VONTOBEL FUNDS, INC.
1500 Forest Avenue, Suite 223, Richmond, Va. 23229
804-285-8211 * 800-527-9500 * 804-285-8251 (fax)
VIA EDGAR
December 27, 1999
Filing Desk
U.S. Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Vontobel Funds, Inc.
File Number 2-78931
Filing Pursuant to Rule 497(e)
Gentlemen:
Transmitted herewith for electronic filing, please find enclosed, pursuant
to Rule 497(e) a copy of the Supplements to the Prospectus and Statement of
Additional Information for Vontobel Funds, Inc. These supplements affect only
the Vontobel Emerging Markets Equity Fund.
These Supplements dated December 27, 1999 to the Prospectus dated August 30,
1999 and the Statement of Additional Information dated August 30, 1999 advise
shareholders of Vontobel Funds, Inc. of the name change for the Vontobel
Emerging Markets Equity Fund (the "Fund"). The new name for this Fund is the
Vontobel U.S. Equity Fund. The investment objctive for the Fund will remain the
same, but the policies and strategies designed to achieve the objective will
change.
Should you have any questions or require additional information, please
contact the undersigned.
Sincerely,
/s/ Darryl S. Peay
Darryl S. Peay
Assistant Secretary
<PAGE>
Supplement dated December 27, 1999
To Prospectus dated August 30, 1999
Of Vontobel Funds, Inc.
The Vontobel Emerging Markets Equity Fund has been renamed. The new name is the
Vontobel U.S. Equity Fund. Any references in this Prospectus that refer to the
Vontobel Emerging Markets Equity Fund now refer to the Vontobel U.S. Equity
Fund. The following "Risk/Return Summary" and "Investment Objective/Strategies
and Risks" sections replace in their entirety the similarly named sections in
the prospectus for the Vontobel Emerging Equity Fund.
RISK/RETURN SUMMARY
Vontobel U.S. Equity Fund ("U.S. Equity Fund")
(formerly, the Vontobel Emerging Markets Equity Fund)
Investment Objective Long-term capital returns
Principal Investment Strategies Under normal circumstances, the
U.S. Equity Fund will invest at
least 65% of its total assets
in equity securities and
securities that are convertible
into equity securities. The Fund
typically invests in securities
that are traded on U.S.exchanges.
Principal Investment Risks The U. S. Equity Fund's
investments are subject to market,
economic and business risks.
These risks will cause the U. S.
Equity Fund's net asset value
("NAV") to fluctuate over time.
Therefore, the value of your
investment in the U.S. Equity
Fund could decline. Also, there
is no assurance that the
investment adviser will achieve
the U.S. Equity Fund's objective.
An investment in the U.S. Equity
Fund is not a bank deposit and is
not insured or guaranteed by the
Federal Deposit Insurance
Corporation or any other
government agency.
Investor Profile You may want to invest in the
U.S. Equity Fund if you are
seeking long-term capital returns,
and are willing to accept share
prices that may fluctuate,
sometimes significantly, over the
short term. You should not invest
in the U.S. Equity Fund if you are
seeking current income.
<PAGE>
INVESTMENT OBJECTIVES/STRATEGIES AND RISKS
U.S. Equity Fund (formerly, the Vontobel Emerging Markets Equity Fund)
The U.S. Equity Fund's investment objective is to achieve long-term capital
returns in excess of the broad market by investing in equity securities and
securities that are convertible into equity securities, such as warrants,
convertible bonds, debentures or convertible preferred stock. Under normal
circumstances, the U.S. Equity Fund will invest at least 65% of its total assets
in equity securities or securities that are convertible into equity securities.
The U.S. Equity Fund typically invests in securities that are traded on U.S.
exchanges. Vontobel USA Inc. (the "Adviser") uses the S&P 500 Index as the
benchmark for the broad market against which the performance of the U.S. Equity
Fund is measured.
The portfolio of the U.S. Equity Fund will be diversified. The U.S. Equity Fund
typically invests in the securities of medium to large capitalization companies,
but is not limited to investing in securities of companies of any size. Using a
bottom-up investment approach, the Adviser seeks to invest in companies that
have a long record of successful operations in their core business and earnings
growth through increasing market share and unit sales volumes. These companies
are typically among the leaders in their industry, having demonstrated
consistent growth in cash flow, sales, operating profits, returns on equity and
returns on invested capital, and little or no debt. The U.S. Equity Fund also
intends to diversify investments broadly among sectors.
The U.S. Equity Fund is subject to stock market risk. Stock market risk is the
possibility that stock prices overall will decline over short or long periods.
Because stock market prices tend to fluctuate, the value of your investment in
the U.S. Equity Fund may increase or decrease. The U.S. Equity Fund's investment
success depends on the skill of the Adviser in evaluating, selecting and
monitoring the portfolio assets. If the Adviser's conclusions about growth rates
or securities values are incorrect, the U.S. Equity Fund may not perform as
anticipated.
The U.S. Equity Fund may invest more than 5% of its assets in U. S. Government
debt securities. However, because it intends to qualify as a "regulated
investment company" for purposes of Subchapter M of the Code, the U.S. Equity
Fund must meet certain diversification requirements. These include the
requirement that at the end of each tax year quarter, at least 50% of the market
value of its total assets must be invested in cash, cash equivalents, 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 and may invest no more than 25% of the value of its
total assets in securities (other than U.S. Government securities) of any one
issuer.
VONTOBEL FUNDS, INC.
(THE "COMPANY") 1500 FOREST AVENUE, SUITE 223, RICHMOND, VA 23229
1-800-527-9500
STATEMENT OF ADDITIONAL INFORMATION
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
VONTOBEL U.S. EQUITY FUND
VONTOBEL EASTERN EUROPEAN EQUITY FUND
VONTOBEL GREATER EUROPEAN BOND FUND
This Statement of Additional Information ("SAI") is not a prospectus. It should
be read in conjunction with the current Prospectus of the Vontobel U.S. Value
Fund, Vontobel International Equity Fund (formerly named Vontobel EuroPacific
Fund), Vontobel U.S. Equity Fund (formerly named Vontobel Emerging Markets
Equity Fund), Vontobel Eastern European Equity Fund and Vontobel Greater
European Bond Fund (collectively, the "Funds"), dated August 30, 1999 as
supplemented to date. You may obtain the Prospectus of the Funds, free of
charge, by Writing to Vontobel Funds, Inc. at 1500 Forest Avenue, Suite 223,
Richmond, VA 23229 or by calling 1-800-527-9500.
The Fund's audited financial statements and notes thereto for the year ended
December 31, 1998 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 1998 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.
The date of this SAI is August 30, 1999, as supplemented December 27, 1999.
