sale of such security to another investor. The value of other property
owned by a Fund shall be determined in a manner which, in the discretion of the
pricing agent of the Fund, most fairly reflects fair market value of the
property on such date.
Following the calculation of security values in terms of currency in
which the market quotation used is expressed ("local currency"), the pricing
agent shall, prior to the next determination of the NAV of a Fund's shares,
calculate these values in terms of U.S. dollars on the basis of the conversion
of the local currencies (if other than U.S.) into U.S. dollars at the rates of
exchange prevailing at the value time as determined by the pricing agent.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the NYSE is
open). In addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in New York
and on which a Fund's NAV is not calculated. Each Fund calculates NAV per share,
and therefore, effects sales, redemptions and repurchases of its shares, as of
the close of the NYSE once on each day on which the NYSE is open. Such
calculation may not take place contemporaneously with the determination of the
prices of portfolio securities used in such calculations. If events materially
affecting the value of a portfolio security occur between the time when its
price is determined and the time when a Fund's NAV is calculated, such a
security will be valued at fair value as determined in good faith by the Board.
Any purchase order may be rejected by the Distributor or by the
Company.
Directors and Officers
The following is a list of the Company's Directors and Officers, their
birth date and a brief statement of their present positions and principal
occupations during the past five years.
*John Pasco, III (4/10/45)
Chairman, Director, and Treasurer
1500 Forest Ave, Suite 223; Richmond, VA 23229
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<PAGE>
Mr. Pasco is Treasurer and Director of Commonwealth
Shareholder Services, Inc., the Company's Administrator,
since 1985. Director, President and Treasurer of
Commonwealth Capital Management, Inc. (a registered
Investment Advisor) since 1983. Director and shareholder of
Fund Services, Inc., the Company's Transfer and Disbursing
Agent, since 1987 and shareholder of Commonwealth Fund
Accounting, Inc. which provides bookkeeping services to Star
Bank. Mr. Pasco is also a certified public accountant.
*Henry Schlegel (1/24/53)
Director
450 Park Avenue, New York, NY 10022
Mr. Schlegel is a Director, the President and the Chief
Executive Officer of Vontobel USA Inc. (since 1988).
Samuel Boyd, Jr. (9/18/40)
Director
10808 Hob Nail Court, Potomac, MD 20854
Mr. Boyd is currently the Manager of the Customer Services
Operations and Accounting Division of the Potomac Electric
Power Company. Mr. Boyd is also a certified public
accountant.
William E. Poist (6/11/39)
Director
5272 River Road, Bethesda, MD 20816
Mr. Poist is a financial and tax consultant through his firm
Management Consulting for Professionals. Mr. Poist is also
a certified public accountant.
Paul M. Dickinson (11/11/47)
Director
8704 Berwickshire Drive, Richmond, VA 23229
Mr. Dickinson is currently the President of Alfred J.
Dickinson, Inc., Realtors.
*Edwin D. Walczak (9/17/53)
Vice President of the Company and President of the Vontobel
U.S. Value Fund
450 Park Avenue, New York, NY 10022
Senior Vice President and Chief Investment Officer of Vontobel USA
Inc., a registered investment advisor, since 1988. From 1984 to 1988
Mr.Walczak was an institutional portfolio manager at Lazard Freres
Asset Management, New York.
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<PAGE>
*Sven Rump (6/2/58)
Vice President of the Company and President of the Vontobel
International Bond Fund
450 Park Avenue, New York, NY 10022
Vice President of Vontobel USA Inc. since 1993. Mr. Rump is
currently (since October 1991) a Vice President of Vontobel
Asset Management, Switzerland, where he is head of fixed
income investments. Mr. Rump is a Chartered Financial
Analyst.
*Fabrizio Pierallini (8/14/59)
Senior Vice President of the Company, President of the Vontobel
International Equity Fund and President of the Vontobel
Emerging Markets Equity Fund
450 Park Avenue, New York, NY 10022
Vice President and Portfolio Manager (International Equities), Vontobel
USA Inc. since April 1994. From 1991 to 1994 Mr. Pierallini was
Associate-Director/Portfolio Manager with Swiss Bank Corporation in New
York; from 1988 to 1991 he was a Vice-President/Portfolio Manager with
SBC Portfolio Management Ltd. in Zurich, Switzerland; and from 1986 to
1988 he was an Associate/Institutional Consultant with Bank Julius Baer
in Zurich, Switzerland.
*Luca Parmeggiani (3/23/62)
Vice President of the Company and President of the Vontobel
Eastern European Equity Fund
450 Park Avenue, New York, NY 10022
Vice President of Vontobel USA Inc. since October 1997. Mr.
Parmeggiani joined Vontobel Asset Management, in 1997 as
lead manager of the Vontobel group's Eastern European
equities funds. He was at the same time appointed Vice
President of Vontobel USA Inc. and is responsible for
Eastern European equity research and management. Prior to
joining the Vontobel group, he was Vice President and
manager of Lombard Odier Cie Invest Eastern Europe Fund. He
has a post-graduate degree in Econometrics from the
University of Geneva.
*Volker Wehrle (3/29/58)
Vice President of the Company and President of the Vontobel
Eastern European Debt Fund
450 Park Avenue, New York, NY 10022
Vice President of Vontobel USA Inc. since May 1997. Mr.
Wehrle is currently (since October 1994) a Vice President of
Vontobel Asset Management, Switzerland, where he is deputy
head of fixed income investments. From January 1989 to
September 1994, he managed fixed income investments for the
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<PAGE>
Group Treasury Department of Sandoz AG in Basel, Switzerland. From
January 1993 to August 1993, he was responsible for setting up the
Sandoz Investment Trust in London. From October 1986 to December 1988
Mr. Wehrle worked as a European equity analyst at Dresdner Bank in
Frankfurt, Germany.
*F. Byron Parker, Jr. (1/26/43)
Secretary
810 Lindsay Court, Richmond, VA 23229
Secretary of Commonwealth Shareholder Services, Inc. since
1986. Partner in the law firm Mustian & Parker.
* Persons deemed to be "interested" persons of the Company,
Vontobel USA Inc. or First Dominion Capital Corp. under the 1940
Act.
The Directors of the Company received compensation from the Company for
the fiscal year ended December 31, 1997, as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Compensation Table
(1) (2) (3) (4) (5)
Compensation
From
Retirement Estimated Registrant
Benefits Annual and Fund
Aggregate Accrued as Benefits Complex
Name of Person Compensation Part of Fund Upon Paid to
Position From Registrant Expenses Retirement Directors
John Pasco, III
Director $0 N/A N/A N/A
Henry Schlegel
Director $0 N/A N/A N/A
Samuel Boyd, Jr.
Director $8,050 N/A N/A $8,050
William E. Poist
Director $8,050 N/A N/A $8,050
Paul M. Dickinson
Director $8,050 N/A N/A $8,050
The directors and officers of the Company, as a group, do not own 1% or
more of any of the Funds.
