Vontobel Annual Report to Shareholders 1998
Vontobel U.S. Value Fund
Vontobel International Equity Fund
Vontobel Eastern European Equity Fund
Vontobel International Bond Fund
Vontobel Emerging Markets Equity Fund
Vontobel Eastern European Debt Fund
A series of Vontobel Funs, Inc.
A "Series" Investment Company
<PAGE>
VONTOBEL U.S. VALUE FUND
ANNUAL REPORT 1998
Dear Shareholder:
At December 31st, 1998, the fund's closing Net Asset Value stood at $16.73,
and net assets totaled $200,462,868, vs. $203,119,627 at year-end 1997. In 1998,
the fund produced a total return of 14.70%, significantly trailing the S&P 500's
total return of 28.72%. On November 20th, the fund paid a per-share distribution
of $1.26 in ordinary income and short-term capital gains and $0.80 in long-term
capital gains to shareholders of record as of November 16th.
1998 was at various times boring, frustrating and irritating, but rarely
satisfying. It was both boring and frustrating in the first half of the year
when the market climbed relentlessly upward for months while we examined idea
after idea and rejected most new names because of too generous price or
inadequate quality. Meanwhile, the fund's cash position, large at the start of
the year, grew even larger, as solid gains among steady growers such as Johnson
& Johnson, Coca-Cola, McDonald's, and Wrigley enticed us to reduce or eliminate
positions in those names. It got more interesting, but remained frustrating, in
late summer and early fall when we finally got what we were hoping for - cheaper
stock prices in the form of a good old stock market crash - but were unable to
decline less than the market, despite the substantial cash position, partly
because of our large exposure to insurance stocks at a time when banks and all
financials were being indiscriminately cast off and partly because the average
stock in the U.S. equity market took a much more severe beating than the market
index. In late fall to yearend we experienced irritation as stocks lurched back
from fear to greed and made a V-like recovery led partly by the technology and
internet sectors - two areas where we generally elect not to invest because we
find few companies that meet our investment criteria, which are heavily weighted
toward predictability and free cash flow. Insofar as we derive satisfaction from
beating the benchmark S&P 500 index, the year was unsatisfactory.
We take only limited consolation in knowing that few money managers did
manage to beat the benchmark in 1998: the average U.S. stock fund returned 14.6%
last year, and the median return for large-capitalization value managers was
12.0%. Indeed, the S&P 500 trounced not only most active money managers, but
also far outdistanced the Dow Jones Industrial Average, which provided an 18.2%
average return last year, and the New York Stock Exchange Composite Index, which
gained 16.6% before dividends. What's more, the average stock within the S&P 500
rose only 13%, a number that helps to explain the performance of the average
stock mutual fund.
What happened last year? Because the index is capitalization-weighted,
price changes in large-cap stocks influence the performance of the index far
more than price changes in small-cap issues. ("Capitalization" refers to the
number of shares outstanding multiplied by the price per share.) A leading
brokerage house noted in January that the largest 100 stocks within the index
accounted for almost 85% of the total return generated by the index! Investors
focused on size and momentum in 1998 - the larger the market cap, and the higher
the price/earnings ratio, the better the performance. Another brokerage firm
recently observed that the gap between the trailing 12-month returns of the
largest 20 stocks and the rest of the market (the other 480 stocks) is the
greatest in over 30 years. When TV's talking heads refer to a "narrow market"
and "poor breadth", it is this sort of market behavior they're talking about.
Some of the Nifty Twenty that propelled the market were Pfizer, Merck,
Intel, Dell, Cisco and Microsoft. Part of the rationale for the Nifty Twenty so
vastly outperforming the rest of the market is that many of them appeared to
offer near certain earnings growth at a time when the "Asian contagion"
phenomenon called earnings growth for the market at large into question. Witness
the numerous earnings warnings we have heard from the likes of Boeing,
Caterpillar, Coke, Disney and others, as well as general concerns that
expectations for U.S. corporate profits for 1999 may be too high. While it may
make some intuitive sense to jump on the "guaranteed" growth stock bandwagon in
this environment, we have a number of reservations. Regarding pharma, we sold
Johnson & Johnson, the last of our pharma holdings, at $82 this past summer and
Baxter at $52 somewhat earlier. It's been over a year since we sold Pfizer and
have not found much value in the drug sector for some time. It's not that we
don't like the business or the companies - it's just that we can't justify the
prices the market is assigning for estimated growth.
Our only technology holding is Dallas Semiconductor, a modest 2% of the
fund. We have never had much of a weighting in technology stocks, principally
because of the extremely competitive business environment, the rapid pace of
technological change, and in many cases the high level of capital investment
required just to maintain earnings. The spectacular rise in internet stocks in
1998, a group in which we are even less likely to participate, merely added salt
to our wounds.1 Also, a general question we might pose to owners of the Nifty
Twenty is how the group can be expected to grow earnings in the mid- to
upper-teens and enjoy significant unit volume growth at a time when inflation
and pricing in the overall economy are punk and GDP growth is slowing.
The good news deriving from 1998's narrow market is that, while skeptical
of the valuations of the Nifty Twenty and therefore "the market" as a whole, we
find ourselves more positive on certain of the other 480 stocks in the market
that rose far less than the market's near-29% increase in 1998. Several of the
fund's holdings are, we believe, significantly undervalued, and offer the sort
of safety of principal and a satisfactory return potential that are the
cornerstones of prudent long-term investing. The fund's large overweight in
insurance brings to mind the overweighting in bank stocks earlier in the decade.
Like the banks earlier, it seems that most insurers are being tarred with the
same brush - investors are treating the group as if all insurers are the same
and as if the industry's current problems are insoluble. The Standard & Poor's
Insurance (Property and Casualty) Group lost 8.2% of price value last year, and
the Multiline Insurance, Insurance Brokers, and Insurance (Life/Health) groups
also performed poorly relative to the S&P 500 index. The fund's holdings in AIG,
Chubb, Mercury General, Provident, and the other insurers to which we've
committed shareholder capital represent investments we've made with confidence.
The group's current out-of-favor status strikes us as not surprising, given the
market's current emphasis on growth, momentum and all things internet. The
insurers owned within the fund have managed well in an adverse industry
environment characterized by fierce price competition and falling investment
yields. They will turn out even better operating results in a less challenging
environment. There is value there, and we're confident that that value will
eventually be realized in the market.
The two newspaper companies whose shares are held have turned in excellent
operating results of late, but the market seems not to care, particularly in the
case of Knight-Ridder, whose shares closed today lower than they were at the
start of 1998. Eventually here, too, value will out. While these words may
provide cold comfort to those who focus solely on our 1998 (and early 1999)
performance relative to the high-flying S&P index, we urge our shareholders to
take a longer view. We can't predict what the market or the fund will do over
any single month, or even year, but we can predict that strict adherence to a
disciplined investment style will provide safety of principal and a satisfactory
return over an investment timeframe that is likely to encompass both irrational
exuberance and unbridled fear.
Edwin Walczak, Fund Manager
Mark Robertson, Associate Fund Manager
January 28, 1999
- --------
1.) Warren Buffett recently noted that if he were a professor at a business
school he would give an exam challenging his students to compute a value for
any of the internet stocks; anyone who handed in an answer would
automatically be given a failing grade because, he believes, it is impossible
to value the stocks. Because one of the world's greatest investors thinks
the group is unanalyzable, however, does not mean the stocks cannot double or
triple in price in a matter of months, weeks, days, or, as we've seen in
early 1999, hours.)