<PAGE>
TABLE OF CONTENTS
PAGE
General Information...............................3
Investment Objectives.............................3
Strategies and Risks..............................3
Investment Programs...............................3
Convertible Securities............................3
Warrants..........................................3
Illiquid Securities...............................3
Debt Securities...................................4
International Bonds...............................4
Strategic Transactions............................4
Options...........................................5
Futures...........................................8
Currency Transactions.............................9
Combined Transactions............................10
Eurocurrency Instruments.........................10
Use of Segregated and Other Special Accounts.....11
Depositary Receipts..............................11
Temporary Defensive Positions....................12
U.S. Government Securities.......................12
Repurchase Agreements............................12
Reverse Repurchase Agreements................... 12
When-Issued Securities...........................13
Other Investments................................13
Investment Restrictions..........................13
Management of the Company........................15
Principal Securities Holders.....................18
Investment Adviser and Advisory Agreement........19
Management-Related Services......................20
Portfolio Transactions...........................22
Portfolio Turnover...............................23
Capital Stock and Dividends......................23
Dividends and Distributions......................23
Additional Information about Purchases and Sales.24
Eligible Benefit Plans...........................24
Tax Status.......................................26
Investment Performance...........................28
Financial Information............................30
<PAGE>
GENERAL INFORMATION
Vontobel Funds, Inc. (the "Company") was organized as a Maryland corporation on
October 28, 1983. The Company is an open-end, management investment company
(commonly known as a "mutual fund"), registered under the Investment Company Act
of 1940, as amended (the "1940 Act"). This SAI relates to the Vontobel U.S.
Value Fund ("Value Fund"), Vontobel International Equity Fund ("International
Equity Fund"), Vontobel U.S. Equity Fund ("U.S. Equity Fund"), Vontobel Eastern
European Equity Fund ("E. European Equity Fund") and Vontobel Greater European
Bond Fund ("Bond Fund") (individually, a "Fund," collectively, the "Funds").
Each Fund is a separate investment portfolio or series of the Company (see
"Capital Stock" below). Each of the International Equity, U.S. Equity and E.
European Equity Funds is a "diversified" series," as that term is defined in the
1940 Act. The Value and Bond Funds are "non-diversified" series.
INVESTMENT OBJECTIVES
The Value Fund's investment objective is to achieve long-term capital return.
The investment objective of each of the International Equity and E. European
Equity Funds is to achieve capital appreciation and the investment objective of
the U.S. Equity Fund is to achieve long-term capital appreciation The investment
objective of the Bond Fund is to maximize total return from capital growth and
income.
All investments entail some market and other risks. For instance, there is no
assurance that a Fund will achieve its investment objective. You should not rely
on an investment in a Fund as a complete investment program.
STRATEGIES AND RISKS
The following discussion of investment techniques and instruments supplements,
and should be read in conjunction with, the investment information in the Funds'
Prospectus. In seeking to meet its investment objective, each Fund may invest in
any type of security whose characteristics are consistent with its investment
program described below.
INVESTMENT PROGRAMS
Convertible Securities: Each of the Value, International Equity, U.S. Equity and
E. European Equity Funds may invest in convertible securities. Traditional
convertible securities include corporate bonds, notes and preferred stocks that
may be converted into or exchanged for common stock, and other securities that
also provide an opportunity for equity participation. These securities are
convertible either at a stated price or a stated rate (that is, for a specific
number of shares of common stock or other security). As with other fixed income
securities, the price of a convertible security generally varies inversely with
interest rates. While providing a fixed income stream, a convertible security
also affords the investor an opportunity, through its conversion feature, to
participate in the capital appreciation of the common stock into which it is
convertible. As the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the price
of a convertible security tends to rise as a reflection of higher yield or
capital appreciation. In such situations, the Funds have to pay more for a
convertible security than the value of the underlying common stock.
Warrants: Each of the Value, International Equity, U.S. Equity and E. European
Equity Funds may invest in warrants. Warrants are options to purchase equity
securities at a specific price for a specific period of time. They do not
represent ownership of the securities, but only the right to buy them. Hence,
warrants have no voting rights, pay no dividends and have no rights with respect
to the assets of the corporation issuing them. The value of warrants is derived
solely from capital appreciation of the underlying equity securities. Warrants
differ from call options in that the underlying corporation issues warrants,
whereas call options may be written by anyone.
Illiquid Securities: Each Fund may invest up to 15% of its net assets in
illiquid securities. For this purpose, the term "illiquid securities" means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities. Illiquid securities include generally, among other things, certain
written over-the-counter options, securities or other liquid assets as cover for
such options, repurchase agreements with maturities in excess of seven days,
certain loan participation interests and other securities whose disposition is
restricted under the federal securities laws.
Debt Securities: The Bond Fund intends to invest primarily in debt securities.
It generally will invest in securities rated Baa3 or higher by Moody's Investor
Service, Inc. ("Moody's") or BBB- by Standard & Poor's Rating Group ("S&P") or
unrated securities which the Adviser believes are of comparable quality. The
Fund reserves the right, however, to invest more than 5% of its assets in lower
rated securities (including unrated securities which the Adviser believes to be
of such lower quality). The Fund will invest no more than 10% in securities
rated Ba2 and no more than 5% in securities rated B2 by Moody's or,
respectively, securities rated BB and B by S&P, or securities which are unrated
but are of comparable quality as determined by the Adviser. 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. Under normal circumstances, the U.S. Equity and Value Funds will have
at least 65% of the total assets of each invested in common stocks or equity
securities or securities convertible into common stocks [or equity securities
?]. Each Fund may also acquire fixed income investments where these fixed income
securities are convertible into equity securities. The fixed income securities
in which the Value 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 for the Value Fund, foreign
securities not subject to standard credit ratings, which the Advisor believes
are of comparable quality.
International Bonds: International bonds are bonds issued in countries other
than the United States. The investments of the Bond Fund may include debt
securities issued or guaranteed by an Eastern European national government, its
agencies, instrumentalities or political subdivisions, corporate debt securities
issued by borrowers in Eastern European countries and Eastern European or bank
holding company debt securities.
Strategic Transactions
Each of the Funds may utilize a variety of investment strategies to hedge
various market risks (such as interest 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
(strategies described in more detail below). Such strategies are generally
accepted as modern portfolio management and are regularly utilized by many
mutual funds and institutional investors. Techniques and instruments may change
over time as new instruments and strategies develop and 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").
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as they are 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 could also 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.
Put and Call Options
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 instrument at the exercise price. A Fund may
purchase a put option on a security to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in 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 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 to profit from a market 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 the Fund 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 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.
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 ("NAV") 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 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 cash
settlement may become available in the future. 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 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 a 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.
Although it is not required to do so, the Fund generally expects to enter into
OTC options that have cash settlement provisions.
Unless the parties provide otherwise, 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 Adviser 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 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 15%
of its assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge against a decrease in the value of the underlying securities or
instruments in its portfolio. The premium may also 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.
Each of the International Equity, E. European Equity, and the Bond Funds
(collectively, 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 the Bond Fund) may not purchase or sell 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. Consequently, the purchase of a put is treated as generating gain on
securities held less than three months or short term capital gain (instead of
long term) as the case may be.
Options on Securities Indices and Other Financial Indices
The Funds may also purchase and sell call and put options on securities indices
and other financial indices. By doing so, the Funds can achieve many of the same
objectives that they 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. For example, 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
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. The
Bond Fund may enter into financial futures contracts or purchases or sell put
and call options on such futures for duration management. The use of futures for
hedging is intended to protect an 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 actually
invests 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.
Regulatory policies governing the use of such hedging techniques require the
International Funds to provide for the deposit of initial margin and the
segregation of suitable assets to meet their obligations 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 an
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 Funds' use of financial futures and options thereon will in
all cases be consistent with applicable regulatory requirements, particularly
the rules and regulations of the Commodity Futures Trading Commission. The
International Funds will use such techniques 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 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) with a
financial intermediary as security for its obligations. 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. 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 or that delivery will occur.