To the best knowledge of the Company, as of April 15, 1998, the
following persons own of record or beneficially 5% or more of the shares of a
Fund, and own such shares in the amounts indicated:
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</TABLE>
<PAGE>
For the Value Fund, (1) Charles Schwab Reinvestment, 101 Montgomery
Street, San Francisco CA 94104 (41.73%); (2) Bank J. Vontobel and its affiliates
for the benefit of its customers, Zv-Kontrollen Bahnhofstrasse #3 CH-8022
Zurich Switzerland (8.44%).
For the International Equity Fund, (1) Bank J. Vontobel and
its affiliates for the benefit of its customers , Zv-Kontrollen Bahnhofstrasse
#3 CH-8022 Zurich Switzerland (34.56%); (2) Peoples Two Ten Co. P.O. Box 821
Hackensack, N.H. 076602 (11.09%); and (3) Charles Schwab Reinvestment, 101
Montgomery Street, San Francisco, CA 94104 (14.88%).
For the E. European Equity Fund, (1) Charles Schwab Reinvestment
101 Montgomery Street, San Francisco, CA 94104 (28.80%); and (2) Bank J.
Vontobel and its affiliates for the benefit of its customers, Zv-Kontrollen
Bahnhofstrasse #3 CH-8022 Zurich Switzerland (13.19%).
For the Bond Fund, (1) Bank J. Vontobel and its affiliates for the
benefit of its customers, Zv-Kontrollen Bahnhofstrasse #3 CH-8022 Zurich
Switzerland (47.25%); (2) Charles Schwab Reinvestment, 101 Montgomery Street
San Francisco, CA 94104 (10.13%); and (3) Vontobel #V201-002 450 Park
Avenue, New York, N.Y. (16.26%).
For the Emerging Markets Equity Fund, (1) Charles Schwab Reinvestment
101 Montgomery Street, San Francisco, CA 94104 (11.18%) and (2) Bank J.
Vontobel and its affiliates for the benefit of its customers ZV-Kontrollen
Banhhofstrasse #3 CH-8022 Zurich Switzerland (27.03%).
For the E. European Debt Fund, Bank J. Vontobel and its
affiliates for the benefit of its customers, ZV-Kontrollen Bahnhofstrasse #3
CH-8022 Zurich Switzerland (73.72%).
Investment Advisor
Vontobel USA Inc. (the "Advisor") manages the investment of the assets
of the Funds pursuant to Investment Advisory Agreements (each, an "Advisory
Agreement"). The Advisory Agreements of the Emerging Markets and E. European
Debt Funds are effective for a period of two years from August 18, 1997 and such
Advisory Agreements may be renewed thereafter, and the Advisory Agreement of
each of the other Funds may be renewed, only so long as such renewal and
continuance is specifically approved at least annually by the Board or by vote
of a majority of the outstanding voting securities of the Company, provided the
continuance is also approved by a majority of the Directors who are not
"interested persons" of the Company or the Advisor by vote cast in person at a
meeting called for the purpose of voting on such approval. Each Advisory
Agreement is terminable without penalty on sixty days notice by the Board or by
the Advisor. Each Advisory Agreement provides that it will terminate
automatically in the event of its assignment.
The Advisor is a wholly owned subsidiary of Vontobel Holding Ltd., a
Swiss bank holding company. The address of the Advisor is 450 Park Avenue, New
York, N.Y. 10022.
The calculation of the investment advisory fee for a Fund is based upon
the average daily net assets of that Fund during each month multiplied by the
daily fee rate times the number of days
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in the month, or an equivalent calculation of the aggregate net assets of the
Fund during that month, multiplied by the daily fee rate. The amount of fees
each Fund paid to the Advisor for investment advisory services and the amount of
investment advisory fees waived by the Advisor for the last three fiscal years
is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Years Ended December 31,
1995 1996 1997
---- ---- ----
Fee Fee Fee
Fund Payable/Waived Payable/Waived Payable/Waived
Value Fund $385,289/ $620,780/ $986,164/
--------- --------- ---------
22,500 22,437 22,500
------ ------ ------
International 1,154,541/ 1,280,135/ 1,443,062/
Equity Fund 0 0 0
Emerging Markets N/A N/A 14,720/14,720
Fund
E. European Equity N/A 302,021/ 2,113,314/
Fund 0 0
Bond Fund 128,371/ 248/407/ 193,299/
128,371/ 48,630/ 115,099
E. European Debt N/A N/A 57,164/0
Fund
</TABLE>
The Advisory Agreements contemplate the authority of the Advisor to
place orders pursuant to its investment determinations for each Fund either
directly with the issuer or with any broker or dealer. In placing orders with
brokers or dealers, the Advisor will attempt to obtain the best price and
execution of its orders. The Advisor may purchase and sell securities to and
from brokers and dealers who provide a Fund with research advice and other
services, or who sell shares of the Fund. See "Portfolio Transactions" above.
Transfer Agent
Fund Services, Inc. (the "Transfer Agent" or "FSI") is the Company's
transfer and disbursing agent, pursuant to a Transfer Agent Agreement. The
Transfer Agent Agreement is dated September 1, 1987, and has been renewed each
year by the Board, including a majority of the Directors who are not interested
persons of the Company or the Transfer Agent.
John Pasco, III, Chairman of the Board and an officer and shareholder
of Commonwealth Shareholder Services, Inc (the Administrator of the Funds) owns
one-third of the stock of FSI, and, therefore, FSI may be deemed to be an
affiliate of the Company and Commonwealth Shareholder Services, Inc.
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<PAGE>
Pursuant to the Transfer Agent Agreement the minimum annual fee for
each Fund is $16,500. During 1997, the Transfer Agent was paid $96,132 by the
Value Fund, $67,540 by the International Equity Fund, $84,127 by the E. European
Equity Fund, $18,855 by the Bond Fund, $3,128 by the Emerging Markets and $4,957
by the E. European Debt Funds.
Administrator
Commonwealth Shareholder Services, Inc. is the Company's administrator
pursuant to Administrative Services Agreements (the "Service Agreements"). The
Service Agreements are described in the Funds' Prospectus. Each of the Service
Agreements continues in effect from year to year for a term of one year only if
the Board, including a majority of the directors who are not interested persons
of the Company or the Administrator, approve the extension at least annually.
During 1997, CSS was paid $318,571 by the Value Fund, $419,496 by the
International Equity Fund, $432,860 by the E. European Equity Fund, $59,783 by
the Bond Fund, $11,074 by the Emerging Markets and $14,359 by the E.
European Debt Funds.
Eligible Benefit Plans
An eligible benefit plan is an arrangement available to the employees
of an employer (or two or more affiliated employers) having not less than ten
employees at the plan's inception, or such an employer on behalf of employees of
a trust or plan for such employees, their spouses and their children under the
age of 21 or a trust or plan for such employees, which provides for purchases
through periodic payroll deductions or otherwise. There must be at least five
initial participants with accounts investing or invested in shares of one or
more of the Funds and/or certain other funds.