<PAGE>
(Graph goes here)
Date US VALUE S&P 500
03/30/90 $10,000.00 $10,000.00
12/31/90 $9,010.85 $9,714.00
12/31/91 $12,370.63 $12,270.00
12/31/92 $14,343.49 $12,817.00
12/31/93 $15,205.24 $13,722.00
12/31/94 $15,215.10 $13,510.78
12/31/95 $21,355.82 $18,588.13
12/31/96 $25,900.56 $22,857.66
12/31/97 $34,878.04 $30,482.98
12/31/98 $39,883.00 $39,195.00
<PAGE>
Schedule of Portfolio Investments
December 31, 1998
Number
of Market
Shares Security Description Value
- -------- ------------------------ ----------
COMMON STOCK: 81.19%
BANKING: 0.56%
76,669 California Center Bank* $1,130,868
----------
ELECTRONIC 2.18%
COMPU-SEMICONDUCTOR:
107,300 Dallas Semiconductor Corp. 4,372,475
----------
INSURANCE - DISABILITY: 13.80%
227,500 Provident Companies Inc. 9,441,250
312,000 UNUM Corp. 18,213,000
----------
27,654,250
----------
INSURANCE-DIVERSIFIED: 19.93%
219,800 American International Group 21,238,174
351,600 Esg Re Limited* 7,119,900
515,425 Old Republic International Corp. 11,597,063
----------
39,955,137
----------
INSURANCE-PROPERTY/CASUALTY: 22.34%
275,300 Chubb Corp. 17,860,088
168,800 Commerce Group 5,981,850
286,000 Mercury General Corp. 12,530,375
211,350 Orion Capital 8,414,371
----------
44,786,684
----------
OTHER FINANCIAL: 9.44%
255,724 Federal National Mortgage Assn. 18,923,576
----------
PAINT & RELATED PRODUCTS 3.24%
148,500 Sherwin Williams 4,362,188
57,050 Valspar Corp. 2,128,678
----------
6,490,866
----------
PUBLISHING AND BROADCAST: 8.69%
134,800 Gannett Co. 8,694,600
170,600 Knight Ridder Inc. 8,721,925
----------
17,416,525
----------
RESTAURANTS: 1.01%
26,400 McDonald's Corp. 2,022,900
----------
Total Investments:
(Cost: $151,511,157)** 81.19% 162,753,281
Other assets, net 18.81% 37,709,587
----- ----------
NET ASSETS 100.00% $200,462,868
======= ===========
* Non-income producing
** Cost for Federal income tax purposes is $151,511,157 and net
unrealized appreciation consists of:
Gross unrealized appreciation $15,888,387
Gross unrealized depreciation (4,646,263)
----------
Net unrealized appreciation $11,242,124
==========
See Notes to Financial Statements
<PAGE>
Statement of Assets and Liabilities
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments at value (identified cost of
$151,511,157) (Note 1& 3) $162,753,281
Cash 37,388,929
Receivables:
Dividends receivable $156,907
Investments sold 208,390
Capital stock sold 336,968
---------
702,265
Deferred organizational costs 18,282
Other assets 182,104
-----------
TOTAL ASSETS 201,044,861
-----------
LIABILITIES
Payables:
Capital stock redeemed 389,356
Investment management fees 146,169 535,525
---------
Accrued expenses 46,468
-----------
TOTAL LIABILITIES 581,993
===========
NET ASSETS $200,462,868
===========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
($200,462,868 / 11,983,398 shares outstanding) $16.73
===========
At December 31, 1998 there were 50,000,000
shares of $.01 par value stock authorized
and components of net assets are:
Paid in capital $188,834,750
Net unrealized appreciation on investments 11,242,124
Accumulated net realized gain on investments 385,994
-----------
Net Assets $200,462,868
===========
See Notes to Financial Statements
<PAGE>
STATEMENT OF OPERATIONS
Year ended December 31, 1998
- -------------------------------------------------------------------------
Investment Income
Income:
Interest $3,254,406
Dividend 1,988,339
----------
Total income $5,242,745
----------
Expenses:
Investment management fees (Note 2) 1,903,694
Recordkeeping and administrative services (Note 2) 498,208
Shareholder servicing and reports (Notes 2) 319,269
Transfer agent fees 308,075
Custodian and accounting fees (Note 3) 83,721
Filing and registration fees (Note 2) 56,799
Legal and audit fees 37,304
Organizational costs 18,130
Other 10,691
-----------
Total expenses 3,235,891
Custody credits (Note 3) (26,959)
Management fee waiver (Note 2) (22,500)
----------
Expenses, net 3,186,432
----------
Net investment income 2,056,313
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments 29,341,209
Net change in unrealized appreciation on investments (4,007,234)
------------
Net gain on investments 25,333,975
------------
Net increase in net assets resulting from operations $27,390,288
============
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Years ended
December 31
----------------------
1998 1997
<S> <C> <C>
OPERATIONS
Net investment income $ 2,056,313 $ 723,976
Net realized gain on investments 29,341,209 20,634,950
Change in unrealized appreciation of investments (4,007,234) 8,708,910
--------- ---------
Net increase in net assets resulting from operations 27,390,288 30,067,836
operations
DISTRIBUTION TO SHAREHOLDERS FROM
Net investment income ($.16 and $.10 per share, respectively)(1,357,295) (687,957)
Net realized gain from investment transactions
transactions ($1.90 and $1.88 per share, respectively) (16,117,877) (12,944,667)
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net assets
resulting from capital share transactions* (12,571,875) 117,132,758
----------- -----------
Net increase (decrease) in net assets (2,656,759) 133,567,970
Net assets at beginning of year 203,119,627 69,551,657
----------- -----------
NET ASSETS at the end of year $200,462,868 $203,119,627
=========== ============
*A summary of capital share transactions follows:
<CAPTION>
Years ended December 31,
1998 1997
----------------- ----------------------
Shares Value Shares Value
<S> <C> <C> <C> <C>
Shares sold 15,954,466 $270,442,839 12,326,479 $203,031,416
Shares reinvested
from distributions 1,043,131 6,283,273 703,536 11,509,842
Shares redeemed (17,313,425) (299,297,987) (5,777,581) (97,408,500)
=========== ============ ========== ===========
Net increase (decrease) (315,828) $(12,571,875) 7,252,434 $117,132,758
======== =========== ========= ==========
<FN>
See Notes to Financial
Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- --------------------------------------------------------------------------------
Years ended December 31,
------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance performance
Net asset value, beginning of year $16.51 $13.78 $13.25 $10.26 $12.64
------ ------ ----- ------ -----
Income from investment operations
Net investment income 0.22 0.10 0.17 0.05 0.09
Net realized and unrealized gain (loss) on
investments 2.06 4.61 2.65 4.09 (0.08)
------ ------ ----- ------ -----
Total from investment operations 2.28 4.71 2.82 4.14 0.01
------ ------ ----- ------ -----
Less distributions
Distributions from net investment income (0.16) (0.10) (0.19) (0.04) (0.23)
Distributions from realized gain on investments (1.90) (1.88) (2.10) (1.11) (2.16)
------ ------ ----- ------ -----
Total distributions (2.06) (1.98) (2.29) (1.15) (2.39)
----- ----- ----- ----- -----
Net asset value, end of year $16.73 $16.51 $13.78 $13.25 $10.26
====== ====== ===== ====== =====
Total Return 14.70% 34.31% 21.28% 40.36% 0.02%
Ratios/Supplemental Data
Net assets, end of year (000's) $200,463 $203,120 $69,552 $55,103 $29,852
Ratio to average net assets-(A)
Expenses -(B) 1.46% 1.61% 1.48% 1.65% 1.62%
Expenses-net(C) 1.45% 1.58% 1.43% 1.50% 1.62%
Net investment income 0.93% 0.72% 0.63% 0.38% 0.76%
Portfolio turnover rate 122.71% 89.76% 108.36% 95.93% 98.90%
<FN>
(A) Management fee waivers reduced the expense ratios and increased net
investment income ratios by .01% in 1998, 0.02% in 1997, 0.04% in 1996 and
0.06% in 1995.
(B) Expense ratio has been increased to include additional custodian fees in
1998, 1997, 1996 and 1995 which were offset by custodian fee credits; prior
to 1995 custodian fee credits reduced expense ratios.
(C) Expense ratio-net reflects the effect of the custodian fee credits, the
Fund received.
See Notes to Financial Statements
</FN>
</TABLE>
<PAGE>
Notes to the Financial Statements
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--Vontobel U.S. Value Fund (the "Fund")
is a series of Vontobel Funds, Inc. ("VFI") which is registered under The
Investment Company Act of 1940, as amended, as a non-diversified open-end
management company. The Fund was established March 30, 1990 as a series of
VFI which has allocated to the Fund 50,000,000 shares of its 500,000,000
shares of $.01 par value common stock. The following is a summary of
significant accounting policies consistently followed by the Fund. The
policies are in conformity with generally accepted accounting principles.
The investment objective of the fund is to seek to achieve long-term capital
returns in excess of the broad market by investing in a continuously managed
non-diversified portfolio of U.S. equity securities.
A. Security Valuation. Investments in securities traded on a national
securities exchange or included in the NASDAQ National Market System are
valued at the last reported sales price; other securities traded in the
over-the-counter market and listed securities for which no sale is reported
on that date are valued at the last reported bid price. Short-term
investments (securities with a remaining maturity of sixty days or less)
are valued at cost which, when combined with accrued interest, approximates
market value.
B. Federal Income Taxes. The Fund intends to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required.
C. Security Transactions and Dividends. Security transactions are accounted
for on the trade date. The cost of securities sold is generally on a
first-in, first-out basis. Dividend income is recorded on the ex-dividend
date.
D. Deferred Organizational Expenses. Reorganization costs assumed in the
acquisition of Centurion Growth Fund on December 24, 1994 amounted to
$90,899 and are being amortized over a period of five (5) years.
E. Accounting Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS--Pursuant to an
Investment Advisory Agreement, the Advisor, Vontobel USA Inc. ("VUSA") provides
investment services for an annual fee of 1.00% of the first $100 million of
average daily net assets and .75% on average daily net assets over $100 million.
VUSA will reimburse the Fund, to the extent of its advisory fee, to limit the
Fund's aggregate annual operating expenses (excluding taxes, brokerage
commissions and amortization of organization expenses), to the lowest applicable
percentage limitation prescribed by any state in which the Fund's shares are
qualified for sale.
As provided in the Administrative Agreement, the Fund reimbursed
Commonwealth Shareholder Services, Inc. ("CSS"), its Administrative Agent,
$504,371 for providing shareholder services, recordkeeping, administrative
services and blue-sky filings. The Fund compensates CSS for blue-sky filings and
certain shareholder servicing on an hourly rate basis. For other administrative
services, CSS receives .20% of average daily net assets.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $186,812 for its services for the year ended December 31,
1998.
Certain officers and/or directors of the Fund are also officers and/or
directors of CSS and FSI.
NOTE 3-PURCHASES AND SALES OF SECURITIES--Purchases and sales of securities
other than short-term notes aggregated $196,250,455 and $170,767,124,
respectively. The custodian has provided credits in the amount $26,959 against
custodian and accounting charges based on credits on uninvested cash balances of
the Fund.
NOTE 4-DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment
income and realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These distribution differences are primarily due to differing
treatments for equalization and post-October capital losses.
<PAGE>
Report of Independent Certified Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of
Vontobel U.S. Value Fund, a series of Vontobel Funds, Inc., including the
schedule of portfolio investments as of December 31, 1998, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Vontobel U.S. Value Fund as of December 31, 1998, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended in conformity with generally accepted accounting
principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 22, 1999
<PAGE>
VONTOBEL INTERNATIONAL EQUITY FUND
ANNUAL REPORT 1998
Dear Shareholder:
In 1998 Vontobel International Equity Fund produced a total return of
16.77%, vs. the 20.0% total return of the MSCI EAFE Index and the 16.43% average
return of the 585 international equity funds tracked by Lipper Analytical
Services. For the 3- and 5-year periods ending December 31st, the fund ranked
within the 17th and 31st percentiles of the Lipper universe of 316 and 149
funds, respectively.
At December 31st, 1998, the fund's closing Net Asset Value stood at $20.18,
and net assets totaled $162,080,238, vs. $160,820,998 at year-end 1997. On
December 10th, the fund paid a per-share distribution of $0.96 in long-term
capital gains to shareholders of record as of December 2nd.
Whereas the fund's underweight in Asia contributed to its outperformance of
the benchmark in the first half, it accounted for its relative underperformance
in the second half, as the Asian markets, particularly Japan, rallied in the
fourth quarter. The spillover effect from the Russian debacle hit the European
markets much more than it did Japan since the potential financial and economic
repercussions were perceived to be much higher for Europe. The fund's lack of
exposure to Japan's banking sector also hurt relative performance vis-a-vis the
benchmark in the fourth quarter.