An 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 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 between the
parties, at a specified price. These contracts are traded in the interbank
market and conducted directly between currency traders (usually large,
commercial banks) and their customers. A forward foreign currency contract
generally has no deposit requirement or commissions charges. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies. Currency swaps operate similarly to an interest rate swap
(described below). The International Funds 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
Adviser.
The International Funds' 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").
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 an International Fund is engaging in proxy
hedging (see "Proxy Hedging," below). If an International Fund enters into a
currency hedging transaction, it will comply with the asset segregation
requirements described below. Cross currency hedges may not be considered
"directly related" to the International Funds' 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").
Currency transactions are also 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 and
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, they tend to limit any potential gain which might result should
the value of such currency increase.
Transaction Hedging
Transaction Hedging occurs when a fund enters into a currency transaction with
respect to specific assets or liabilities. These specific assets or liabilities
generally arise in connection with the purchase or sale of a fund's portfolio
securities or the receipt of income therefrom. The International Funds may use
transaction hedging to preserve the United States dollar price of a security
when they enter into a contract for the purchase or sale of a security
denominated in a foreign currency. An 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 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 Funds may use position hedging when the Adviser believes that
the currency of a particular foreign country may suffer a substantial decline
against the United States dollar. The International Funds 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 Funds 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 Funds 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 International Funds
have or expect 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 Funds 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 U.S.
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 buying 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 Adviser considers that the
Japanese yen is linked to the Euro, the International Funds hold securities
denominated in yen and the Adviser believes that the value of yen will decline
against the U.S. dollar, the Adviser may enter into a contract to sell Euros and
buy U.S. dollars.
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 and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction or when the Adviser believes that it is in the Fund's best interests
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 Adviser'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. The International Funds 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.
Segregated and Other Special Accounts
In addition to other requirements, many transactions require a Fund to 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 price industry or other 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 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
sufficient liquid assets. 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 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.
Depositary Receipts
American Depositary Receipts ("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.
Like ADRs, European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), and Registered Depositary Certificates ("RDCs") represent receipts for
a foreign security. However, they are issued outside of the U.S. E. European
Equity Fund may invest in ADRs and GDRs. EDRs, GDRs and RDCs involve risks
comparable to ADRs, as well as the fact that they are issued outside of the U.S.
Furthermore, RDCs involve risks associated with securities transactions in
Russia.
Temporary Defensive Positions
When the Adviser 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 temporary defensive purposes, each of the International Equity,
E. European Equity and the Bond 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
investment policies. The Adviser 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.
U.S. Government Securities
The Funds may invest in 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
directly against the United States 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
As a means of earning income for periods as short as overnight, the Funds may
enter into repurchase agreements that are collateralized by U.S. Government
Securities. The Funds may enter into repurchase commitments for investment
purposes for periods of 30 days or more. Such commitments involve investment
risks similar to those of the debt securities in which the Funds invest. Under a
repurchase agreement, a Fund acquires a security, subject to the seller's
agreement to repurchase that security at a specified time and price. A purchase
of securities under a repurchase agreement is considered to be a loan by a Fund.
The Adviser 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 seller of the repurchase agreement. If the seller becomes insolvent, a
Fund's right to dispose of the securities held as collateral may be impaired and
the Fund may incur extra costs. Repurchase agreements for periods in excess of
seven days may be deemed to be illiquid.
Reverse Repurchase Agreements
As a means of enhancing income, the Bond Fund 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. The Fund will also 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").
If the buyer under a repurchase agreement becomes insolvent, the 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 U.S. Equity 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 of the securities 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.
OTHER INVESTMENTS
The Board of Directors may, in the future, authorize one or more of the Funds to
invest in securities other than those listed in this SAI and in the prospectus,
provided that such investments would be consistent with the Fund's investment
objective and would not violate the Fund's fundamental investment policies or
restrictions.
INVESTMENT RESTRICTIONS
Fundamental Investment Policies and Restrictions: Each of the Funds have adopted
the following fundamental investment restrictions. The fundamental investment
restrictions applicable to a Fund cannot be changed without approval by the vote
of a "majority of the outstanding voting securities" of such Fund.
As a matter of fundamental policy, a Fund will not:
1)Except for the Value and Bond 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.
2)Except for the Value and Bond 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 U.S. Equity Fund, more than 10% of any class of the outstanding stock or
securities of such issuer.
3)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.
4)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.)
5)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, U.S. Equity and Bond 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, U.S. Equity and Bond Funds may borrow up to 33 1/3% 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.
6)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 Fund, 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.
7)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 U.S. Equity and Bond Funds, 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 , 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.
8)Except for the U.S. Equity and Bond Funds, 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.
9)Invest in interests in oil, gas, or other mineral explorations or development
programs.
10)Issue senior securities.
11)Participate on a joint or a joint and several basis in any securities
trading account.
12)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).
13)Invest in companies for the purpose of exercising control.
14)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.
15)Engage in short sales.
Non-Fundamental Policies and Restrictions: In addition to the fundamental
policies and investment restrictions described above, and the various general
investment policies described in the Prospectus and elsewhere in the SAI, the
Funds will be subject to the following investment restrictions. Theses
restrictions are considered non-fundamental and may be changed by the Board of
Directors without shareholder approval.
As a matter of non-fundamental policy, a Fund may not:
1)Invest more than 15% of its net assets in illiquid securities.
In applying the fundamental investment policies and restrictions:
(a) 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.
(b) The Funds adhere to the percentage restrictions on investment or utilization
of assets set forth above 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.
MANAGEMENT OF THE COMPANY
Directors and Officers
The Company is governed by a Board of Directors, which is responsible for
protecting the interests of shareholders. The Directors are experienced
businesspersons who meet throughout the year to oversee the Company's
activities, review contractual arrangements with companies that provide services
to the Funds, and review performance. The names and addresses of the Directors
and officers of the Company, together with information as to their principal
occupations during the past five years, are listed below. The Directors who are
considered "interested persons" as defined in Section 2(a)(19) of the 1940 Act,
as well as those persons affiliated with the Adviser and principal underwriter,
and officers of the Company, are noted with an asterisk (*).
Principal
Occupation(s)
Name, Address and Position(s) Held With During the Past 5
Birthdate Company Years
*John Pasco, III Chairman, Director Mr. Pasco has served
1500 Forest Ave, Suite and Treasurer as Treasurer and
223 Richmond, VA 23229 Director of
(4/10/45) Commonwealth
Shareholder Services,
Inc. ("CSS"), the
Company's
Administrator, since
1985; Director,
President and
Treasurer of
Commonwealth Capital
Management, Inc. (a
registered investment
adviser) since 1983;
Director and
shareholder of Fund
Services, Inc., the
Company's Transfer
and Disbursing Agent,
since 1987;
shareholder of
Commonwealth Fund
Accounting, Inc.,
which provides
bookkeeping services
to Star Bank; and
Chairman, Director and
Treasurer of the World
Funds, Inc., a
registered investment
company, since May
1997. Mr. Pasco is
also a certified
public accountant.