The initial purchase by the eligible benefit plan and prior purchases
by or for the benefit of the initial participants of the plan must aggregate not
less than $5,000 and subsequent purchases must be at least $50 per account and
must aggregate at least $250. Purchases by the eligible benefit plan must be
made pursuant to a single order paid for by a single check or federal funds wire
and may not be made more often than monthly. A separate account will be
established for each employee, spouse or child for which purchases are made. The
requirements for initiating or continuing purchases pursuant to an eligible
benefit plan may be modified and the offering to such plans may be terminated at
any time without prior notice.
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<PAGE>
Distribution
Shares of the Funds are sold at NAV on a continuous basis, without a
sales charge.
Vontobel Fund Distributors, a division of First Dominion Capital Corp.
(the "Distributor"), 1500 Forest Avenue, Suite 223, Richmond, VA 23229, is the
Company's principal underwriter pursuant to a Distribution Agreement between the
Company and the Distributor. John Pasco, III, Chairman of the Board owns 100% of
the Distributor, and is its President, Treasurer and a Director.
Fund Expenses
Each Fund will pay its expenses not assumed by the Advisor, including,
but not limited to, the following: custodian; stock transfer and dividend
disbursing fees and expenses; taxes; expenses of the issuance and redemption of
Fund shares (including stock certificates, registration and qualification fees
and expenses); legal and auditing expenses; and the cost of stationery and forms
prepared exclusively for the Fund.
The allocation of the general expenses to each Fund is made on a basis
that the Board deems fair and equitable, which may be based on the relative net
assets of the series of the Company or the nature of the services performed and
relative applicability to each series of the Company.
Investors should understand that the International Funds' expense
ratios can be expected to be higher than investment companies investing in
domestic securities since the cost of maintaining the custody of foreign
securities and the rates of advisory fees paid by the International Funds are
higher.
Special Shareholder Services
As described briefly in the Prospectus, each Fund offers the following
shareholder services:
Regular Account: The regular account allows for voluntary investments
to be made at any time. Available to individuals, custodians, corporations,
trusts, estates, corporate retirement plans and others, investors are free to
make additions and withdrawals to or from their account as often as they wish.
Simply use the Account Application provided with the Prospectus to open your
account.
Telephone Transactions: You may redeem shares or transfer
into another fund if you request this service at the time you
complete the initial Account Application. If you do not elect
this service at that time, you may do so at a later date by
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putting your request in writing to the Transfer Agent and having your signature
guaranteed.
Each Fund employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if it does not,
it may be liable for any losses due to unauthorized or fraudulent transactions.
As a result of this policy, a shareholder authorizing telephone redemption bears
the risk of loss which may result from unauthorized or fraudulent transactions
which the Fund believes to be genuine. When you request a telephone redemption
or transfer, you will be asked to respond to certain questions designed to
confirm your identity as a shareholder of record. Your cooperation with these
procedures will protect your account and the Fund from unauthorized
transactions.
Invest-A-Matic Account: Any shareholder may utilize this feature, which
provides for automatic monthly investments into your account. Upon your request,
the Transfer Agent will withdraw a fixed amount each month from your checking
account for investment into your account. This does not require you to make a
commitment for a fixed period of time. You may change the monthly investment,
skip a month or discontinue your Invest-A-Matic Plan as desired by notifying the
Transfer Agent. This feature requires a separate Plan application, in addition
to the Account Application. To obtain an application, or to receive more
information, please call the offices of the Company.
Individual Retirement Account ("IRA"): All wage earners under 70-1/2,
even those who participate in a company sponsored or government retirement plan,
may establish their own IRA. You can contribute 100% of your earnings up to
$2,000 (or $2,250 with a spouse who is not a wage earner, for years prior to
1997). Starting in 1997, even a spouse who does not earn compensation can
contribute up to $2,000 per year to his or her own IRA. The deductibility of
such contributions will be determined under the same rules as for contributions
made by individuals with earned income. A special IRA program is available for
corporate employers under which the employers may establish IRA accounts for
their employees in lieu of establishing corporate retirement plans. Known as
SEP-IRA's (Simplified Employee Pension-IRA), they free the corporate employer of
many of the recordkeeping requirements of establishing and maintaining a
corporate retirement plan trust.
If you have received a lump sum distribution from another qualified
retirement plan, you may rollover all or part of that distribution into your
Fund IRA. Your rollover contribution is not subject to the limits on annual IRA
contributions. By acting within applicable time limits of the distribution you
can continue to defer Federal Income Taxes on your lump sum
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<PAGE>
contribution and on any income that is earned on that
contribution.
How to Establish Retirement Accounts: Please call the Company to obtain
information regarding the establishment of individual retirement plan accounts.
Each plan's custodian charges nominal fees in connection with plan establishment
and maintenance. These fees are detailed in the plan documents. You may wish to
consult with your attorney or other tax advisor for specific advice concerning
your tax status and plans.
Exchange Privilege: Shareholders may exchange their shares for shares
of any other series of the Company, provided the shares of the fund the
shareholder is exchanging into are noticed for sale in the shareholder's state
of residence. Each account must meet the minimum investment requirements
(currently $1,000). Exchange Privilege Authorization Forms are available by
calling the Company. Your special authorization form must have been completed
and must be on file with the Transfer Agent. To make an exchange, an exchange
order must comply with the requirements for a redemption or repurchase order and
must specify the value or the number of shares to be exchanged. Your exchange
will take effect as of the next determination of the Fund's NAV per share
(usually at the close of business on the same day). The Transfer Agent will
charge your account a $10.00 service fee each time you make such an exchange.
The Company reserves the right to limit the number of exchanges or to otherwise
prohibit or restrict shareholders from making exchanges at any time, without
notice, should the Company determine that it would be in the best interest of
its shareholders to do so. For tax purposes an exchange constitutes the sale of
the shares of the Fund from which you are exchanging and the purchase of shares
of the Fund into which you are exchanging. Consequently, the sale may involve
either a capital gain or loss to the shareholder for federal income tax
purposes. The exchange privilege is available only in states where it is legally
permissible to do so.
General Information and History
The Company is authorized to issue up to 500,000,000 shares of common
stock, par value $0.01 per share, of which it has presently allocated 50,000,000
shares to each of the Funds. The Board can allocate the remaining authorized but
unissued shares to any series of the Company, or may create additional series
and allocate shares to such series. Each series is required to have a suitable
investment objective, policies and restrictions, to maintain a separate
portfolio of securities suitable to its purposes, and to generally operate in
the manner of a separate investment company as required by the 1940 Act.
If additional series were to be formed, the rights of existing series
shareholders would not change, and the objective,
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policies and investments of each series would not be changed. A share of any
series would continue to have a priority in the assets of that series in the
event of a liquidation.
The shares of each series when issued will be fully paid and
nonassessable, will have no preference over other shares of the same series as
to conversion, dividends, or retirement, and will have no preemptive rights. The
shares of any series will be redeemable from the assets of that series at any
time at a shareholder's request at the current NAV of that series determined in
accordance with the provisions of the 1940 Act and the rules thereunder. The
Company's general corporate expenses (including administrative expenses) will be
allocated among the series in proportion to net assets or as determined in good
faith by the Board.