While benchmark risk inflicts occasional short-term pain, for us the
greater risk is in owning firms that destroy shareholder value instead of
creating it. We still don't want to own Japanese banks. Their revenues are
highly geared to the domestic economy, which continues to be weak. Last year's
company failures and bankruptcies in the manufacturing sector exceeded the
record set in 1984. The longer it takes for a full-scale resolution of the bad
debt problem, the greater the risk that currently strong borrowers end up as
victims. Japan has only five Moody's triple A-rated firms left. So much for
safety. Our stock selection process keeps us out of firms with weak balance
sheets. We pay a lot of attention to debt levels, preferring to own firms that
have high interest-coverage ratios, like Credit Saison, Nintendo, Takeda
Chemical and Fuji Photo. Within our investable universe we have a number of
Japanese stocks that have excellent investment characteristics, both from an
operational and financial standpoint. That has led us to own such market leaders
in their respective industries as Bridgestone, a tire producer, or Murata and
Rohm, electronic component producers. These firms focus on their core business,
and have produced good results in terms of their returns on capital, year after
year. Unlike the majority of Japanese firms, they don't require us to speculate
as to whether they're going to have to streamline their operations or strain for
greater efficiency.
In Europe, following our investment discipline of buying good businesses at
the right price, we took advantage of the market downdraft in Europe to increase
or add positions in a number of high-quality stocks, like Heineken, Getronics,
Rentokil, WPP, HSBC, Scor and Zurich-Allied, all of which were trading between
25%-40% below our calculation of their intrinsic value. To effect this shift in
country allocation, we used residual cash and reduced Japan by about 4% of total
assets, for a year-end weighting in that market of 18%, vs. 23.5% at the end of
1997. As a result of our bottom-up strategy to commit efforts to the most
attractive companies in our investable universe, our weighting in Europe had
risen to 75% by year end, vs. 65% at the end of 1997.
Our core positions in Europe -- like Aegon, Axa, Scor, Allianz, BMW, Valeo
(CGIP), Heineken, Getronics -- all have the same characteristics, a strong
franchise in their respective industries, a proven record of competing
internationally, strong balance sheets--little or no debt--and valuations close
to their respective intrinsic values. Our concern is always to be invested in
firms that have the ability to pay both interest and principal out of cash flow.
Any change in this ability may signal difficulties, such as occurred at Adidas
and EMI during 1998, which caused us to sell both. Outside the euro-zone, some
of our prominent holdings are first, in Switzerland, Swiss Re, the world's
second-largest reinsurance company, Roche and Novartis, world leaders in pharma
both trading at discounts to their intrinsic values, Rentokil and Compass in the
UK, and Assa Abbloy in Sweden, firms that have proved themselves for decades
long before the euro. We believe that all of our holdings, in Europe as well in
Japan, have substantial upside potential to be rerated on a discounted cash
flows basis.
For currency management, we employ an active strategy, hedging the US
dollar value of the portfolio in periods of dollar strength. We were hedged
against the Swiss franc, German mark and French franc during the first half and
against the Japanese yen until October, removing our hedges as the dollar
weakened in the second half. In accordance with our investment process, the euro
has now replaced the German mark. Purely technical analysis has its limits, but
we find it a useful tool for reducing the volatility of the fund.
As our longtime shareholders are aware, our investment process keeps us out
of companies that have high levels of debt, that are deeply cyclical, that have
low barriers to entry and that produce inconsistent financial results. We invest
only in companies whose historical record gives us a sufficient level of
confidence. This approach has led our shareholders to own the same companies for
long periods of time, on average four years.
Fabrizio Pierallini
Fund Manager
January 19, 1999
<PAGE>
GRAPH GOES HERE]
INTERNATIONAL
EQUITY FUND EAFE
07/06/90 $10,000.00 $10,000.00
12/31/90 $ 8,708.79 $ 8,564.00
12/31/91 $10,343.09 $ 9,401.00
12/31/92 $10,096.62 $ 8,096.00
12/31/93 $14,216.18 $10,570.00
12/31/94 $13,460.83 $11,395.53
12/31/95 $14,927.15 $12,672.97
12/31/96 $17,461.60 $13,438.45
12/31/97 $19,066.32 $13,677.79
12/31/98 $27,674.00 $16,412.00
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998
Number of Market
Shares Security Description Value
- --------- ------------------------- --------
Common Stock: 95.61%
Belgium: 1.17%
6,700 Barco Nv Npv (Diversified) $1,889,890
----------
Denmark: 0.57%
15,050 Bang & Olufsen Holding (Electronics) 919,631
-------
Finland: 0.91%
10,000 Nokia ADR (Telecommunications) 1,204,375
5,000 Pohjola Group Insurance B Shares (Multi-line Insurance) 274,246
-------
1,478,621
---------
France: 11.50%
25,000 Axa S.A. (Multi-line Insurance) 3,621,892
10,666 BIC (Office Supplies) 591,390
37,000 CGIP (Metal Processors/Fabrication) 2,038,276
42,000 Dassault Systems SA (Computer Software) 1,973,422
2,600 L'OREAL (Cosmetics) 1,878,734
8,500 LVMH Louis Vuitton/Moet Hennessy (Diversified) 1,681,452
45,000 Scor (Reinsurance) 2,973,976
13,000 Societe Generale (Banking) 2,104,274
17,315 Total SA (Oil/Gas) 1,752,869
---------
8,616,285
---------
Greece: 0.64%
10,000 Alpha Credit Bank (Banking) 1,042,586
---------
Germany: 6.86%
4,839 Alliance AG (Multi-line Insurance) 1,773,357
1,400 Bayerische Motoren Werke (Automobile) 1,085,740
419 Bayerische Motoren Werke New (Automobile) 310,373
7,000 Ckag Colonia Konzern AG (Insurance) 793,522
20,000 Mannesmann AG (Machinery) 2,291,198
88 Munchener Ruckversicherung Wts 6/02/03 (Reinsurance) 4,091
2,588 Munchener Ruckversicherung (Reinsurance) 1,252,671
7,550 SAP AG (Computer Software) 3,600,996
---------
11,111,948
----------
Great Britain: 18.02%
15,949 British Petroleum PLC Sponsored ADR* (Petroleum) 1,515,155
110,000 Capita Group PLC (Human Resources) 1,013,097
87,135 CGU PLC (Multi-line Insurance) 1,374,698
334,000 Compass Group PLC (Food) 3,814,625
130,000 Dixons Group (Retail) 1,828,363
150,000 Hays PLC (Diversified) 1,321,648
78,000 HSBC Holdings (Banking) 2,095,485
150,348 Lloyds TSB Group PLC (Banking) 2,142,038
228,040 Misys PLC (Computer Services) 1,675,645
83,959 Provident Financial Group PLC (Funancial) 1,232,471
564,000 Rentokil Initial PLC (Diversified) 4,255,106
40,381 Schroders PLC (Banking) 737,774
268,560 Siebe PLC (Diversified) 1,055,896
65,000 Viridian Group PLC (Utilities-Electric) 785,591
100,000 Vodafone Group PLC (Telecommunications) 1,625,876
210,000 WPP Group (Advertising) 1,274,268
33,000 Zeneca Group PLC (Pharmaceutical) 1,438,451
---------
29,186,187
----------
Ireland: 5.19%
200,306 Allied Irish Banks PLC (Banking) 3,569,746
75,000 Bank Of Ireland (Banking) 1,670,089
29,821 CRH PLC (Construction) 505,674
30,328 CRH PLC (Construction) 524,009
26,200 Elan Corporation ADR * (Medical Products) 1,822,538
68,260 Greencore Group (Food-Processing) 306,393
-------
8,398,449
---------
Netherlands: 9.92%
19,209 Aegon NV ADR (Multi-line Insurance) 2,348,300
33,108 Aegon NV (Multi-line Insurance) 4,063,997
45,000 ASM Lithography Holdings NV * (Electronics) 1,374,946
20,000 Getronics NV (Computer Services) 990,089
27,000 Heineken NV (Beverages) 1,624,065
32,000 ING Groep NV (Banking) 1,950,368
22,000 Philips Electronics (Electronics) 1,475,551
50,241 Vedior NV (Human Resources) 989,512
51,195 Vendex NV (Diversified) 1,242,663
---------
16,059,491
----------
Portugal: 0.63%
5,000 Telecel Comunicacaoes Pessoais SA (Telecommunications) 1,021,056
---------
Spain: 0.93%
20,000 Banco Popular Espanol SA (Banking) 1,508,817
---------
Sweden: 6.29%
150,000 ABB AB - B Shares (Engineering) 1,594,825
68,700 Assa Abloy Series 'B' (Metal Processors/Fabrication) 2,632,944
76,666 Astra AB * (Pharmaceutical) 1,563,904
61,000 Bure Investment AB (Financial) 867,263
33,000 Hennes & Mauritz AB (Retail) 2,700,817
66,000 OM Gruppen AB (Financial) 832,276
-------
10,192,029
----------
Switzerland: 11.87%
21,000 Credit Suisse Group (Banking) 3,290,097
345,000 Credit Suisse Wts * (Banking) 510,347
1,250 Nestle AG (Food) 2,723,530
500 Novartis AG (Pharmaceutical) 983,750
1,000 Pharma Vision * (Pharmaceutical) 706,843
75 Roche Holdings AG (Pharmaceutical) 1,359,487
410 Roche Holdings Genusscheine (Pharmaceutical) 5,007,360
1,000 Swiss Reinsurance (Reinsurance) 2,609,487
2,750 Zurich Allied AG (Multi-line Insurance) 2,038,002
---------
19,228,903
----------
Hong Kong: 1.22%
271,400 Dah Sing Financial Services (Financial Services) 658,568
180,000 Sun Hung Kai Properties (Real Estate) 1,312,665
---------
1,971,233
---------
Japan: 17.98%
100,500 Bank Of Tokyo-Mitsubishi Ltd. (Banking) 1,041,220
115,000 Bridgestone Corporation (Tire and Rubber) 2,612,016
82,750 Credit Saison Co. (Financial) 2,040,722
70,000 Fuji Photo Film Co.(Consumer Goods) 2,603,383
39,000 Hoya Co. (Glass Products and Electronics) 1,899,407
30,000 Ito-Yokado Co. Ltd.(Diversified) 2,098,644
26,500 Murata Manufacturing Co. Ltd. (Electronics) 1,100,549
25,000 Nintendo Co. Ltd. (Consumer Goods) 2,424,068
300 NTT Data Communications Systems (Telecommunications) 1,490,304
34,000 Rohm Co. Ltd. (Electronics) 3,098,025
23,000 Sony Corp. (Audio/Video Products) 1,676,170
100,000 Takeda Chemical Industries (Medical/Drugs) 3,851,944
60,000 Tokyo Broadcasting System, Inc. (Broadcasting) 671,034
38,000 Tokyo Electron Ltd. (Electronics) 1,443,549
220,000 Yasuda Fire & Marine Insurance (Insurance) 1,059,772
---------
29,110,807
----------
Malaysia: 0.38%
300,000 Malayan Banking Berhad (Banking) 607,895
-------
Singapore: 1.53%
620,000 Jardine Strategic Holdings Ltd. (Diversified) 899,000
145,000 Singapore Press Holdings Ltd. (Publishing) 1,581,818
---------
2,480,818
---------
Total Investments:
(Cost: $111,246,362)** 95.61% 154,824,646
Other assets, net 4.39% 7,108,447
---- ---------
Net Assets 100.00% $161,933,093
====== ============
* Non-income producing
** Cost for Federal income tax purposes is $111,246,362 and
net unrealized appreciation consists of:
Gross unrealized appreciation $48,449,789
Gross unrealized depreciation (4,871,505)
----------
Net unrealized appreciation $43,578,284
===========
ADR--Security represented is held by the custodian bank in the form of
American Depository Receipts.