*Henry Schlegel Director Mr. Schlegel has
450 Park Avenue served as a Director,
New York, NY 10022 the President and the
(1/24/53) Chief Executive
Officer of Vontobel
USA Inc., a
registered investment
adviser since 1988
Samuel Boyd, Jr. Director Mr. Boyd has served as
10808 Hob Nail Court the Manager of the
Potomac, MD 20854 Customer Services
(9/18/40) Operations and
Accounting Division of
the Potomac Electric
Power Company since
1978 and as Director
of World Funds, Inc.,
a registered
investment company,
since May, 1997. Mr.
Boyd is also a
certified public
accountant.
William E. Poist Director Mr. Poist has served
5272 River Road as a financial and tax
Bethesda, MD 20816 consultant through his
(6/11/39) firm Management
Consulting for
Professionals since
1968 and as Director
of World Funds, Inc.,
a registered
investment company,
since May 1997. Mr.
Poist is also a
certified public
accountant.
Paul M. Dickinson Director Mr. Dickinson has
8704 Berwickshire Drive served as President of
Richmond, VA 23229 Alfred J. Dickinson,
(11/11/47) Inc., Realtors since
April 1971 and as a
Director of World
Funds, Inc. a
registered
investment company
since May 1997.
*Edwin D. Walczak Vice President of the Mr. Walzcak has served
450 Park Avenue Company and as Senior Vice
New York, N.y. 10022 President of the President and
(9/17/53) Vontobel U.S. Value Portfolio Manager (U.
Fund S. Equities) of
Vontobel USA Inc. a
registered investment
adviser, since July
1988.
*Fabrizio Pierallini Vice President of the Mr. Pierallini has
450 Park Avenue Company, served as Senior
New York, N.Y. 10022 President of the Vice President and
(8/14/59) Vontobel Portfolio Manager
International Equity (International and
Fund and the Emerging Markets
Vontobel U.S. Equities) of Vontobel
Equity Fund USA inc., a registered
investment adviser,
since April 1994.
*Monica Mastroberardino Vice President of the Ms. Mastroberardino
450 Park Avenue Company and President has served as Vice
New York, N.Y. 10022 of the Greater European President and
(6/2/58) Bond Fund Portfolio Manager.
(International Fixed
Income of Vontobel USA
Inc., a registered
investment adviser
since February 1999.
Dr. Mastroberardino
has been a
macroeconomic analyst
with Vontobel Asset
Management,
Switzerland, since
February 1998, and
also serves as the
associate portfolio
manager of the
Vontobel group's
Luxembourg-registered
Eastern European Debt
Fund and the
U.S.-registered
Greater Bond Fund.
From February 1995 to
January 1998 she was a
macroeconomic and
financial analyst with
Credit Suisse,
Switzerland.
*Luca Parmeggiani Vice President of the Mr. Parmeggiani has
450 Park Avenue Company and President served as Vice
New York, NY 10022 of the Vontobel President and
(3/23/62) Eastern European Portfolio Manager
Equity Fund (Eastern European
equities) of Vontobel
USA Inc., a registered
investment adviser,
since October 1997.
Mr. Parmeggiani has
served sine September
1997 as head of
Eastern European
equity management of
Vontobel Asset
Management,
Switzerland. From
1992 to 1997 he was a
portfolio manager with
Lombard Odier & Cie,
Geneva. Mr.
Parmeggiani is an
EFFAS certified
financial analyst
(European Federaltion
of Financial Analysts
and Statisticians).
F. Byron Parker, Jr. Secretary Mr. Parker has served
810 Lindsay Court as Secretary of
Richmond, VA 23229 Commonwealth
(1/26/43) Shareholder Services,
Inc. since 1986. He is
also a Partner in the
law firm Mustian &
Parker.
Compensation of Directors: The Company does not compensate the Directors who are
officers or employees of the Adviser. The "independent" Directors receive an
annual retainer of $1,000 and a fee of $200 for each meeting of the Directors
which they attend in person or by telephone. Directors are reimbursed for travel
and other out-of-pocket expenses. The Company does not offer any retirement
benefits for Directors. As of December 31, 1998 the officers and Directors,
individually and as a group, owned beneficially less than 1% of the outstanding
shares of the Funds. For the fiscal year ended December 31, 1998, the Directors
received the following compensation from the Company:
Aggregate
Compensation Pension or
From the Retirement
Funds Fiscal Benefits Total
Year Ended Accrued as Compensation
Name and December 31, Part of Fund from the
Position Held 1998 (1) Expenses Company
John Pasco, III N/A
Director
Henry Schlegel N/A
Director
Samuel Boyd,
Jr. 10,050.00 N/A 10,050.00
Director
William E. 10,050.00 N/A 10,050.00
Poist
Director
Paul M. 10,050.00 N/A 10,050.00
Dickinson
Director
- ------
(1) This amount represents the aggregate amount of compensation paid to the
Directors for: (a) service on the Board of Directors for the Funds for the
fiscal year ended December 31, 1998.
PRINCIPAL SECURITIES HOLDERS
As of July 31, 1999, the following persons owned of record or beneficially
shares of the Funds in the following amounts.
Value Fund
Charles Schwab Reinvestment, 101 Montgomery Street, San Francisco CA 94104,
owned of record 3,699,032.275 outstanding shares (or 40.847%); and Bank J.
Vontobel and its affiliates for the benefit of its customers, Bahnhofstrasse #3
CH-8022 Zurich Switzerland, owned of record 1,172,282.468 outstanding shares (or
12.945%).
International Equity Fund
Bank J. Vontobel and its affiliates for the benefit of its customers,
Bahnhofstrasse #3 CH-8022 Zurich Switzerland, owned of record 3,139,026.644
outstanding shares (or 40.071%); Riggs Bank P.O. Box 96211, Washington, D.C.
20090-6211, owned of record 458,518.362 outstanding shares (or 5.853%); and
Charles Schwab Reinvestment, 101 Montgomery Street, San Francisco, CA 94104,
owned of record 1,497,863.507 outstanding shares (or 19.121%).
E. European Equity Fund
Charles Schwab Reinvestment, 101 Montgomery Street, San Francisco, CA 94104,
owned of record 9945537.070 outstanding shares (or 24.772%); and Bank J.
Vontobel and its affiliates for the benefit of its customers, Bahnhofstrasse #3
CH-8022 Zurich Switzerland, owned of record 574,658.584 outstanding shares (or
14.313%).
U.S. Equity Fund
Charles Schwab Reinvestment 101 Montgomery Street, San Francisco, CA 94104,
owned of record 16,241.398 outstanding shares (or 8.372%); and Bank J. Vontobel
and its affiliates for the benefit of its customers Banhhofstrasse #3 CH-8022
Zurich Switzerland, owned of record 54,666.501 outstanding shares (or 28.178%)
and Vontobel USA Inc. 450 Park Avenue, New York, N.Y. 10022 for Acct. # V202-039
owned of record 10,828.810 outstanding shares (or 5.582%).
Greater European Bond Fund
Bank J. Vontobel and its affiliates for the benefit of its customers,
Bahnhofstrasse #3 CH-8022 Zurich Switzerland, owned of record 636,765.604
outstanding shares (or 85.996%); and Palenzona Ingeborg of Bahnhofstrasse 33
Ch-8022 Zurich Switzerland owned of record 40,637.473 outstanding shares (or
5.488%).