The investment advisory fees payable to the Advisor by each Fund and
the expense limitation guarantee formula of each Fund will be based upon the
separate assets of each Fund. The shareholders of each of the Funds have the
right to vote with respect to the investment advisor of such Fund, respectively.
Voting and Control - Each outstanding share of the Company is entitled
to one vote for each full share of stock and a fractional share of stock. All
shareholders vote on matters which concern the corporation as a whole. Election
of Directors or ratification of the auditor are examples of matters to be voted
upon by all shareholders. The Company is not required to hold a meeting of
shareholders each year. The Company intends to hold annual or special meetings
when it is required to do so by the Maryland General Corporate Law or the 1940
Act. Shareholders have the right to call a meeting to consider the removal of
one or more of the Directors and will be assisted in Shareholder communication
in such matter. Each series shall vote separately on matters (1) when required
by the General Corporation Law of Maryland, (2) when required by the 1940 Act
and (3) when matters affect only the interest of the particular series. An
example of a matter affecting only one series might be a proposed change in an
investment restriction of one series. The shares will not have cumulative voting
rights, which means that the holders of more than 50% of the shares voting for
the election of directors can elect all of the directors if they choose to do
so.
Code of Ethics - The Company has adopted a Code of Ethics which imposes
certain restrictions on the authority of portfolio managers and certain other
personnel of the Company and the Advisor governing personal securities
activities and investments of those persons and has instituted procedures to its
Code of Ethics to require such investment personnel to report such activities to
the compliance officer. The Code is reviewed and updated annually.
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<PAGE>
Performance
Current yield and total return are the two primary methods of measuring
investment performance. Occasionally, however, a Fund may include its
distribution rate in sales literature. Yield, in its simplest form, is the ratio
of income per share derived from the Fund's portfolio investments to the current
maximum offering price expressed in terms of percent. The yield is quoted on the
basis of earnings after expenses have been deducted. Total return, on the other
hand, is the total of all income and capital gains paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the change in the
value of the original investment, expressed as a percentage of the purchase
price. The distribution rate is the amount of distributions per share made by
the Fund over a twelve-month period divided by the current maximum offering
price.
Generally, performance quotations by investment companies are subject
to certain rules adopted by the Securities and Exchange Commission (the
"Commission"). These rules require the use of standardized performance
quotations, or alternatively, that every non-standardized performance quotation
furnished by a Fund be accompanied by certain standardized performance
information computed as required by the Commission. Current yield and total
return quotations used by a Fund are based on the standardized methods of
computing performance mandated by the Commission.
Yield. As indicated below, current yield is determined by dividing the
net investment income per share earned during the period by the maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders
during the 30-day base period. According to the Commission formula:
6
Yield = 2 [(a-b + 1) -1]
cd
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
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Total Return. The Funds' average annual total returns for
the periods ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
One-Year Five-Year Ten-Year From
Period Period Period Inception
Ended Ended Ended to
Fund Name 12/31/97 12/31/97 12/31/97 12/31/97
Value Fund 34.31% 19.37% N/A 17.42%
International
Equity Fund 9.19% 13.82% 8.72%* 8.72%
Emerging Markets
Fund N/A N/A N/A 5.80%
E. European
Equity Fund 8.70% N/A N/A 30.86%**
Bond Fund -6.04%% N/A N/A 5.06%
E. European
Debt Fund N/A N/A N/A .55%
* Since July 6, 1990, when the International Equity Fund's current
investment advisor was appointed and the Fund's investment objective
was changed to its current status. Average annual total return of 3.71%
for the ten-year period since January 1, 1987 includes that of the
Fund's predecessor, the Tyndall-Newport Global Growth Fund (1/1/87-
7/6/90).
** Unannualized return from inception through 12/31/97.
</TABLE>
As the following formula indicates, the average annual total return is
determined by multiplying a hypothetical initial purchase order of $1,000 by the
average annual compound rate of return (including capital
appreciation/depreciation and dividends and distributions paid and reinvested)
for the stated period less any fees charged to all shareholder accounts and
annualizing the result. The calculation assumes the maximum sales load is
deducted from the initial $1,000 purchase order and that all dividends and
distributions are reinvested at the public offering price on the reinvestment
dates during the period. The quotation assumes the account was completely
redeemed at the end of each one-, five- and ten-year or since inception period
and the deduction of all applicable charges and fees. According to the
Commission formula:
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<PAGE>
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1-, 5- or 10- year periods (or
fractional portion thereof).
Sales literature pertaining to a Fund may quote a distribution rate in
addition to the yield or total return. The distribution rate is the amount of
distributions per share made by the Fund over a twelve-month period divided by
the current maximum offering price. The distribution rate differs from the yield
because it measures what the Fund paid to shareholders rather than what the Fund
earned from investments. It also differs from the yield because it may include
dividends paid from premium income from option writing, if applicable, and
short-term capital gains in addition to dividends from investment income. Under
certain circumstances, such as when there has been a change in the amount of
dividend payout, or a fundamental change in investment policies, it might be
appropriate to annualize the distributions paid over the period such policies
were in effect, rather than using the distributions paid during the past twelve
months.
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare the Fund's
NAV or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a Fund relative to the total market as
represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less than 1.00
indicates volatility less than the market. Another measure of volatility or risk
is standard deviation. Standard deviation is used to measure variability of NAV
or total return around an average, over a specified period of time. The premise
is that greater volatility connotes greater risk undertaken in achieving
performance.
Sales literature referring to the use of a Fund as a potential
investment for IRAs, Business Retirement Plans, and other tax-advantaged
retirement plans may quote a total return based upon compounding of dividends on
which it is presumed no federal income tax applies.
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Regardless of the method used, past performance is not necessarily
indicative of future results, but is an indication of the return to shareholders
only for the limited historical period used.
Comparisons and Advertisements
To help investors better evaluate how an investment in a Fund might
satisfy their investment objective, advertisements regarding the Fund may
discuss yield, total return, or Fund volatility as reported by various financial
publications. Advertisements may also compare yield, total return, or volatility
(as calculated above) to yield, total return, or volatility as reported by other
investments, indices, and averages. The following publications, indices, and
averages may be used:
(a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment
of dividends.
(b) Standard & Poor's 500 Stock Index or its component indices an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices -unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available. Comparisons
of performance assume reinvestment of dividends.
(e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income Analysis,
and Lipper Mutual Fund Indices - measures total return and average current yield
for the mutual fund industry. Ranks individual mutual fund performance over
specified time periods assuming reinvestment of all distributions, exclusive of
sales charges.
(f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
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<PAGE>
(g) Mutual Fund Source Book and other material, published by
Morningstar, Inc. - analyzes price, yield, risk, and total return
for equity funds.
(h) Financial publications: Business Week, Changing Times,
Financial World, Forbes, Fortune, and Money magazines - rate fund
performance over specified time periods.
(i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services, in major expenditure groups.
(j) Standard & Poor's 100 Stock Index - an unmanaged index based on the price of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for option trading.