See Notes to Financial Statements
<PAGE>
DECEMBER 31, 1998
INDUSTRY PERCENTAGE BASED ON NET ASSETS
BANKING /FINANCIAL 17%
INSURANCE 15%
ENGINEERING/ELECTRONICS 15%
CONSUMER GOODS 13%
PHARMACEUTICALS 10%
DIVERSIFIED 9%
COMPUTER SOFTWARE/SERVICES 5%
MISCELLANEOUS/OTHER 6%
AUTOMOTIVE/MACHINERY 4%
OIL/GAS 2%
-
96%
OTHER ASSETS, NET 4%
-
NET ASSETS 100%
===
<PAGE>
Statement of Assets and Liabilities
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments at value (identified cost of
$111,246,362)(Notes 1 & 3) $154,824,646
Cash (including foreign currencies) 6,212,849
Receivables:
Capital stock sold 304,720
Dividends and interest 206,048
Investments sold 949,277
-------
1,460,045
Other assets 23,998
------
TOTAL ASSETS 162,521,538
-----------
LIABILITIES
Payables:
Investment management fees 121,029
Capital stock redeemed 214,020
-------
335,049
Accrued expenses 253,396
-------
TOTAL LIABILITIES 588,445
-------
NET ASSETS $161,933,093
============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($161,933,093 / 8,024,740 shares outstanding) $20.18
======
At December 31, 1998 there were 50,000,000 shares of $.01 par value stock
authorized and the components of net assets are:
Paid in capital $118,352,723
Net unrealized gain on investments and currency transactions 43,580,370
----------
Net Assets $161,933,093
============
See Notes to Financial Statements
<PAGE>
Statement of Operations
Year ended December 31, 1998
- --------------------------------------------------------------------------------
Investment Income
Income:
Interest $ 253,915
Dividend (Net of foreign tax withheld
of $245,212) 2,122,995
---------
Total income $ 2,376,910
------------
Expenses:
Investment management fees (Note 2) 1,505,510
Recordkeeping and administrative services (Note 2) 394,391
Custodian and accounting fees (Note 3) 168,658
Shareholder servicing and reports (Note 2) 94,734
Transfer agent fees (Note 2) 87,270
Legal and audit fees 44,358
Filing and registration fees (Note 2) 33,093
Other 6,869
-----
Total expenses 2,334,883
Custody credits (Note 3) (64,790)
------------
Expenses, net 2,270,093
------------
Net investment income 106,817
------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on investments 14,952,306
Net realized gain on foreign currency
conversions and forward currency contracts 1,222,278
Change in unrealized appreciation
on investments and foreign currencies 10,265,830
------------
Net gain on investments 26,440,414
------------
Net increase in net assets
resulting from operations $ 26,547,231
============
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
--------------------------------
1998 1997
---- ----
OPERATIONS
Net investment income (loss) $106,817 ($269,659)
Net realized gain on investments and
foreign currency transactions 16,174,584 11,288,347
Net unrealized appreciation of
investments and currencies 10,265,830 2,518,629
---------- ---------
Net increase in net assets resulting
from operations 26,547,231 13,537,317
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net realized gain from investment
transactions($0.96 and $1.78 per
share, respectively) (7,497,265) (14,484,891)
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net
assets resulting from capital share
transactions* (17,937,871) 10,058,821
----------- ----------
Net increase in net assets 1,112,095 9,111,247
Net assets at beginning of year 160,820,998 151,709,751
----------- -----------
NET ASSETS at end of year $161,933,093 $160,820,998
============ ============
*A summary of capital share transactions follows:
Years ended December 31,
------------------------
1998 1997
---- ----
Shares Value Shares Value
------ ----- ------ -----
Shares sold 10,169,780 $205,066,242 2,418,086 $46,636,966
Shares reinvested
from distributions 366,109 6,999,999 703,496 13,035,788
Shares redeemed (11,371,833) (230,004,112) (2,586,904) (49,613,933)
----------- ------------ ---------- -----------
Net increase
(decrease) (835,944) ($17,937,871) 534,678 $10,058,821
======== ============ ======= ===========
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
For a Share Outstanding Throughout Each Year
- --------------------------------------------------------------------------------
Years ended December 31,
---------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year $18.15 $18.22 $17.13 $16.23 $17.22
------ ------ ------ ------ ------
Income from investment operations-
Net investment income (loss) 0.01 (0.03) 0.03 0.16 0.01
Net realized and unrealized gain (loss)
on investments 2.98 1.74 2.85 1.61 (0.92)
---- ---- ---- ---- -----
Total from investment operations 2.99 1.71 2.88 1.77 (0.91)
Less distributions-
Distributions from net investment income 0.00 0.00 (0.03) (0.17) (0.08)
Distributions from realized gains (0.96) (1.78) (1.76) (0.70) 0.00
----- ----- ----- ----- ----
Total distributions (0.96) (1.78) (1.79) (0.87) (0.08)
----- ----- ----- ----- -----
Net asset value, end of year $20.18 $18.15 $18.22 $17.13 $16.23
====== ====== ====== ====== ======
Total Return 16.77% 9.19% 16.98% 10.91% (5.28%)
Ratios/Supplemental Data
Net assets, end of year (000's) $161,933 $160,821 $151,710 $130,505 $138,174
Ratio to average net assets-
Expenses (A) 1.40% 1.56% 1.60% 1.63% 1.54%
Expenses-net (B) 1.36% 1.50% 1.39% 1.53% 1.54%
Net investment income (loss) 0.06% (0.17%) 0.15% 0.41% 0.08%
Portfolio turnover rate 41.51% 38.45% 54.58% 68.43% 34.04%
<FN>
(A) Expense ratio has been increased to include additional custodian fees since
1995 which were offset by custodian fee credits. Prior to 1995, custodian
fee credits reduced expense ratios.
(B) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
See Notes to Financial Statements
</FN>
</TABLE>
<PAGE>
Notes to the Financial Statements
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel International Equity
Fund (the "Fund") is a series of Vontobel Funds, Inc. ("VFI") which is
registered under The Investment Company Act of 1940, as amended, as a
diversified open-end management company. The Fund was established in December,
1984 as a series of VFI which has allocated to the Fund 50,000,000 of its
500,000,000 shares of $.01 par value common stock.
The investment objective of the Fund is to seek to achieve capital
appreciation by investing in a carefully selected and continuously managed
diversified portfolio consisting primarily of equity securities of issuers
located in Europe and the Pacific Basin.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Investments traded on stock exchanges are valued at the
last quoted sales price on the exchange on which the securities are traded
as of the close of business on the last day of the period or, lacking any
sales, at the last available bid price. In cases where securities are
traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Fund's Board of Directors.
Securities traded in the over-the-counter market are valued at the last
available sale price in the over-the-counter market prior to time of
valuation. Securities for which market quotations are not readily available
are valued on a consistent basis at fair value as determined in good faith
by or under the direction of the Fund's officers in a manner specifically
authorized by the Board of Directors of the Fund. Temporary investments in
U.S. dollar denominated short-term investments are valued at amortized
cost, which approximates market. Portfolio securities which are primarily
traded on foreign exchanges are generally valued at the closing price on
the exchange on which they are traded, and those values are then translated
into U.S. dollars at the current exchange rate.
B. Federal Income Taxes. The Fund intends to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required.
C. Security Transactions and Dividends. Security transactions are accounted
for on the trade date. The cost of securities sold is determined generally
on a first-in, first-out basis. Dividends are recorded on the ex-dividend
date.
D. Currency Translation. The market values of foreign securities, currency
holdings, other assets and liabilities initially expressed in foreign
currencies are recorded in the financial statements after translation to
U.S. dollars based on the exchange rates at the end of the period. The cost
of such holdings is determined using historical exchange rates. Income and
expenses are translated at approximate rates prevailing when accrued or
incurred. The Fund does not isolate that portion of gains and losses on
investments which is due to changes in foreign exchange rates from that
which is due to changes in market prices of the investments. Such
fluctuations are included with net realized and unrealized gains and losses
from investments. Foreign securities and currency transactions may involve
certain considerations and risks not typically associated with those of
domestic origin.