INVESTMENT ADVISER AND ADVISORY AGREEMENT
Vontobel USA Inc. (the "Adviser"), 450 Park Avenue, New York, N.Y. 10022, is
each Fund's investment adviser. The Adviser is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended, (the "Advisers
Act"). The Adviser is a wholly owned subsidiary of Vontobel Holding Ltd., a
Swiss bank holding company which is traded on the Swiss Stock Exchange.
The Adviser serves as investment adviser to the Funds pursuant to separate
Investment Advisory Agreements with the Company for each Fund (each an "Advisory
Agreement"). The Advisory Agreements of the U.S. Equity and Bond Funds are
effective for a period of two years from August 18, 1997, and may be renewed
annually thereafter. The Advisory Agreements for the Value Fund, International
Equity Fund and E. European Equity Fund are dated July 14, 1992, July 14, 1992
and February 14, 1996, respectively. The Advisory Agreement for each such Fund
may be renewed annually provided such renewal is approved annually by: 1) the
Company's Board of Directors; or 2) by a majority vote of the outstanding voting
securities of the Company and a majority of the Directors who are not
"interested persons" of the Company. The Advisory Agreements will automatically
terminate in the event of their "assignment," as that term is defined in the
1940 Act, and may be terminated without penalty at any time upon 60 days'
written notice to the other party by: (i) the majority vote of all the Directors
or by vote of a majority of the outstanding voting securities of the Fund; or
(ii) the Adviser.
Under the Advisory Agreements, the Adviser, subject to the supervision of the
Directors, provides investment management advice with respect to securities and
other instruments. The Adviser makes all decisions and performs all duties in
accordance with the Funds' investment objectives, policies, and investment
restrictions.
The Adviser is responsible for effecting all security transactions on behalf of
the Funds, including the allocation of principal business and portfolio
brokerage and negotiation of commissions. In placing orders with brokers or
dealers, the Adviser will attempt to obtain the best price and execution for the
Fund's orders. The Adviser may allocate brokerage to an affiliated dealer in
accordance with written policies adopted by the Company's Board of Directors.
The Adviser is also permitted to purchase and sell securities to and from
brokers and dealers who provide the Adviser with research advice and other
statistical services. In such instances, the Adviser may be authorized to pay a
commission, which is higher than the commission that would be charged by another
broker. From time to time, and subject to the Adviser obtaining the best price
and execution for each Fund, the Board of Directors may authorize the Adviser 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.
Each Fund is obligated to pay the Adviser an advisory fee. That fee is payable
monthly at an annual rate that is equal to a percentage of the Fund's average
daily net assets. Both the Value and International Equity Funds pay the Adviser
at a rate of 1.00% on the first $100 million and 0.75% on assets in excess of
$100 million. Each of the U.S. Equity, E. European Equity and Bond Funds pay the
Adviser at a rate of 1.25% on the first $500 million and 1.00% on assets in
excess of $500 million. The table below shows the total amount of advisory fees
that each Fund paid the Adviser for the last three fiscal years. The table also
shows the amount of investment advisory fees that the Adviser waived during the
last three fiscal years.
Years Ended December 31,
Fund 1996 Fee 1997 Fee 1998 Fee
Payable/Waived Payable/Waived Payable/Waived
- ------------
Value Fund $620,780/22,437 $986,164/22,500 $1,903,694/22,500
International
Equity Fund 1,280,135/0 1,443,062/0 $1,505,510/0
U.S. Equity Fund* N/A 14,720/14,720 35,051/35psi
E. European
Equity Fund** 302,021/0 2,113,314/0 1,003,342/0
Bond Fund* N/A 57,164/0 154,111/50,475
* Fees paid and/or waived in 1997 reflect payments for the period from September
1, 1997, the commencement of operations, to December 31, 1997.
** Fees paid and/or waived in 1996 reflect payments for the period from February
15, 1996, the commencement of operations, to December 31, 1998.
Pursuant to the terms of the Advisory Agreements, the Adviser pays all expenses
it incurs in connection with rendering its management services. Each Fund is
responsible for all other expenses that are not specifically assumed by the
Adviser. Such expenses include (but are not limited to) brokerage fees and
commissions, legal fees, auditing fees, fees for bookkeeping and record keeping
services, custodian and transfer agency fees and registration fees. The services
furnished by the Adviser under the Advisory Agreements are not exclusive, and
the Adviser is free to perform similar services for others.
ADMINISTRATION
Pursuant to the Administrative Services Agreement with the Company, dated
January 7, 1999 (the "Service Agreements"), Commonwealth Shareholder Services,
Inc. ("CSS"), 1500 Forest Avenue, Suite 223, Richmond, Virginia 23229, serves as
the administrator of the Funds. CSS supervises all aspects of the operation of
the Funds, except those performed by the Adviser. John Pasco III, Chairman of
the Board of the Company, is the sole owner of CSS. CSS provides certain
administrative services and facilities for the Funds, including preparing and
maintaining certain books, records, and monitoring compliance with state and
federal regulatory requirements.
As administrator, CSS receives asset-based fees, computed daily and paid monthly
at annual rates of 0.20% of the average daily net assets of the Funds on the
first $500 million and 0.15% 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 execution of portfolio trades, and certain services in
connection with Fund accounting). CSS receives an hourly fee, plus certain
out-of-pocket expenses, for shareholder servicing and state securities law
matters.
The table below shows the total amount of administrative fees that each Fund
paid CSS for the last three fiscal years.
Years Ended December 31,
Fund 1996 1997 1998
- -------------
Value Fund $147,596 $318,571 $509,371
International Equity
Fund 297,410 419,496 328,563
U.S. Equity Fund* N/A 11,074 18,245
E. European Equity
Fund** 80,336 432,860 205,758
Bond Fund* N/A 14,359 36,769
* Fees paid in 1997 reflect payments for the period from September 1, 1997, the
commencement of operations, to December 31, 1997.
** Fees paid 1996 reflect payments for the period from February 15, 1996, the
commencement of operations, to December 31, 1998.
CUSTODIAN AND ACCOUNTING SERVICES
Pursuant to the Custodian Agreement and Accounting Agency Agreement with the
Company dated November 1,1998, Brown Brothers Harriman & Co. ("BBH"), 40 Water
Street, Boston Massachusetts, 02109, acts as the custodian of the Funds'
securities and cash and as the Funds' accounting services agent. With the
consent of the Company, BBH has designated The Depository Trust Company of New
York, as its agent to secure a portion 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. As the accounting
services agent of the International Funds, BBH maintains and keeps current the
books, accounts, records, journals or other records of original entry relating
to such Funds' business.
TRANSFER AGENT
Pursuant to a Transfer Agent Agreement with the Company dated January 1, 1999,
Fund Services, Inc. ("FSI") acts as the Company's transfer and disbursing agent.
FSI is located at 1500 Forest Avenue, Suite 111, Richmond, VA 23229. John Pasco,
III, Chairman of the Board of the Company and an officer and shareholder of CSS
(the Administrator of the Funds), owns one-third of the stock of FSI; therefore,
FSI may be deemed to be an affiliate of the Company and CSS.
FSI provides certain shareholder and other services to the Company, including
furnishing account and transaction information and maintaining shareholder
account records. FSI is responsible for processing orders and payments for share
purchases. FSI mails proxy materials (and receives and tabulates proxies),
shareholder reports, confirmation forms for purchases and redemptions and
prospectuses to shareholders. FSI disburses income dividends and capital
distributions and prepares and files appropriate tax-related information
concerning dividends and distributions to shareholders.