(k) Morgan Stanley Capital International EAFE Index - an arithmetic, market
value-weighted average of the performance of over 1,100 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
(l) J.P. Morgan Traded Global Bond Index - is an unmanaged index of government
bond issues and includes Australia, Belgium, Canada, Denmark, France, Germany,
Italy, Japan, The Netherlands, Spain, Sweden, United Kingdom and United States
gross of withholding tax.
(m) Financial publications: Barron's, Financial Times,
Investor's Business Daily, New York Times, and The Wall Street
Journal - publications that rate fund performance over specified
time periods.
(n) Morgan Stanley Capital International Emerging Markets Free Index - a market
value-weighted average of the performance of approximately 900 securities traded
on the stock exchanges of emerging markets throughout the world that are
accessible to foreign investors.
(o) Nomura Research, Inc. Eastern Europe an Equity Index -
comprised of those equities which are traded on listed markets in
Poland, the Czech Republic, Hungary and Slovakia (returns do not
include dividends).
(p) Deutsche Morgan Grenfell Emerging Eastern Europe (DB-EEE Index) - an
unmanaged index that tracks U.S. dollar total returns for 3-month fixed income
instruments denominated in the local currencies of 12 emerging Eastern European
debt markets (out of a potential investment universe of currently 28 countries).
The DB-EEE's subindex for investment grade countries (EEE-IG)
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currently comprises the Czech Republic, Hungary, Poland, Estonia,
Latvia and Slovakia.
In assessing such comparisons of yield, return, or volatility, an
investor should keep in mind that the composition of the investments in the
reported indices and averages in not identical to a Fund's portfolio, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its figures. In addition, there can be no assurance that the
Fund will continue its performance as compared to such other averages.
Financial Statements
The books of each Fund will be audited at least once each year by Tait,
Weller and Baker, of Philadelphia, PA, independent public accountants.
The Fund's audited financial statements and notes thereto for the year
ended December 31, 1997 and the unqualified report of Tait, Weller & Baker, on
such financial statements (the "Report") are incorporated by reference in this
SAI and are included in the Fund's 1997 annual report to shareholders (the
"Annual Report"). A copy of the Annual Report accompanies this SAI and an
investor may obtain a copy of the Annual Report by writing to the Fund or
calling (800)-527-9500
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APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND
RATINGS:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks at a higher end of
the rating category, modified 2 indicated a mid-range rating, and the modifier 3
indicates that the issue ranks at the lower end of the rating category.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations, i.e.
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements, their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good
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and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
MOODY'S SHORT-TERM DEBT RATINGS:
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Prime-1 - Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics,
lending market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established access
to range of financial markets and assured sources of alternate liquidity.
Prime-2 - Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
-61-
<PAGE>
Prime 3 - Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS:
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation indicate an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from highest rated issues only to a small degree.
Plus(+) or Minus(-) - The ratings from AA to CCC may be modified by the
addition of a plus or a minus sign, which shows relative standing
within the major rating categories.
A - Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in the higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in categories than for debt in higher rated categories.
BB, B, CCC, CC - Debt rated BB, B, CCC, and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation which indicates BB the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
-62-
<PAGE>
Investment Advisor: Vontobel USA Inc.
450 Park Ave.
New York, NY 10022
Distributor: Vontobel Fund Distributors,
a division of First Dominion Capital
Corp.
1500 Forest Ave., Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Marketing Services: For general information on the Funds
and marketing services, call the
Distributor at(800) 527-9500 toll
free.
Transfer Agent: For account information, wire
purchase or redemptions, call or
write to the Fund's Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260-6305
(800) 628-4077 Toll Free
More Information: For 24-hour, 7-days-a-week price
- -----------------
information call 1-800-527-9500. For
information on any series of the
Company, investment plans, or other
shareholder services, call the
Company at 1-800-527-9500 during
normal business hours, or write the
Company at 1500 Forest Avenue, Suite
223, Richmond, VA 23229
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
1. Included in Part A:
(a) For the Vontobel U.S. Value Fund,
Vontobel International Equity Fund
(formerly named, Vontobel EuroPacific
Fund), Vontobel Eastern European Equity
Fund Vontobel International Bond Fund
Vontobel Eastern European Debt Fund and
Emerging Markets Equity Fund:
* Financial Highlights for years (or
period) ended December 31, 1997 and each
previous year (or period) ended December
31 through the later of the year of
inception of the fund or 1988 as
applicable.
2. Incorporated by reference in Part A from the
Annual Report to Shareholders of each of the
series of the registrant which was filed via
(audited) the Securities and Exchange
Commission's ("SEC") EDGAR system on March 2,
1998.
(a) For each of the Vontobel U.S. Value
Fund), Vontobel Eastern European Equity
Fund, Vontobel International Bond Fund,
Vontobel Eastern European Debt Fund and
Vontobel Emerging Markets Equity Fund.
. Report of Independent Auditors
dated January 23, 1998 relating to
the Financial Statements for fiscal
periods ended December 31, 1997.
. Schedule of Portfolio Investments
as of December 31, 1997 (audited);
. Statement of Assets and Liabilities
at December 31, 1997 (audited);
. Statement of Operations for the
year ended December 31, 1997
(audited);
. Statements of Changes in Net Assets
for the years ended December 31,
1996 and December 31, 1997 (as
applicable) (audited);
. Financial Highlights (audited)
. Notes to Financial Statements dated
December 31, 1997 (audited).
C-1
<PAGE>
3. Included in Part B: None
(b) Exhibits.
1. Articles of Incorporation of Registrant are
incorporated herein by reference to Post-
Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No.
2-78931) as filed with the Securities and
Exchange Commission (the "Commission") on
November 1, 1983.
(a) Articles Supplementary of Registrant are
incorporated herein by reference to:
(1) Post-Effective Amendment No. 4 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
October 29, 1984;
(2) Post-Effective Amendment No. 11 to
Registrant's Registration Statement
on Form N-1A (2-78931) as filed
with the Commission on February 28,
1989.
(3) Post-Effective Amendment No. 15 to
Registrant's Registration Statement
on Form N-1A (2-78931) as filed
with the Commission on January 29,
1990.
(4) Post-Effective Amendment No. 23 to
Registrant's Registration Statement
on Form N-1A (2-78931) as filed
with the Commission on December 13,
1993.
(5) Post-Effective Amendment No. 25 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on April
29, 1994.
(6) Post-Effective Amendment No. 27 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
October 19, 1994.
(7) Post-Effective Amendment No. 30 to
the Registrant's Registration
Statement on Form N-1A (File Nos.
2-78931 and 811-3551) as filed with
the Commission on November 9, 1995.
(b) Articles Supplementary of the Registrant
dated February 26, 1997 creating the
Vontobel Emerging Markets Equity Fund
C-2
<PAGE>
and the Vontobel Eastern European Debt
Fund are incorporated herein by
reference to Post-Effective Amendment
No. 34 to Registrant's Registration
Statement on Form N-1A (File Nos. 2-
78931 and 811-3551) as filed with the
Commission on June 3, 1997.
(c) Articles of Amendment of Registrant arr
incorporated herein by reference to:
(1) Post-Effective Amendment No. 19 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931 as
filed with the Commission on March
1, 1991.