E. Forward Currency Contracts. Forward sales of currencies are undertaken to
hedge certain assets denominated in currencies that Vontobel USA,
Inc.("VUSA"), the Fund's investment advisor, expects to decline in value in
relation to other currencies. A forward currency contract is an agreement
between two parties to buy or sell a currency at a set price on a future
date. Forward contracts are marked to market daily and the change in market
value is recorded by the Fund as an unrealized gain or loss. When a
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The Fund could be at risk if the
counterparties are unable to meet the terms of the contracts or if the
value of the currency changes unfavorably.
F. Distribution to Shareholders. Distribution from net investment income and
realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions, net operating losses,
equalization and post-October capital and currency losses.
G. Accounting Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS--Pursuant to an
Investment Advisory Agreement, the Advisor, Vontobel USA, Inc. ("VUSA") provides
investment services for an annual fee of 1.00% on the first $100 million of
average daily net assets and .75% on average daily net assets over $100 million.
As provided in the Administrative Agreement, the Fund reimbursed
Commonwealth Shareholder Services, Inc. ("CSS"), its administrative agent,
$328,563 for providing shareholder services, recordkeeping, administrative
services and blue-sky filings. The Fund compensates CSS for blue-sky and certain
shareholder servicing on an hourly rate basis. For other administrative
services, CSS receives 0.20% of average daily net assets.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $57,650 for its services for the year ended December 31,
1998.
Certain officers and/or directors of the Fund are also officers and/or
directors of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY--Purchases and sales of securities other than
short-term notes aggregated $66,471,820 and $86,343,091, respectively. The
Custodian has provided credits in the amount of $64,790 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund.
NOTE 4-SECURITIES LENDING--At December 31, 1998, securities valued at
$18,300,000 were on loan to brokers. For collateral, the Fund received shares of
a short-term global investment trust valued at $19,100,000. Income from
securities lending amounted to $12,273 for the year ended December 31, 1998. The
risks to the Fund of securities lending are that the borrower may not provide
additional collateral when required or return the securities when due.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of
Vontobel International Equity Fund, a series of Vontobel Funds, Inc., including
the schedule of portfolio investments as of December 31, 1998, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Vontobel International Equity Fund as of December 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
Tait, Weller and Baker
Philadelphia, Pennsylvania
January 22, 1999
<PAGE>
VONTOBEL EASTERN EUROPEAN EQUITY FUND
ANNUAL REPORT 1998
Dear Shareholder:
At December 31st, 1998, the fund's closing Net Asset Value stood at $8.14,
and net assets totaled $36,404,450, vs. $139,408,405 at year-end 1997. In 1998,
the fund lost 46.62%, vs. the -21.84% loss of Nomura Research Institute's
Composite Index-11 and the average -26.83% return of the 169 emerging markets
equity funds tracked by Lipper Analytical Services. The fund made no year-end
distributions of income and capital gains.
1998 was an exceedingly difficult year for Eastern European equity markets,
buffeted by the Asian crisis, political crises in Russia and the Czech Republic,
and finally the Russian devaluation and debt default that sent the region into a
tailspin. The fourth quarter saw advances in all major markets, but they were
woefully insufficient to wipe out the losses of the turbulent second and third
quarters. The year-end rally was fueled by interest rate cuts in Hungary, Poland
and the Czech Republic, the general feeling that markets were cheap and, mostly,
by the rebound in Western markets. All the markets in our universe posted
negative US dollar returns last year: Prague (-8%), Warsaw (-12%), Budapest
(-25%), Moscow (-88%).
The relative outperformance of the Czech market is a consequence of the
lack of interest of foreign investors in this market due to economic and
political controversies, low liquidity, lack of progress on the corporate
restructuring front, and dubious enforcement of securities regulations. Some of
the biggest Czech corporations, like Skoda Plzen and Chemapol, are virtually in
bankruptcy. This catastrophic situation is not new, but was thrown into sharper
relief after the Russian crisis provoked a collapse in the demand for
manufactured goods and put pressure on banks to scrutinize loan quality, causing
a credit crunch. Komercni, the country's largest commercial bank, will post
losses in both 1998 and 1999 due to heavy provisioning for losses in Russia. Its
capital adequacy ratio has plunged, necessitating an injection of money that a
strong strategic partner might provide; however, the government has announced
that privatization in the banking sector will be delayed. We continue to be
bearish on this market.
We remain positive about the prospects of both Hungary and Poland, for
which our preliminary forecasts put GDP growth in 1999 at 4% and 4.5%
respectively. However, we've become less bullish on Poland now for two reasons:
it's now overweighted in most investment funds and recent company results have
been disappointing. Moreover, December saw three incidents that put Polish
corporate governance into question. Most egregiously, Elektrim, Poland's
equivalent of GE, announced the existence of an old contract (1996) obliging the
group to sell an important stake of its holding in a cellular telecom company at
book value. This trade, if effected, would reduce the total value of Elektrim by
approximately $150 million (Elektrim's market capitalization is $ 800 million ).
As a result the entire management team resigned on the 22nd of December. Agros,
a food processing company, cut back its forecast net earnings for 1998 by 63%,
having made a downward revision just one month earlier. Lastly, BIG Bank Gdanski
also announced forecasts for 1998 that were much worse than those given
previously, without providing investors with a satisfactory explanation for the
discrepancy. Together, these announcements constituted a rude reminder that it
is often difficult to obtain relevant-and timely-corporate information in
emerging markets, and that quality of management is often a weak point.
Although we're maintaining an overweight in Poland because of its strong
macro environment, and the belief that earnings growth will accelerate in 1999,
we cut back our exposure last quarter in favor of an increased weighting in
Hungary, where we find that company quality is much higher. Indeed, four of the
fund's top five positions at year end were Hungarian firms: MOL (oil & gas) 7.5%
, Matav (telecom) 6.4%, Pannonplast (plastics) 6.2% and Pick (food processing)
6.0%. The fifth, at 5.9% of fund assets, is Pliva, a Croatian pharmaceutical
company that is Central Europe's largest.
Our year-end country allocation was as follows:
Hungary 45.6%
Poland 33.4%
Croatia 9.4%
Romania 2.5%
Russia 2.1%
Lithuania 1.8%
Estonia 1.2%
Czech Republic 1.0%
One of the lessons investors had to digest during last year's difficult
market environment is that they need to distinguish between Central Europe and
Russia, their geographical proximity notwithstanding. We would like to believe
that Eastern European markets could benefit from January portfolio reallocations
as they are under-represented in most global and emerging markets funds.
However, considering the risky environment in Japan, Brazil and Russia, which
will put downward pressure on earnings growth as well as GDP growth forecasts,
we anticipate a continued reluctance on the part of investors to invest in
economies in transition.
In our view, the principal investment rationale for Central Europe remains
the eventual convergence of these markets with the European Union, the
increasing need for diversification within Europe with the arrival of the euro,
and inexpensive valuations.
Luca Parmeggiani
Fund Manager
January 19, 1999
<PAGE>
[GRAPH GOES HERE]
EASTERN EUROPEAN NRI EEEI
EQUITY FUND
02/15/96 $10,000.00 $10,000.00
12/31/96 $14,890.00 $13,476.00
12/31/97 $16,191.39 $13,571.00
12/31/98 $ 8,642.28 $10,607.00
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998
Number of Market
Shares Security Description Value
- --------- -------------------- --------
Common Stocks: 100.73%
Austria: 2.83%
580,000 Coca Cola Beverages PLC * (Beverages) $1,022,074
----------
Croatia: 9.42%
130,000 Pliva D D GDR * (Medical-Drugs) 2,145,000
85,500 Zagrebacka Banka GDR * (Banking) 1,261,125
---------
3,406,125
---------
Czech Republic: 1.03%
89,900 CKD Praha Holding AS * (Engineering) 372,805
-------
Estonia: 1.19%
1,206,800 Britannic Group PLC (Natural Resources) 431,343
-------
Hungary: 46.12%
93,444 Danubus Hotel & Spahuf * (Hotel) 1,957,556
80,000 Delmagyarorszagi Aramsz Sponsored GDR *(Utilities-Electric) 1,380,000
66,700 Egis Gyogysergyar (Medical-Drugs) 1,518,127
19,615 Inter Europa Bank (Banking) 947,563
99,500 Magyar Olay Es Gazipari RT (Oil and Gas) 2,729,161
78,000 Matav RT ADR (Telecommunications) 2,325,375
15,000 MOL Magyar Olay GDR * 144A (Oil and Gas) 415,500
20,000 OTP Bank GDR (Banking) 980,000
79,417 Pannonplast Muanyagipari (Construction Materials) 2,248,399
51,099 Pick Szeged (Food-Meat) 2,171,799
---------
16,673,480
----------
Lithuania: 1.82%
10,150 Baltic Republic Fund * (Other) 659,750
-------
Poland: 33.68%
142,964 Agros Holdings Series C * (Food) 517,277
1,250,000 Big Bank Gdanski (Banking) 1,121,795
141,000 Computerland Poland SA * (Technology) 1,727,350
95,056 Elektrim SA (Engineering) 1,029,096
81,000 Exbud SA Sponsored GDR * (Construction) 729,000
75,249 Exbud SA * (Construction) 649,585
55,000 Exbud SA GDR * (Construction) 495,000
75,000 Mostostal Zabrze-Holding SA (Construction) 275,641
133,464 NFI Foksal * (Other) 155,898
133,464 NFI Fortuna * (Other) 186,317
133,464 NFI Hetman * (Other) 121,677
133,464 NFI I Pierwszy * (Other) 125,479
121,988 NFI II Drugi* (Other) 109,476
133,464 NFI III Trzeci* (Other) 129,281
133,464 NFI Magna Polonia * (Other) 174,910
133,464 NFI Octava * (Other) 235,748
133,464 NFI Piast Fund * (Other) 155,898
133,464 NFI Progress * (Other) 197,724
133,464 NFI V Victoria* (Other) 174,910
133,464 NFI VII K Wielkiego* (Other) 131,183
133,464 NFI XI Jedenasty* (Other) 142,590
133,464 NFI Zachodni * (Other) 193,922
55,000 Orbis SA * (Hotels) 432,479
22,000 Prokom Software Sponsored GDR 144A (Software) 414,700
285,010 Wielkopolski Bank Kredytowy SA (Banking) 1,794,507
80,000 Zakalady Metali Lekkich * (Manufacturing) 754,416
-------
12,175,859
----------
Romania: 2.49%
2,000 Romanian Investment Fund * (Other) 900,000
-------
Russia: 2.15%
1,600,000 Cores Kuzbassenergo GDR * (Utilities) 24,000
23,000 Cores Yar Telecom GDR * 144A (Telecommunications) 17,250
480,000 Primamedic Ltd. * (Pharmaceutical) 306,912
45 Megionneftegaz RDC 144A (Oil and Gas) 10,625
11 Irkutskenergo RDC * 144A (Utilities) 41,250
126,000 Unified Energy Systems GDS (Utility-Electric) 378,050
-------
778,087
-------
Total Investments:
(Cost: $62,292,300) ** 100.73% 36,419,523
Liabilities in excess of other assets (0.73)% (265,581)
Net Assets 100.00% $36,153,942
======= ===========
* Non-income producing
** Cost for Federal income tax purposes is $62,292,300 and net unrealized
depreciation consists of:
Gross unrealized appreciation $1,740,729
Gross unrealized depreciation (27,613,506)
-----------
Net unrealized depreciation ($25,872,777)
============
ADR--Security represented is held by the custodian bank in the form of American
Depository Receipts.