DISTRIBUTOR
Vontobel Fund Distributors, a division of First Dominion Capital Corp. (the
"Distributor"), 1500 Forest Avenue, Suite 223, Richmond, VA 23229, serves as the
principal underwriter of the Funds' shares pursuant to a Distribution Agreement
dated August 18, 1997. John Pasco, III, Chairman of the Board of the Company,
owns 100% of the Distributor, and is its President, Treasurer and a Director.
INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Tait, Weller & Baker, audit the Company's
annual financial statements, assists in the preparation of certain reports to
the U.S. Securities and Exchange Commission (the "SEC"), and prepares the
Company's tax returns. Tait, Weller & Baker is located at 8 Penn Center Plaza,
Suite 800, Philadelphia, PA 19103.
PORTFOLIO TRANSACTIONS
It is the policy of the Adviser, 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 the skill
required of the executing broker/dealer. After a purchase or sale decision is
made by the Adviser, the Adviser 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 Adviser, when placing transactions, may allocate a portion of a Fund's
brokerage to persons or firms providing the Adviser with investment
recommendations, statistical, research or similar services useful to the
Adviser's investment decision-making process. The term "investment
recommendations or statistical, research or similar services" means (1) 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 (2) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, and portfolio strategy.
Such services are one of the many ways the Adviser 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 Adviser 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 formula, agreement or undertaking to do so, and when it can be
done consistent with the policy of 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 Adviser 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 Board of Directors of the Company has adopted policies and procedures
governing the allocation of brokerage to affiliated brokers. The Adviser has
been instructed not to place transactions with an affiliated broker-dealer,
unless that broker-dealer can demonstrate to the Company that the 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 which
that broker-dealer would offer to unaffiliated persons in a similar transaction.
The Board reviews all transactions which have been placed pursuant to those
policies and procedures at its Board meetings.
When two or more Funds that are managed by the Adviser are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated in a manner deemed equitable to each Fund. In some cases this
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, the ability of such Fund
to participate in volume transactions will be beneficial for the Fund. The Board
of Directors of the Company believes that these advantages, when combined with
the other benefits available because of the Adviser's organization, outweigh the
disadvantages that may exist from this treatment of transactions.
The Funds paid brokerage commissions as follows:
Years Ended December 31,
Fund 1996 1997 1998
- -------------
Value Fund $ 198,787 $290,165 $496,553
International
Equity Fund 1,185,252 292,194 146,822
U.S. Equity Fund N/A 4,604 17,928
E. European Equity
Fund 344,275 932,733 374,114
Bond Fund N/A 0 0
The Funds paid brokerage commissions to Vontobel Securities, Ltd. (an affiliated
broker-dealer) as follows:
Years Ended December 31,
Fund 1996 1997 1998
- -------------
U.S. Equity Fund N/A 0 0
E. European Equity
Fund N/A 0 0
Bond Fund N/A 0 0
International
Equity Fund N/A 0 0
PORTFOLIO TURNOVER
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
portfolio turnover 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. The Adviser makes purchases and sales for a
Fund's portfolio whenever necessary, in the Adviser's opinion, to meet the
Fund's objective. The Adviser anticipates that the average annual portfolio
turnover rate, for the E. European Equity and U.S. Equity Funds, will be less
than 150% and, for each of the other Funds will be less than 100%.
CAPITAL STOCK AND DIVIDENDS
The Company is a series investment company that currently offers one class of
shares. The Company is authorized to issue 500,000,000 shares of common stock,
with a par value of $0.01 per share. The Company has presently allocated
50,000,000 shares to each of the Funds. Each share has equal dividend, voting,
liquidation and redemption rights and there are no conversion or preemptive
rights. Shares of the Funds 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. In such event,
the holders of the remaining shares will not be able to elect any person to the
Board of Directors. Shares will be maintained in open accounts on the books of
FSI.
If they deem it advisable and in the best interests of shareholders, the
Directors may create additional series of shares, each of which represents
interests in a separate portfolio of investments and is subject to separate
liabilities, and may create multiple classes of shares of such series, which may
differ from each other as to expenses and dividends. If the Directors create
additional series or classes of shares, shares of each series or class are
entitled to vote as a series or class only to the extent required by the 1940
Act or as permitted by the Directors. Upon the Company's liquidation, all
shareholders of a series would share pro-rata in the net assets of such series
available for distribution to shareholders of the series, but, as shareholders
of such series, would not be entitled to share in the distribution of assets
belonging to any other series.
A shareholder will automatically receive all income dividends and capital gain
distributions in additional full and fractional shares of the applicable Fund at
its net asset value as of the date of payment unless the shareholder elects to
receive such dividends or distributions in cash. The reinvestment date normally
precedes the payment date by about seven days although the exact timing is
subject to change. Shareholders will receive a confirmation of each new
transaction in their account. The Company will confirm all account activity,
transactions made as a result of the Automatic Investment Plan described below.
Shareholders may rely on these statements in lieu of stock certificates.
ADDITIONAL INFORMATION ABOUT PURCHASES AND SALES
Each Fund's share price, called its NAV, is determined as of the close of
trading on the New York Stock Exchange ("NYSE") (currently 4:00 p.m., Eastern
Time) on each business day ("Valuation Time") that the NYSE is open; however,
the Company's management may compute the NAV more frequently in order to protect
shareholders' interests. As of the date of this prospectus, the Fund is informed
that the NYSE will be closed on the following holidays: New Year's Day, Martin
Luther King Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. NAV per share is computed by
adding the total value of the investments and other assets, subtracting any
liabilities and then dividing by the total number of shares outstanding.
The Fund's securities are generally valued at current market prices. Investments
in securities traded on the national securities exchanges or included in the
NASDAQ National Market System are valued at the last reported sale price. Other
securities traded in the over-the-counter market and listed securities for which
no sales are 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. 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.
Depositary Receipts (i.e., 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. Securities 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.
PURCHASING SHARES
You may purchase shares of the Funds directly from the Distributor or through
brokers or dealers who are members of the National Association of Securities
Dealers, Inc. When you acquire or redeem shares through a securities broker or
dealer, you may be charged a transaction fee. The offering price per share is
equal to the NAV next determined after the Fund receives your purchase order.
The minimum initial investment for the Value Fund, Bond Fund, E. European Equity
Fund and U.S. Equity Fund is $1,000. The minimum initial investment in the
International Equity Fund is $200,000. Subsequent investments for all Funds must
be $50 or more. The Company may waive the minimum initial investment requirement
for purchases made by directors, officers and employees of the Company. The
Company may also waive the minimum investment requirement for purchases by its
affiliated entities and certain related advisory accounts and retirement
accounts (such as IRAs). You may purchase shares of a Fund by mail or wire.
ELIGIBLE BENEFIT PLANS
An eligible benefit plan is an arrangement available to the (1) employees of an
employer (or two or more affiliated employers) having not less than ten
employees at the plan's inception (2) 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 along with prior purchases by
or for the benefit of the initial participants of the plan must aggregate not
less than $5,000. Subsequent purchases must be at least $50 per account and must
aggregate at least $250. The eligible benefit plan must make purchases using a
single order and a single check or federal funds wire. The eligible benefit plan
may not make purchases more often than monthly. The Company will establish a
separate account for each employee, spouse or child for which purchases are
made. The Company may modify the requirements for initiating or continuing
purchases or stop offering shares to such a plan at any time without prior
notice.