(2) Post-Effective Amendment No. 27 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
October 19, 1994.
(3) Post-Effective Amendment No. 33 to
the Registrant's Registration
Statement on Form N-1A (file Nos.
2-78931 and 811-3551) as filed with
the Commission on March 14, 1997.
(4) Articles of Amendment dated May 13,
1997 changing the name of the
Vontobel Emerging Markets Equity
Fund are incorporated herein by
reference to Post-Effective
Amendment No. 34 to Registrant's
Registration Statement on Form N-1A
(File Nos. 2-78931 and 811-3551) as
filed with the Commission on June
3, 1997.
2. By-Laws of Registrant are incorporated herein
by reference to Post-Effective Amendment No.
1 to Registrant's Registration Statement on
Form N-1A (File No. 2-78931) as filed with
the Commission on November 1, 1983.
(a) Amendment to By-Laws of the Registrant
is incorporated herein by reference to
Post-Effective Amendment No. 4 to
Registrant's Registration Statement on
Form N-1A (File Nos. 2-78931 and 811-
3551) as filed with the Commission on
October 29, 1984.
3. Not Applicable.
4. (a) Specimen of security issued by the:
(1) Vontobel International Equity Fund
series of the Registrant is
C-3
<PAGE>
incorporated herein by reference to
Post-Effective Amendment No. 19 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on March
1, 1991.
(2) Vontobel U.S. Value Fund series of
the Registrant is incorporated
herein by reference to Post-
Effective Amendment No. 19 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on March
1, 1991.
(3) Vontobel International Bond Fund
series of the Registrant is
incorporated herein by reference to
Post-Effective Amendment No. 23 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
December 13, 1993.
(4) Vontobel Eastern European Equity
Fund series of the Registrant is
incorporated herein by reference to
Post-Effective Amendment No. 30 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
November 9, 1995.
(5) Vontobel Eastern European Debt Fund
series of the Registrant is
incorporated by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
(6) Vontobel Emerging Markets Equity
Fund series of the Registrant is
incorporated by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
5. (a) Investment Advisory Agreement between
Vontobel USA, Inc. and the Registrant on
behalf of the:
(1) Vontobel International Equity Fund
series (dated July 14, 1992) is
incorporated herein by reference to
Post-Effective Amendment No. 22 of
Registrant's Registration Statement
C-4
<PAGE>
on Form N-1A (File No. 2-78931) as
filed with the Commission on April
30, 1993.
(2) Vontobel U.S. Value Fund series
(dated July 14, 1992) is
incorporated by reference to Post-
Effective Amendment No. 22 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on April
30, 1993.
(3) Vontobel International Bond Fund
series (dated February 10, 1994) is
incorporated herein by reference to
Post-Effective Amendment No. 25 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on April
29, 1994.
(4) Vontobel Eastern European Equity
Fund series (dated February 14,
1997) is incorporated herein by
reference to Post-Effective
Amendment No. 31 of Registrant's
Registration Statement on Form N-1A
(File No. 2-78931) as filed with
the Commission on April 29, 1997.
(5) Vontobel Eastern European Debt Fund
series of the Registrant is
incorporated by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
(6) Vontobel Emerging Markets Equity
Fund series of the Registrant is
incorporated by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
6. (a) Distribution Agreement between Newport
Distributors, Inc. and the Registrant
(dated January 1, 1994) is incorporated
herein by reference to Post-Effective
Amendment No. 34 to Registrant's
Registration Statement on Form N-1A
(File Nos. 2-78931 and 811-3551) as
filed with the Commission on June 3,
1997.
(b) Selling Dealer Agreement between Newport
Distributors, Inc. and the selling
C-5
<PAGE>
dealers is incorporated herein by
reference to Post-Effective Amendment
No. 19 of Registrant's Registration
Statement on Form N-1A (File No. 2-
78931) as filed with the Commission on
March 1, 1991.
(c) Foreign Broker Dealer Selling Agreement
between Newport Distributors, Inc. and
the foreign selling broker dealers is
incorporated by reference to Post-
Effective Amendment No. 20 of
Registrant's Registration Statement on
Form N-1A (File No. 2-78931) as filed
with the Commission on April 24, 1992.
7. Not Applicable.
8. (a) Custodian Agreement between Brown
Brothers Harriman & Co. and the
Registrant (dated November 10, 1992) is
incorporated herein by reference to
Post-Effective Amendment No. 22 of
Registrant's Registration Statement on
Form N-1A, (File No. 2-78931) as filed
with the Commission on April 20, 1993.
(b) Custodian Agreement between Star Bank
and the Registrant on behalf of the
Vontobel U.S. Value Fund (dated August
1, 1997) is filed herewith as Exhibit
24(b)8.(b).
9. (a) Transfer Agency Agreement, as amended,
between Fund Services, Inc. and the
Registrant is incorporated herein by
reference to Post-Effective Amendment
No. 16 of Registrant's Registration
Statement on Form N-1A, (File No. 2-
78931) as filed on April 27, 1990.
(b) Administrative Services Agreement
between Commonwealth Shareholder
Services, Inc. and the Registrant on
behalf of the:
(1) Vontobel International Equity Fund
series and Vontobel U.S. Value Fund
series (dated July 14, 1992) is
incorporated by reference to Post-
Effective Amendment No. 22 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on April
30, 1993.
(2) Vontobel International Bond Fund
series (dated February 10, 1994) is
incorporated herein by reference to
Post-Effective Amendment No. 25 of
C-6
<PAGE>
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on April
29, 1994.
(3) Vontobel Eastern European Equity
Fund series (dated February 15,
1996) is incorporated by reference
to Post-Effective Amendment No. 31
of Registrant's Registration
Statement on Form N-1A (File No. 2-
78931) as filed with the Commission
on April 29, 1996.
(4) Vontobel Eastern European Debt Fund
series of the Registrant is
incorporated by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
(5) Vontobel Emerging Markets Equity
Fund series of the Registrant is
incorporated by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
10. Opinion of Counsel is attached hereto as
Exhibit 99.
11. Auditor's consent is attached hereto as
Exhibit 24(b)11.
12. Not applicable.
13. Not applicable.
14. (a) Custodial Account Agreement for
Individual Retirement Accounts is
incorporated herein by reference to
Post-Effective Amendment No. 22 to
Registrant's Registration Statement on
Form N-1A (File No. 2-78931) as filed
with the Commission on April 30, 1993.
(b) Disclosure Statement for Individual
Retirement Accounts is incorporated by
reference to Post-Effective Amendment
No. 22 to Registrant's Registration
Statement on Form N-1A (File No. 2-
78931) as filed with the Commission on
April 30, 1993.
(c) Custodial Account Agreement and
Disclosure Document dated February 16,
C-7
<PAGE>
1996 on behalf of the Vontobel Eastern
European Equity Fund series is
incorporated herein by reference to
Post-Effective Amendment No. 31 to
Registrant's Registration Statement on
Form N-1A (File No. 2-78931) as filed
with the Commission on April 29, 1996.