GDR--Security represented is held by the custodian bank in the form of Global
Depository Receipts.
GDS--Security represented is held by the custodian bank in the form of Global
Depository Shares.
RDC--Security represented is held by the custodian bank in the form of Russian
Depository Certificates.
144A-Restricted security. May be resold to qualified institutional buyers. The
aggregate market value of these securities at 12/31/98 was $899,325 which
represented 2.49% of the Fund's net assets.
See Notes to Financial Statements
<PAGE>
VONTOBEL EASTERN EUROPEAN EQUITY FUND
DECEMBER 31, 1998
INDUSTRY PERCENTAGE BASED ON NET ASSETS
- --------------------------------------------------------------------------------
MISCELLANEOUS/OTHER 24%
BANKING/FINANCIAL 18%
PHARMACEUTICALS 11%
CONSTRUCTION 11%
CONSUMER GOODS 10%
OIL/GAS 10%
ENGINEERING/MANUFACTURING 6%
TELECOMMUNICATIONS 6%
TECHNOLOGY 5%
-
101%
LIABLILITIES IN EXCESS OF OTHER ASSETS (1)%
--
NET ASSETS 100%
===
Statement of Assets and Liabilities
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments at value
(identified cost of $62,292,300)(Notes 1 & 3) $36,419,523
Foreign currencies at value $229,981
Receivables:
Capital stock sold 190,839
Dividends 30,644
Investments sold 929,715
-------
1,151,198
Deferred organizational costs 29,955
------
TOTAL ASSETS 37,830,657
----------
LIABILITIES
Payables:
Bank overdraft 1,158,686
Investment management fees 39,618
Capital stock redeemed 324,506
-------
1,522,810
Accrued expenses 153,905
-------
TOTAL LIABILITIES 1,676,715
---------
NET ASSETS $36,153,942
===========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($36,153,942 / 4,440,950 shares outstanding) $8.14
=====
At December 31, 1998 there were 50,000,000 shares of
$.01 par value stock authorized and the components of net
assets are:
Paid in capital $88,072,835
Net unrealized loss on investments
and foreign currency transactions (25,876,380)
Accumulated net realized loss on investments and
foreign currency transactions (26,042,513)
-----------
Net Assets $36,153,942
===========
See Notes to Financial Statements
<PAGE>
Statement of Operations
Year ended December 31, 1998
- --------------------------------------------------------------------------------
Investment Income
Income:
Dividend (Net of foreign tax withheld of $79,370) $ 594,796
-----------
Expenses:
Investment management fees (Note 2) 1,003,342
Shareholder servicing and reports (Note 2) 274,256
Recordkeeping and administrative services (Note 2) 237,176
Transfer agent fees (Note 2) 229,498
Custodian and accounting fees (Note 3) 165,355
Filing and registration fees (Note 2) 58,398
Legal and audit fees 42,651
Organizational costs 14,016
Other 35,957
------------
Total expenses 2,060,649
Custody credits (Note 3) (126,581)
------------
Expenses, net 1,934,068
------------
Net investment loss (1,339,272)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized loss on investments (24,081,682)
Net realized gain on foreign currency conversions 65,244
Net change in unrealized depreciation
of investments and foreign currencies (18,220,110)
------------
Net loss on investments (42,236,548)
------------
Net decrease in net assets resulting from operations ($43,575,820)
============
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Years ended December 31,
---------------------------------
1998 1997
------- ------
OPERATIONS
Net investment loss ($1,339,272) ($1,736,904)
Net realized gain(loss)
on investments and foreign currency
transactions (24,016,438) 11,205,526
Change in unrealized appreciation
of investments and foreign
currencies (18,220,110) (15,462,328)
----------- -----------
Net decrease in net assets
resulting from operations (43,575,820) (5,993,706)
DISTRIBUTION TO SHAREHOLDERS FROM:
Realized gains on investments
($0.00 and $.92 per share,
respectively) --- (8,627,379)
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net
assets resulting from capital share
transactions* (59,678,643) 92,176,846
Net increase (decrease) in net
assets (103,254,463) 77,555,761
Net assets at beginning of year 139,408,405 61,852,644
----------- ----------
NET ASSETS at end of year $36,153,942 $139,408,405
=========== ============
*A summary of capital share transactions follows:
Years ended December 31,
-------------------------------
1998 1997
----------- ----------
Shares Value Shares Value
------ ------ ------- -------
Shares sold 8,327,774 $68,491,154 12,074,912 $215,450,927
Shares reinvested from
distributions -- -- 537,499 8,014,108
Shares redeemed (13,029,324)(128,169,797) (7,623,001) (131,288,189)
----------- ------------ ---------- ------------
Net increase (decrease) (4,701,550)($59,678,643) 4,989,410 $92,176,846
========== ============ ========= ===========
Notes to Financial Statements
<PAGE>
Financial Highlights
For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
Years ended December 31, February
1998 1997 December
31, 1996
-------- ------ --------
Per Share Operating
Performance Net asset value, beginning
of period $15.25 $14.89 $10.00
--------- ------ -----
Income from investment operations-
Net investment loss (0.31) (0.19) (0.06)
Net realized and unrealized gain(loss)
on investments (6.80) 1.47 4.95
----- ---- ----
Total from investment operations (7.11) 1.28 4.89
Less distributions-
Distributionsfrom realized gains
on investments 0.00 (0.92) 0.00
--------- ------ -----
Total distributions 0.00 (0.92) 0.00
---- ----- ----
Net asset value, end of period $8.14 $15.25 $14.89
===== ====== ======
Total Return (46.62)% 8.74% 48.90%
Ratios/Supplemental Data
Net assets, end of period (000's) $36,154 $139,408 $61,853
Ratio to average net assets-
Expenses(A) 2.57% 1.94% 2.02%**
Expenses-net(B) 2.41% 1.66% 1.71%**
Net investment loss (1.67%) (1.30%) (1.07%)**
Portfolio turnover rate 135.35% 105.86% 38.69%
* Commencement of operations ** Annualized
(A) Expense ratio has been increased to include additional custodian fees which
were offset by custodian fee credits.
(B) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel Eastern European
Equity Fund (the "Fund") is a series of Vontobel Funds, Inc. ("VFI") which is
registered under The Investment Company Act of 1940, as amended, as a
diversified open-end management company. The Fund was established in February,
1996 as a series of VFI which has allocated to the Fund 50,000,000 of its
500,000,000 shares of $.01 par value common stock.
The objective of the Fund is to seek to achieve capital appreciation by
investing in a carefully selected and continuously managed diversified portfolio
consisting primarily of equity securities of issuers located in Eastern Europe.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Investments traded on stock exchanges are valued at the
last quoted sales price on the exchange on which the securities are traded
as of the close of business on the last day of the period or, lacking any
sales, at the last available bid price. In cases where securities are
traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Fund's Board of Directors.
Securities traded in the over-the-counter market are valued at the last
available sale price in the over-the-counter market prior to time of
valuation. Securities for which market quotations are not readily available
are valued on a consistent basis at fair value as determined in good faith
by or under the direction of the Fund's officers in a manner specifically
authorized by the Board of Directors of the Fund. Temporary investments in
U.S. dollar denominated short-term investments are valued at amortized
cost, which approximates market. Portfolio securities which are primarily
traded on foreign exchanges are generally valued at the closing price on
the exchange on which they are traded, and those values are then translated
into U.S. dollars at the current exchange rate.
B. Federal Income Taxes. The Fund intends to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required. The Fund has capital loss
carryforwards available to offset future capital gains, if any, of
$20,327,913 which expires in 2006.
C. Security Transactions and Dividends. Security transactions are accounted
for on the trade date. The cost of securities sold is determined generally
on a first-in, first-out basis. Dividends are recorded on the ex-dividend
date.
D. Currency Translation. The market values of foreign securities, currency
holdings, other assets and liabilities initially expressed in foreign
currencies are recorded in the financial statements after translation to
U.S. dollars based on the exchange rates at the end of the period. The cost
of such holdings is determined using historical exchange rates. Income and
expenses are translated at approximate rates prevailing when accrued or
incurred. The Fund does not isolate that portion of gains and losses on
investments which is due to changes in foreign exchange rates from that
which is due to changes in market prices of the investments. Such
fluctuations are included with the net realized and unrealized gains and
losses from investments. Foreign securities and currency transactions may
involve certain considerations and risks not typically associated with
those of domestic origin.
E. Distribution to Shareholders. Distribution from net investment income and
realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions, net operating losses and
post-October capital and currency losses.
F. Use of Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS AND
OTHER--Pursuant to an Investment Advisory Agreement, the Advisor, Vontobel USA,
Inc. ("VUSA") provides investment services for an annual fee of 1.25% on the
first $500 million of average daily net assets and 1.00% on average daily net
assets over $500 million.