SELLING SHARES
You may redeem shares of the Funds at any time and in any amount by mail or
telephone. The Funds will use reasonable procedures to confirm that instructions
communicated by telephone are genuine and, if the procedures are followed, will
not be liable for any losses due to unauthorized or fraudulent telephone
transactions.
The Company's procedure is to redeem shares at the NAV determined after FSI
receives the redemption request in proper order. The Company deducts a 2%
redemption fee from proceeds of the International Equity Fund and Value Fund
shares on shares redeemed less than three months after purchase (including
shares to be exchanged). The Company deducts a 2% redemption fee from proceeds
of the U.S. Equity Fund shares , E. European Equity Fund shares or Bond Fund
shares redeemed less than six months after purchase (including shares to be
exchanged). The applicable Fund retains this amount to offset the Fund's costs
of purchasing or selling securities. The Adviser reserves the right to waive the
redemption fee for its clients.
The Company may suspend the right to redeem shares for any period during which
the NYSE is closed or the SEC 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 NAV next computed after the suspension is
terminated.
SMALL ACCOUNTS
Due to the relatively higher cost of maintaining small accounts, the Company may
deduct $10 per year from your account or may redeem the shares in your account,
if it has a value of less than $1,000. The Company will advise you in writing
sixty (60) days prior to deducting the annual fee or closing your account,
during which time you may purchase additional shares in any amount necessary to
bring the account back to $1,000. The Company will not close your account if it
falls below $1,000 solely because of a market decline.
SPECIAL SHAREHOLDER SERVICES
As described briefly in the Prospectus, each Fund offers the following
shareholder services:
Regular Account: A regular account allows a shareholder to make voluntary
investments and/or withdrawals at any time. Regular accounts are available to
individuals, custodians, corporations, trusts, estates, corporate retirement
plans and others. You may use the Account Application provided with the
Prospectus to open a regular account.
Telephone Transactions: You may redeem shares or transfer into another fund if
you request this service on your initial Account Application. If you do not
elect this service at that time, you may do so at a later date by sending a
written request and signature guarantee to FSI.
Each Fund employs reasonable procedures designed to confirm the authenticity of
your telephone instructions and, if it does not, it may be liable for any losses
caused by unauthorized or fraudulent transactions. As a result of this policy, a
shareholder that authorizes telephone redemption bears the risk of losses, 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. The Company has designed these questions
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: Invest-A-Matic Accounts allow shareholders to make
automatic monthly investments into their account. Upon request, FSI will
withdraw a fixed amount each month from a shareholder's checking account and
apply that amount to additional shares. This feature 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 FSI. In order to open an Invest-A-Matic Account, you must complete a
separate application. To obtain an application, or to receive more information,
please call the offices of the Company at 1-800-527-9500. Any shareholder may
utilize this feature.
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). 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 that govern 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. A
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 rollover contribution and on any income that
is earned on that contribution.
Roth IRA: A Roth IRA permits certain taxpayers to make a non-deductible
investment of up to $2,000 per year. Provided an investor does not withdraw
money from his or her Roth IRA for a 5 year period, beginning with the first tax
year for which contribution was made, deductions from the investor's Roth IRA
would be tax free after the investor reaches the age of 59-1/2. Tax free
withdrawals may also be made before reaching the age of 59-1/2 under certain
circumstances. Please consult your financial and/or tax professional as to your
eligibility to invest in a Roth IRA. An investor may not make a contribution to
both a Roth IRA and a regular IRA in any given year.
An annual limit of $2,000 applies to contributions to regular and Roth IRAs. For
example, if a taxpayer contributes $2,000 to a regular IRA for a year, he or she
may not make any contribution to a Roth IRA for that year.
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 adviser 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 for
all Funds except the International Equity Fund, for which the minimum is
$200,000). You must complete an Exchange Privilege Authorization Form to make an
exchange. Also, 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). FSI 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. TAX STATUS
DISTRIBUTIONS AND TAXES
Distributions of net investment income
The Funds receive income generally in the form of dividends and interest on
their investments. This income, less expenses incurred in the operation of a
Fund, constitutes a Fund's net investment income from which dividends may be
paid to you. Any distributions by a Fund from such income will be taxable to you
as ordinary income, whether you take them in cash or in additional shares.
Distributions of capital gains
The Funds may derive capital gains and losses in connection with sales or other
dispositions of their portfolio securities. Distributions from net short-term
capital gains will be taxable to you as ordinary income. Distributions from net
long-term capital gains will be taxable to you as long-term capital gain,
regardless of how long you have held your shares in a Fund. Any net capital
gains realized by a Fund generally will be distributed once each year, and may
be distributed more frequently, if necessary, in order to reduce or eliminate
excise or income taxes on the Fund.
Effect of foreign investments on distributions
Most foreign exchange gains realized on the sale of securities are treated as
ordinary income by a Fund. Similarly, foreign exchange losses realized by a Fund
on the sale of securities are generally treated as ordinary losses by the Fund.
These gains when distributed will be taxable to you as ordinary dividends, and
any losses will reduce a Fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce a Fund's ordinary
income distributions to you, and may cause some or all of a Fund's previously
distributed income to be classified as a return of capital.
A Fund may be subject to foreign withholding taxes on income from certain of its
foreign securities. If more than 50% of a Fund's total assets at the end of the
fiscal year are invested in securities of foreign corporations, a Fund may elect
to pass-through to you your pro rata share of foreign taxes paid by the Fund. If
this election is made, the year-end statement you receive from a Fund will show
more taxable income than was actually distributed to you. However, you will be
entitled to either deduct your share of such taxes in computing your taxable
income or (subject to limitations) claim a foreign tax credit for such taxes
against your U.S. federal income tax. A Fund will provide you with the
information necessary to complete your individual income tax return if it makes
this election.
Information on the tax character of distributions
The Funds will inform you of the amount of your ordinary income dividends and
capital gains distributions at the time they are paid, and will advise you of
their tax status for federal income tax purposes shortly after the close of each
calendar year. If you have not held Fund shares for a full year, a Fund may
designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the Fund.
Election to be taxed as a regulated investment company
Each Fund has elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code, has qualified as such for its most
recent fiscal year, and intends to so qualify during the current fiscal year. As
regulated investment companies, the Funds generally pay no federal income tax on
the income and gains they distribute to you. The board reserves the right not to
maintain the qualification of a Fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such case,
a Fund will be subject to federal, and possibly state, corporate taxes on its
taxable income and gains, and distributions to you will be taxed as ordinary
dividend income to the extent of such Fund's earnings and profits.
Excise tax distribution requirements
To avoid federal excise taxes, the Internal Revenue Code requires a Fund to
distribute to you by December 31 of each year, at a minimum, the following
amounts: 98% of its taxable ordinary income earned during the calendar year; 98%
of its capital gain net income earned during the twelve month period ending
October 31; and 100% of any undistributed amounts from the prior year. Each Fund
intends to declare and pay these amounts in December (or in January that are
treated by you as received in December) to avoid these excise taxes, but can
give no assurances that its distributions will be sufficient to eliminate all
taxes.