15. Not Applicable.
16. (a) Schedule(s) of computation of
performance quotation(s) on behalf of
the:
(1) Vontobel International Equity Fund
series is incorporated by reference
to Post-Effective Amendment No. 34
to Registrant's Registration
Statement on Form N-1A (File Nos.
2-78931 and 811-3551) as filed with
the Commission on June 3, 1997.
(2) Vontobel U.S. Value Fund series is
incorporated by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
(3) Vontobel International Bond Fund
series is incorporated by reference
to Post-Effective Amendment No. 34
to Registrant's Registration
Statement on Form N-1A (File Nos.
2-78931 and 811-3551) as filed with
the Commission on June 3, 1997.
(4) Vontobel Eastern European Equity
Fund series is incorporated by
reference to Post-Effective
Amendment No. 34 to Registrant's
Registration Statement on Form N-1A
(File Nos. 2-78931 and 811-3551) as
filed with the Commission on June
3, 1997.
(5) Vontobel Eastern European Debt Fund
series of the Registrant is
incorporated by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
(6) Vontobel Emerging Markets Equity
Fund series of the Registrant is
incorporated by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
C-8
<PAGE>
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
17. (a) Financial Data Schedule on behalf of
the:
(1) Vontobel U.S. Value Fund series is
attached hereto as Exhibit
24(b)17.(a)(1).
(2) Vontobel Emerging Markets Equity
Fund series is attached hereto as
Exhibit 24(b)17.(a)(2).
(3) Vontobel Eastern European Debt Fund
series is attached hereto as
Exhibit 24(b)17.(a)(3).
(4) Vontobel International Equity Fund
is attached hereto as Exhibit
24(b)17.(a)(4).
(5) Vontobel International Bond Fund
series is attached hereto as
Exhibit 24(b)17.(a)(5).
(6) Vontobel Eastern European Debt Fund
is attached hereto as Exhibit 24(b)
17.(a)(6).
18. Not applicable.
19. (a) Powers-of-Attorney for:
(1) Samuel Boyd, Jr. is incorporated
herein by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
(2) Paul M. Dickinson is incorporated
herein by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
(3) Henry Schlegel is incorporated
herein by reference to Post-
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
(4) William E. Poist is incorporated
herein by reference to Post-
C-9
<PAGE>
Effective Amendment No. 34 to
Registrant's Registration Statement
on Form N-1A (File Nos. 2-78931 and
811-3551) as filed with the
Commission on June 3, 1997.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
None.
C-10
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES: As of March 31, 1998:
Title of Class Record Holders
Vontobel International Equity Fund 1,628
Vontobel U.S. Value Fund 6,058
Vontobel International Bond Fund 115
Vontobel Eastern European Equity Fund 14,449
Vontobel Eastern European Debt Fund 123
Vontobel Emerging Markets Equity Fund 146
ITEM 27. INDEMNIFICATION.
Incorporated by reference from PEA No. 1, filed
November 1, 1983, as modified in, and incorporated by
reference from, PEA No. 3, filed March, 1984.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
(a) Vontobel USA, Inc., the investment advisor to the
Vontobel U.S. Value Fund series, the Vontobel
International Equity Fund series, the Vontobel
International Bond Fund series and the Vontobel Eastern
European Equity Fund series provides investment
advisory services consisting of portfolio management
for a variety of individuals and institutions and as of
December 31, 1997, had approximately $1.9 billion in
assets under management.
For information as to any other business, profession,
vocation or employment of a substantial nature in which
each director, officer or partner of Vontobel USA, Inc.
(the "Advisor") is or has been, at any time during the
past two fiscal years, engaged for his own account or
in the capacity of director, officer, employee, partner
or trustee, reference is made to the Advisor's Form ADV
(File #801-21953), currently on file with the
Commission as required by the Investment Advisers Act
of 1940, as amended.
ITEM 29. PRINCIPAL UNDERWRITER.
(a) None.
(b)
<TABLE>
<CAPTION>
Name and Principal Offices With Offices with
Business Address Underwriter Registrant
John Pasco, III President, Chief Chairman &
1500 Forest Avenue Financial Officer, Treasurer &
Suite 223 Treasurer, Director
Richmond, VA 23229
Mary T. Pasco Director Assistant
1500 Forest Avenue Secretary
Suite 223
Richmond, VA 23229
Lori J. Martin Vice President None
1500 Forest Ave. & Assistant Sec.
Suite 223
C-11
<PAGE>
Richmond, VA 23229
F. Byron Parker, Jr. Secretary Secretary
Mustian & Parker
Two Paragon Place
Suite 100
6802 Paragon Place
Richmond, VA 23230
<S> <C> <C> <C> <C> <C> <C>
(c) None.
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books or other documents of the
Investment Company Act of 1940, as amended, and the
rules promulgated thereunder are kept in several
locations:
(a) Shareholder account records (including share
ledgers, duplicate confirmations, duplicate
account statements, and applications forms) of
each series of the Registrant are maintained by
its transfer agent, Fund Services, Inc., at 1500
Forest Avenue, Suite 111, Richmond, VA 23229.
(b) Investment records:
(1) including research information, records
relating to the placement of brokerage
transactions, memorandums regarding
investment recommendations for supporting
and/or authorizing the purchase or sale of
assets, information relating to the placement
of securities transactions, and certain
records concerning investment recommendations
of the Vontobel International Equity Fund,
Vontobel U.S. Value Fund, Vontobel
International Bond Fund and Vontobel Eastern
European Equity Fund series of the Registrant
are maintained at each series' investment
advisor, Vontobel USA, Inc., at 450 Park
Avenue, New York, NY 10022.
(c) Accounts and records for portfolio securities and
other investment assets, including cash:
(1) of the Vontobel International Equity Fund,
Vontobel U.S. Value Fund, Vontobel
International Bond Fund and Vontobel Eastern
European Equity Fund series are maintained in
the custody of the Registrant's custodian
bank, Brown Brothers Harriman & Co., at 40
Water St., Boston, MA 02109.
(d) Accounting records, including general ledgers,
supporting ledgers, pricing computations, etc.:
(1) of the Vontobel International Equity Fund,
Vontobel U.S. Value Fund, Vontobel
International Bond Fund and Vontobel Eastern
C-12
<PAGE>
European Equity Fund series are maintained by
the Registrant's accounting services agent,
Brown Brothers Harriman & Co., at 40 Water
Street, Boston, MA 02109.
(e) Administrative records, including copies of the
charter, by-laws, minute books, agreements,
compliance records and reports, certain
shareholder communications, etc., are kept at the
Registrant's principal office, at 1500 Forest
Avenue, Suite 223, Richmond, VA 23229, by the
Registrant's Administrator, Commonwealth
Shareholder Services, Inc., whose address is the
same as Registrant's.
(f) Records relating to distribution of shares of the
Registrant are maintained by the Registrant's
distributor, First Dominion Capital Corp. at 1500
Forest Avenue, Suite 223, Richmond, VA 23229.