As provided in the Administrative Agreement, the Fund reimbursed
Commonwealth Shareholder Services, Inc. ("CSS"), its administrative agent,
$205,758 for providing shareholder services, recordkeeping, administrative
services and blue-sky filings. The Fund compensates CSS for blue-sky and certain
shareholder servicing on an hourly rate basis. For other administrative
services, CSS receives 0.20% of average daily net assets.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $278,304 for its services for the year ended December 31,
1998.
To discourage short-term investing and recover certain administrative,
transfer agency, shareholder servicing and other costs associated with such
short-term investing, the Fund charges a 2% fee on such redemption of shares
held less than six months. Such fees amounted to $190,026 for the year ended
December 31, 1998, representing 0.24% of average net assets.
Certain officers and/or directors of the Fund are also officers and/or
directors of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY--Purchases and sales of securities other than
short-term notes aggregated $49,455,187 and $106,520,316, respectively. The
custodian has provided credits in the amount of $126,581 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund .
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of
Vontobel Eastern European Equity Fund, a series of Vontobel Funds, Inc.,
including the schedule of portfolio investments as of December 31, 1998, the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the two years in the period then ended and for
the period February 15, 1996 (commencement of operations) to December 31, 1996.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Vontobel Eastern European Equity Fund as of December 31, 1998, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the two years in the period then ended and for the period February 15, 1996
to December 31, 1996, in conformity with generally accepted accounting
principles.
Tait, Weller and Baker
Philadelphia, Pennsylvania
January 22, 1999
<PAGE>
VONTOBEL INTERNATIONAL BOND FUND
ANNUAL REPORT 1998
Dear Shareholder:
At December 31st, 1998, the fund's closing Net Asset Value stood at $10.66,
and net assets totaled $6,983,389, vs. $10,792,844 at year-end 1997. In 1998,
the fund produced a total return of 14.85%, vs. the 18.28% total return of J.P.
Morgan Government Bond Index ex-US and the 11.91% average return of the 51
international bond funds tracked by Lipper Analytical Services. On December
10th, the fund paid a per-share distribution of $0.70 in long-term capital gains
to shareholders of record as of December 2nd.
After a dispiriting 1997, in which US dollar strength wiped out their local
currency gains, international bonds in the developed markets ended the year with
a flourish, rewarding US-dollar-based investors with double-digit returns. The
main driver of international bond performance throughout the year was global
deflation, exacerbated by the Asian financial crisis, depression in Japan, and a
plunge in commodity prices to 20-year lows. Against this gloomy macroeconomic
backdrop, investors sought the safety of sovereign issues, and willingly
accepted lower yield levels for long-term investments. The global flight to
safety resulted in an unusually divergent spread between government and
corporate issues, liquidity in high-yield and emerging markets debt issues dried
up. This divergence caught many sophisticated hedge fund investors by surprise;
their erroneous bets on a closer correlation among fixed income instruments were
of such magnitude as to threaten the stability of global financial markets.
Currency markets throughout the year were very volatile, often registering
movements of several percent per day. Especially volatile were the yen, which
traded in a range of yen 147-111 vs. the dollar, and currencies of
commodity-dependent economies like Canada, Australia and New Zealand, the latter
two of which tended to move in sympathy with the yen, the dominant trading
currency in their region.
Investor panic crescendoed in the wake of the Russian default in July,
given the exposure of some of the world's largest financial institutions to
Russian and Latin American debt. So dire were the predictions of a global
financial meltdown that by the end of September the Fed was prompted to make a
25 bp rate cut, premature from an economic standpoint, but necessary for
systemic reasons.
The successful Euro convergence story was the other main driver of
international bond performance in 1998. In early December the German Bundesbank
took its last policy action and lowered rates to 3%. It was immediately followed
by all but one of the 10 European central banks, and by the Bank of Italy a few
weeks later. Euro money market rates have thus started at 3% and will now be
controlled by the fiercely independent new European Central Bank (ECB).
Following several months of speculation, the Governing Council of the ECB has
agreed on a monetary policy strategy, defining price stability as an inflation
level of 2% or less. ECB officials reiterated that they would not take into
consideration individual national and regional developments. With the launch of
the Euro on January 4th, the European government bond market is now second in
size to that of the US.
EMU participant countries turned in performances within a range of 19-21%,
topped by the ECU market's stunning 21.77%. The fund had a 70% exposure to the
Euro markets, including overweight positions in both the German mark and the
ECU. It also held a combined 19% weighting in the bonds of non-EMU participants
Denmark and the UK, which also performed very well (19% and 21% respectively),
benefiting from currency strength and spread tightening relative to the German
mark.
The fund's underperformance of the benchmark was due to its lack of
exposure to yen bonds, which gained 15.90% yoy largely due to dollar/yen
weakness (-20%) in the last quarter following the Fed rate cuts and, to a lesser
extent, its 4% position in Canadian dollar bonds, which returned only 2% due to
the Canadian dollar's record low weakness vs. the US dollar. In addition, our
outlook for interest rates was too cautious, and we held lesser-performing
short-duration issues.
Looking ahead, the weakening of US growth and the continuous widening of
the US balance of trade and current account deficits point to even lower dollar
interest rates. Nevertheless, we remain zero-weighted in Pacific Region bonds,
since we believe that yen levels are not sustainable given Japan's desperate
need to revive its economy. With prices at the consumer and wholesale levels
declining in y-o-y terms, the Japanese central bank is expected to boost money
supply further to ease liquidity constraints and encourage bank lending.
If, as we expect, the Euro continues to strengthen against the US dollar,
US-based investors stand to enjoy continued attractive returns for this asset
class in 1999.
Sven Rump
Fund Manager
January 15, 1999
<PAGE>
[GRAPH GOES HERE]
INTERNATIONAL JP MORGAN GLOBAL
BOND FUND GOV'T BOND INDEX
03/01/94 $10,000.00 $10,000.00
12/31/94 $10,200.00 $10,418.00
12/31/95 $11,951.00 $12,618.00
12/31/96 $12,848.52 $13,282.97
12/31/97 $12,072.47 $12,782.07
12/31/98 $13,914.00 $15,119.00
<PAGE>
Schedule of Portfolio Investments
December 31, 1998
Principa
Amount* Security Description Value
- ----------- --------------------- ---------
BONDS: 92.47%
BRITISH POUND 12.07%
460,000 DSL Bank 9.25% 19 Aug 2002
Corporate Bond $ 842,653
---------
CANADIAN 4.04%
DOLLAR
400,000 Government of Canada 6.5% 1 June 2004
Government Bond 281,906
---------
DANISH KRONE 6.56%
2,500,000 Kingdom of Denmark 7% 15 Dec 2004
Government Bond 458,248
---------
DEUTSCHE MARK 22.95%
900,000 Republic of Finland 7.5% 27 Jan 2000
Government Bond 563,001
1,000,000 Republic of Germany 6.5% 14 Oct 2005
Government Bond 698,096
500,000 Republic of Germany 7.125% 20 Dec 2002
Government Bond 341,221
---------
1,602,318
---------
EUROPEAN CURRENCY 20.13%
600,000 DSL Bank 4.75% 27 May 2003
Corporate Bond 737,894
500,000 France O.A.T. 10% 26 Feb 2001
Government Bond 667,880
---------
1,405,774
---------
FRENCH FRANC 15.75%
5,000,000 France O.A.T. 7.25% 25 Apr 2006
Government Bond 1,100,071
---------
IRISH PUNT 6.05%
250,000 Republic of Ireland 6.25% 18 Oct 2004
Government Bond 422,456
---------
NETHERLANDS 4.92%
GUILDER
600,000 Government of Netherlands 9% 15 May 2000
Government Bond 343,829
---------
Total
Investments:
(Cost:$6,350,250)** 92.47% 6,457,255
Other assets,net 7.53% 526,134
-------- --------
NET ASSETS 100.00$ 6,983,389
======== ========
*Stated in local currencies
**Cost for Federal income tax purposes is $6,350,250 and net unrealized
appreciation consists of:
Gross unrealized appreciation $257,987
Gross unrealized depreciation (150,982)
--------
Net unrealized appreciation $107,005
========
See Notes to Financial Statements
<PAGE>
Statement of Operations
Year ended December 31, 1998
- --------------------------------------------------------------------------------
Investment Income
Interest $532,645
----------
EXPENSES:
Investment management fees (Note 2) 80,161
Custodian and accounting fees (Note 3) 52,802
Transfer agent fees (Note 2) 20,712
Recordkeeping and administrative services (Note 2) 18,573
Organizational costs 16,440
Filing and registration fees (Note 2) 13,525
Legal and audit fees 10,859
Shareholder servicing and reports (Note 2) 8,856
Other 7,211
-------
Total expenses 148,978
Management fee waiver and reimbursed expenses (Note 2) (100,161)
----------
Expenses, net 48,817
----------
Net investment income 483,828
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (387,768)
Net realized loss on currencies (8,966)
Net change in unrealized appreciation on
investments and foreign currencies 967,732
----------
Net gain on investments 570,998
-------
Net increase in net assets resulting from operations $1,054,826
==========
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Years ended December 31,
------------------------
1998 1997
---- ----
OPERATIONS
Net investment income $403,667 $1,146,677
Net realized loss on investments
and foreign currency transactions (396,734) (1,022,601)
Change in unrealized appreciation
(depreciation) of investments and foreign
currencies 967,732 (2,092,635)
----------- -----------
Net increase (decrease) in net assets
resulting from operations 974,665 (1,968,559)
DISTRIBUTION TO SHAREHOLDERS FROM
Realized gains on investments
($.70 and $.38 per share, respectively) (428,263) (401,372)
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets
from capital share transactions* (4,355,857) (13,715,794)
---------- -----------
Net decrease in net assets (3,809,455) (16,085,725)
Net asset at beginning of year 10,792,844 26,878,569
----------- -----------
NET ASSETS at end of year $6,983,389 $10,792,844
=========== ===========
*A summary of capital share transactions follows:
Years ended December 31,
------------------------
1998 1997
-------------------- ----------------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold 187,554 $1,980,560 208,557 $2,162,409
Shares reinvested
from distributions 37,238 397,700 39,686 392,896
Shares redeemed (661,675) (6,734,117) (1,616,069) (16,271,099)
-------- ---------- ---------- -----------
Net decrease (436,883) ($4,355,857) (1,367,826) ($13,715,794)
======== =========== ========== ============
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
For a Share Outstanding Throughout each Period
- --------------------------------------------------------------------------------
March 1*
Years ended December 31, to
---------------------------------------- December 31,
1998 1997 1996 1995 1994
------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $9.89 $10.93 $10.60 $9.48 $10.00
----- ------ ------ ----- ------
Income from investment operations-
Net investment income 0.62 0.61 0.47 0.61 0.70
Net realized and unrealized gain (loss)
on investments 0.85 (1.27) 0.32 1.06 (0.50)
---- ----- ---- ---- -----
Total from investment operations 1.47 (0.66) 0.79 1.67 0.20
---- ----- ---- ---- ----
Less distributions-
Distributions from net investment income -- -- (0.40) (0.55) (0.70)
Distributions from realized gains on (0.70) (0.38) (0.06) -- --
investments
Distributions in excess of net investment
income -- -- -- -- (0.02)
------ ----- ------ ----- ------
Total distributions (0.70) (0.38) (0.46) (0.55) (0.72)
------ ----- ------ ----- ------
Net asset value, end of period $10.66 $9.89 $10.93 $10.60 $9.48
====== ===== ====== ===== ======
Total Return 14.85% (6.04)% 7.51% 17.60% 1.98%
====== ===== ====== ===== ======
Ratios/Supplemental Data
Net assets, end of period (000's) $6,983 $10,793 $26,879 $16,253 $10,235
Ratio to average net assets-(A)
Expenses (B) 1.61% 1.60% 1.84% 1.76% 1.35%**
Expense ratio-net (C) 1.61% 1.40% 1.52% 1.35% 1.35%**
Net investment income 5.04% 5.92% 4.78% 5.38% 3.99%**
Portfolio turnover rate 8.72% 0.00% 19.89% 18.63% 19.00%
* Commencement of Operations
** Annualized
<FN>
(A) Management fee waivers and expense reimbursements reduced the expense
ratios and increased the ratios of net investment income by .25% in 1998
0.60% in 1997, 0.20% in 1996, 1.00% in 1995 and 0.19% in 1994.