Redemption of Fund shares
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. If you redeem your Fund shares, or exchange your
Fund shares for shares of a different series of the Company, the IRS will
require that you report a gain or loss on your redemption or exchange. If you
hold your shares as a capital asset, the gain or loss that you realize will be
capital gain or loss and will be long-term or short-term, generally depending on
how long you hold your shares. Any loss incurred on the redemption or exchange
of shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gains distributed to you by the Fund
on those shares.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you buy other shares in such Fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you purchase.
U.S. Government Obligations
Many states grant tax-free status to dividends paid to you from interest earned
on direct obligations of the U.S. government, subject in some states to minimum
investment requirements that must be met by the Fund. Investments in Government
National Mortgage Association or Federal National Mortgage Association
securities, bankers' acceptances, commercial paper and repurchase agreements
collateralized by U.S. government securities do not generally qualify for
tax-free treatment. The rules on exclusion of this income are different for
corporations.
Dividends-received deduction for corporations
If you are a corporate shareholder, you should note that 10% of the dividends
paid by the Value Fund for the most recent fiscal year qualified for the
dividends-received deduction. In some circumstances, you will be allowed to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay on these dividends. The dividends-received
deduction will be available only with respect to dividends designated by the
Value Fund as eligible for such treatment. All dividends (including the deducted
portion) must be included in your alternative minimum taxable income
calculation.
Because the income of each of the International Funds (and, until the end of
December, 1999, the income of the U.S. Equity Fund)is derived primarily from
investments in foreign rather than domestic U.S securities, no portion of its
distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by such Funds for the
most recent calendar year qualified for such deduction, and it is anticipated
that none of the current year's dividends will so qualify.
Investment in complex securities
The Funds may invest in complex securities. These investments may be subject to
numerous special and complex tax rules. These rules could affect whether gains
and losses recognized by a Fund are treated as ordinary income or capital gain,
accelerate the recognition of income to a Fund and/or defer a Fund's ability to
recognize losses, and, in limited cases, subject a Fund to U.S. federal income
tax on income from certain of its foreign securities. In turn, these rules may
affect the amount, timing or character of the income distributed to you by a
Fund.
INVESTMENT PERFORMANCE
For purposes of quoting and comparing the performance of the Funds to that of
other mutual funds and to relevant indices in advertisements or in reports to
shareholders, performance will be stated in terms of total return or yield. Both
"total return" and "yield" figures are based on the historical performance of a
Fund, show the performance of a hypothetical investment and are not intended to
indicate future performance.
YIELD INFORMATION
From time to time, the Funds may advertise a yield figure. A portfolio's yield
is a way of showing the rate of income the portfolio earns on its investments as
a percentage of the portfolio's share price. Under the rules of the SEC, yield
must be calculated according to the following formula:
Yield = 2[(a-b +1)-1]6
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.
A Fund's yield, as used in advertising, is computed by dividing the Fund's
interest and dividend income for a given 30-day period, net of expenses, by the
average number of shares entitled to receive distributions during the period
dividing this figure by a Fund's NAV at the end of the period and annualizing
the result (assuming compounding of income) in order to arrive at an annual
percentage rate. Income is calculated for purposes of yield quotations in
accordance with standardized methods applicable to all stock and bond mutual
funds. Dividends from equity investments are treated as if they were accrued on
a daily basis solely for the purposes of yield calculations. In general,
interest income is reduced with respect to bonds trading at a premium over their
par value by subtracting a portion of the premium from income on a daily basis,
and is increased with respect to bonds trading at a discount by adding a portion
of the discount to daily income. Capital gains and losses generally are excluded
from the calculation. Income calculated for the purpose of calculating a Fund's
yield differs from income as determined for other accounting purposes. Because
of the different accounting methods used, and because of the compounding assumed
in yield calculations, the yield quoted for a Fund may differ from the rate of
distributions the fund paid over the same period or the rate of income reported
in the Fund's financial statements.
TOTAL RETURN PERFORMANCE
Under the rules of the SEC, fund advertising performance must include total
return quotes, "T" below, calculated according to the following formula:
P(1+T)n= ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1,5 or 10)
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).
The average annual total return will be calculated under the foregoing formula
and the time periods used in advertising will be based on rolling calendar
quarters, updated to the last day of the most recent quarter prior to submission
of the advertising for publication, and will cover prescribed periods. When the
period since inception is less than one year, the total return quoted will be
the aggregate return for the period. In calculating the ending redeemable value,
all dividends and distributions by a Fund are assumed to have been reinvested at
NAV as described in the prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the prescribed periods (or fractional
portions thereof) that would equate the initial amount invested to the ending
redeemable value.
Fund Name One-Year Five-Year Ten-Year From
Period Ended Period Ended Period Ended Inception
12/31/98 12/31/98 12/31/98 12/31/98
Value Fund 14.70% 21.27% N/A 17.12%
International
Equity Fund 16.77% 9.38% N/A 9.89%
U.S. Equity
Fund (22.20%) N/A N/A (20.97%)
E. European
Equity
Fund (46.62%) N/A N/A (4.95%)
Bond Fund 24.54% N/A N/A 17.43%
The Funds may also from time to time include in such advertising an aggregate
total return figure or an average annual total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately each Fund's performance with other measures of investment return. The
Funds may quote an aggregate total return figure in comparing each Fund's total
return with data published by Lipper Analytical Services, Inc. or with the
performance of various indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, Russell Indices, the
Value Line Composite Index, the Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency Index,
Merrill Lynch Intermediate Agency Index, Morgan Stanley Capital International
Europe, Australia, Far East Index or the Morgan Stanley Capital International
World Index. For such purposes, each Fund calculates its aggregate total return
for the specific periods of time by assuming the investment of $1,000 in shares
of the applicable Fund and assuming the reinvestment of each dividend or other
distribution at NAV on the reinvestment date. Percentage increases are
determined by subtracting the initial value of the investment from the ending
value and by dividing the remainder by the beginning value. To calculate its
average annual total return, the aggregate return is then annualized according
to the SEC's formula for total return quotes outlined above.
The Funds may also advertise the performance rankings assigned by the various
publications and statistical services, including but not limited to, SEI, Lipper
Mutual Performance Analysis, Intersec Research Survey of non-U.S. Equity Fund
Returns, Frank Russell International Universe, and any other data which may be
reported from time to time by Dow Jones & Company, Morningstar, Inc., Chase
Investment Performance, Wilson Associates, Stanger, CDA Investment Technologies,
Inc., the Consumer Price Index ("CPI"), The Bank Rate Monitor National Index, or
IBC/Donaghue's Average U.S. Government and Agency, or as appears in various
publications, including but not limited to, The Wall Street Journal, Forbes,
Barron's, Fortune, Money Magazine, The New York Times, Financial World,
Financial Services Week, USA Today and other national or regional publications.
FINANCIAL INFORMATION
Financial Highlights, Statements and Reports of Independent Accountants. You can
receive free copies of reports, request other information and discuss your
questions about the Funds by contacting the Funds directly at:
VONTOBEL FUNDS, INC.
1500 Forest Avenue, Suite 223
Richmond, VA 23229
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, 1998 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 1998 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.
A prospectus and additional information may also be obtained from our website at
www.vontobelfunds.com.