ITEM 31. MANAGEMENT SERVICES. There are no management-related
service contracts not discussed in Parts A or B of this
Form.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) The Registrant hereby undertakes to furnish each
person to whom a Prospectus for one or more of the
series of the Registrant is delivered with a copy
of the relevant latest annual report to
shareholders, upon request and without charge.
C-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant certifies
that it meets all of the requirements for effectiveness of the
Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Richmond, and the Commonwealth of
Virginia on the 1st day of May, 1998.
VONTOBEL FUNDS, INC.
Registrant
By /s/ John Pasco, III
John Pasco, III, Chairman
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
(Signature) (Title) (Date)
/s/ John Pasco, III Director, Chairman May 1, 1998
John Pasco, III & Treasurer
Henry Schlegel* Director May 1, 1998
Henry Schlegel
Samuel Boyd, Jr.* Director May 1, 1998
Samuel Boyd, Jr.
Paul M. Dickinson* Director May 1, 1998
Paul M. Dickinson
William E. Poist* Director May 1, 1998
William E. Poist
/s/ John Pasco, III
John Pasco, III
Attorney-In-Fact*
* Pursuant to Powers-of-Attorney on file.
<PAGE>
EXHIBIT INDEX
EDGAR EXHIBIT
24(b)10 Opinion of Counsel Ex-99.B10
24(b)11 Auditor's consent Ex-99.B11
24(b)17.(a)(1) Financial Data Schedule Ex 27-1
on behalf of Vontobel U.S.
Value Fund.
24(b)17.(a)(2) Financial Data Schedule Ex 27-2
on behalf of Vontobel
Emerging Markets Equity
Fund
24(b)17.(a)(3) Financial Data Schedule Ex 27-3
on behalf of Vontobel
Eastern European Equity
Fund
24(b)17.(a)(4) Financial Data Schedule Ex 27-4
on behalf of Vontobel
International Equity
Fund
24(b)17.(a)(5) Financial Data Schedule Ex 27-5
on behalf of Vontobel
International Bond Fund
24(b)17.(a)(6) Financial Data Schedule Ex 27-6
on behalf of Vontobel
Eastern European Debt
Fund
<PAGE>
1
Law Offices
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8074
April 30, 1998
Vontobel Funds, Inc.
Suite 223
1500 Forest Avenue
Richmond, Virginia 23226
Re: Legal Opinion-Securities Act of 1933
Ladies and Gentlemen:
We have examined the Articles of Incorporation (the "Articles") of Vontobel
Funds, Inc. (the "Fund"), a series corporation organized under Maryland law, the
By-Laws of the Fund, the resolutions adopted by the Fund's Board of Directors
organizing the business of the Fund, and its proposed form of Share Certificates
(if any), all as amended to date, and the various pertinent corporate
proceedings we deem material. We have also examined the Notification of
Registration and the Registration Statements filed under the Investment Company
Act of 1940 (the "Investment Company Act") and the Securities Act of 1933 (the
"Securities Act"), all as amended to date, as well as other items we deem
material to this opinion. The Fund is authorized by the Articles to issue five
hundred million (500,000,000) shares of common stock at a par value of $0.01 per
share. The Fund, by Articles Supplementary adopted by the Board of Diurectors in
accordance with the Articles, have designated six series of the Fund and have
authorized the issuance of fifty million (50,000,000) shares of common stock for
each such series.
The Fund has filed with the U.S. Securities and Exchange Commission a
registration statement under the Securities Act, which registration statement is
deemed to register an indefinite number of shares of the Fund pursuant to the
provisions of Rule 24f-2 under the Investment Company Act. You have advised us
that the Fund each year has filed, and each year hereafter will timely file, a
Notice pursuant to Rule 24f-2 perfecting the registration of the shares sold by
the Fund during each fiscal year during which such registration of an indefinite
number of shares has been and remains in effect.
You have also informed us that the shares of the Fund have been, and will
continue to be, sold in accordance with the Fund's usual method of distributing
its registered shares, under which prospectuses are made available for delivery
to offerees and purchasers of such shares in accordance with Section 5(b) of the
Securities Act.
Based upon the foregoing information and examination, so long as the Fund
remains a valid and subsisting entity under the laws of Maryland, and the
registration of an indefinite number of shares of the Fund remains effective,
the authorized shares of the designated series of the Fund, when issued for the
consideration set by the Board of Directors pursuant to the Articles, and
subject to compliance with Rule 24f-2, will be legally outstanding, fully-paid,
and non-assessable shares, and the holders of such shares will have all the
rights provided for with respect to such holding by the Articles and the laws of
the State of Maryland.
We hereby consent to the use of this opinion, in lieu of any other, as an
exhibit to the Registration Statement of the Fund, along with any amendments
thereto, covering the registration of the shares of the Fund under the
Securities Act and the applications, registration statements or notice filings,
and amendments thereto, filed in accordance with the securities laws of the
several states in which shares of the Fund are offered, and we further consent
to reference in the registration statement of the Fund to the fact that this
opinion concerning the legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUN, LLPP
By: _______________________________________
Steven M. Felsenstein
-63-
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our reports each dated January 23, 1998 on the
financial statements and financial highlights of the Vontobel Funds, Inc.
(comprising Vontobel U.S. value Fund, Vontobel International Equity Fund,
Vontobel Eastern European Equity Fund, Vontobel International Bond Fund,
Vontobel Emerging Markets Equity Fund, and Vontobel Eastern European Debt Fund).
Such financial statements and financial highlights appear in the 1997 Annual
Reports to Shareholders which are incorporated by reference in the Prospectus
filed in the Registration Statement on Form N-1A of the Vontobel Funds, Inc.
We also consent to the references to our Firm in such Registration Statement
and Prospectus.
/s/ Tait Weller & Baker
TAIT, WELLER & BAKER
Philadelphia, Pennsulvania
April 29, 1998
<PAGE>
y 1500 Forest Avenue, Suite 223 Richmond, Va. 23229
804-285-8211 * 800-527-9500 * (Fax) 804-285-8251
May 1, 1998
Filing Desk
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Vontobel Funds, Inc. (formerly, The World Funds, Inc.)
Post-Effective Amendment No. 35
File Numbers: 2-78931 and 811-3551
Gentlemen:
Transmitted herewith for electronic filing, please find enclosed Post-
Effective Amendment ("PEA") No. 35, to the registration statement of
Vontobel Funds, Inc. (the "Registrant").
This PEA No. 35 is being filed pursuant to paragraph (b) of Rule 485,
and will become effective when filed on May 1, 1998. The purpose of this
filing is to update the Fund's financial statements pursuant to Section
10(a)(3) of the Securities Act of 1933, as amended, and to make such other
changes as are required in connection therewith.
Drafts of the material have been reviewed by counsel, Steven M.
Felsenstein, of Stradley, Ronon, Stevens & Young, LLP. Transmitted
electronically with this filing is a letter referencing Rule 485(b).
Please call Steven M. Felsenstein, Esquire, at 215-564-8074 should you have
any questions or comments concerning this filing.
Sincerely,
/s/ John Pasco, III
John Pasco, III
Chairman
<PAGE>
8894
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