(B) Expense ratio has been increased to include additional custodian fees in
1997, 1996 and 1995 that were offset by custodian fee credits; prior to
1995 custodian fee credits reduced the expense ratio.,
(C) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
See Notes toFinancial Statements
</FN>
</TABLE>
<PAGE>
Notes to the Financial Statements
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel International Bond
Fund (the"Fund") is a series of Vontobel Funds, Inc. ("VFI") which is registered
under The Investment Company Act of 1940, as amended, as a non-diversified
open-end management company. The Fund was established in February, 1994 as a
series of VFI which has allocated to the Fund 50,000,000 of its 500,000,000
shares of $.01 par value common stock.
The investment objective of the Fund is to seek to maximize total return
from capital growth and income by investing in a continuously managed portfolio
consisting primarily of high- grade international bonds.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Money market investments with a remaining maturity of
less than sixty days are valued using the amortized cost method; debt
securities are valued by appraising them at prices supplied by a pricing
agent approved by the Fund, which prices may reflect broker-dealer supplied
valuations and electronic data processing techniques. Those values are then
translated into U.S. dollars at the current exchange rate.
B. Federal Income Taxes. The Fund intends to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required.
C. Security Transactions. Security transactions are accounted for on the trade
date. The cost of securities sold is determined on a first-in, first-out
basis.
D. Currency Translation. The market values of foreign securities, currency
holdings, other assets and liabilities initially expressed in foreign
currencies are recorded in the financial statements after translation to
U.S. dollars based on the exchange rates at the end of the period. The cost
of such holdings is determined using historical exchange rates. Income and
expenses are translated at approximate rates prevailing when accrued or
incurred. The Fund does not isolate that portion of gains and losses on
investments which is due to changes in foreign exchange rates from that
which is due to changes in market prices of the investments. Such
fluctuations are included with net realized and unrealized gains and losses
from investments. Foreign securities and currency transactions may involve
certain considerations and risks not typically associated with those of
domestic origin.
E. Forward Currency Contracts. Forward sales of currencies are undertaken to
hedge certain assets denominated in currencies that Vontobel USA,
Inc.("VUSA"), the Fund's investment advisor, expects to decline in value in
relation to other currencies. A forward currency contract is an agreement
between two parties to buy or sell a currency at a set price on a future
date. Forward contracts are marked to market daily and the change in market
value is recorded by the Fund as an unrealized gain or loss. When a
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The Fund could be at risk if the
counterparties are unable to meet the terms of the contracts or if the
value of the currency changes unfavorably.
F. Deferred Organizational Expenses. All of the expenses of the Fund incurred
in connection with its organization and the public offering of its shares
have been assumed by the Fund. The organization expenses allocable to the
Fund are being amortized over a period of fifty-seven (57) months.
G. Distribution to Shareholders. Distribution from net investment income and
realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions, equalization, forwards and
post-October capital and currency losses.
H. Accounting Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS--Pursuant to an
Investment Advisory Agreement, the Advisor, Vontobel USA, Inc.("VUSA") provides
investment services for an annual fee of 1.00%of average daily net assets.
VUSA will reimburse the Fund to limit the Fund's aggregate annual operating
expenses (excluding taxes and brokerage commissions), to the lowest applicable
percentage limitation prescribed by any state in which the Fund's shares are
qualified for sale. For the year ended December 31, 1998, a reimbursement of
$100,161 was made.
As provided in the Administrative Agreement, the Fund reimbursed
Commonwealth Shareholder Services, Inc. ("CSS"), its administrative agent,
$28,517 for providing shareholder services, recordkeeping, administrative
services and blue-sky filings. The Fund compensates CSS for blue-sky and certain
shareholder servicing on an hourly rate basis. For other administrative
services, CSS receives 0.20% of average daily net assets. .
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $18,136 for its services for the year ended December 31,
1998.
Certain officers and/or directors of the Fund are also officers and/or
directors of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS--Purchases and sales of securities other than short-term
notes aggregated $663,433 and $4,797,187 respectively.
<PAGE>
Report of Independent Certified Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of
Vontobel International Bond Fund, a series of Vontobel Funds, Inc., including
the schedule of portfolio investments as of December 31, 1998, the related
statement of operations for the year then ended, statement of changes in net
assets for each of the two years in the period then ended and the financial
highlights for each of the four years in the period then ended and for the
period March 1, 1994 (commencement of operations) to December 31, 1994. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Vontobel International Bond Fund as of December 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the four years in the period then ended and the period March 1, 1994 to December
31, 1994, in conformity with generally accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 22, 1999
<PAGE>
VONTOBEL EMERGING MARKETS EQUITY FUND
ANNUAL REPORT 1998
Dear Shareholder:
At December 31st, 1998, the fund's closing Net Asset Value stood at $7.31,
and net assets totaled $1,610,731, vs. $3,600,542 at year-end 1997. In 1998, the
fund lost 22.40%, vs. the 27.5% loss of the MSCI Emerging Markets Free Index and
the average -26.83% return of the 169 emerging markets equity funds tracked by
Lipper Analytical Services. The fund made no year-end distributions of income
and capital gains.
The worst of the financial crisis that originated in Asia and rippled
across to Latin America and Eastern Europe seems to have passed as liquidity and
interest rate pressures have abated. Whereas emerging markets equities were
indiscriminately punished as a class throughout most of the year, Q4 saw a
decoupling in regional performance as market valuations became more attuned to
country-specific issues.
Asia/Pacific Asia's 34% gain in Q4 kept its losses for the year to only
12%. Improving current accounts, lower interest rates, strengthening currencies
and portfolio deleveraging helped to support the markets' turnaround. However,
the region's higher stock prices do not necessarily denote better quality, and a
rosier macroeconomic picture in Asia has not made finding quality companies any
easier. Investors have discounted broad structural improvements, but the real
earnings picture is still quite poor. We started to increase our Asian weighting
in the 4th quarter, accumulating positions in companies that we consider to be
solid businesses trading at attractive prices, for example, SM Prime Holdings in
the Philippines, and Singapore Press (a new purchase), each of which has little
or no debt and a consistent record of strong operating profits. We are looking
to increase our exposure to the region, but will do so cautiously, after careful
consideration of each company's underlying business and balance sheet risks.
Latin America Despite a 7% rebound in the fourth quarter, the region lost
38% in 1998. Mexico was last quarter's regional standout performer, returning
4.5% in December and close to 10% for the quarter. The recent plunge in oil
prices threatened to derail Mexico's fiscal deficit target of 1.25% of GDP, and
the ruling parties continue to haggle over tax hikes and expenditures. However,
Mexico's economy is expected to grow at a comfortable rate of 3% this year, and
strong domestic demand should help to avert an economic crisis. Net
international reserves are steady at US$ 20 billion and companies such as Grupo
Modelo and Kimberly-Clark de Mexico continue to generate positive cash flow and
earnings. The big loser, of course, was Brazil, down 44% for the year. In spite
of the IMF's bailout package of US$41 billion, its twin deficits, fiscal and
current account, high debt burden, legislative impasse and currency pressure
drove investors to the exits. We scaled back our holdings in Brazil last quarter
to 8.6% (vs. 12% for the benchmark) due to declining operating conditions and
slowing corporate growth prospects. The recent devaluation of the real has not
yet eliminated the burden of high interest rates. We remain cautious on Brazil.
Europe/Middle East/Africa (EMEA) We have consistently maintained an
overweight in this region, which has contributed, since the fund's inception on
September 1, 1997, to its outperformance of the benchmark. Three of our favorite
markets are Greece, Turkey and Poland, which all adhere to the European
conversion profile. This means that these countries are on track for early
admission to the European Union, possibly by 2003-2004. By keeping their budget
deficits under control, they benefit from lower interest rates, which has
attracted foreign investors and accelerated the rerating process of these
markets. Taking advantage of market strength last quarter, we took profits in
some of our EMEA holdings last quarter, particularly in Greece.
The rigors of screening companies according to stringent criteria continue
to pay dividends as illustrated by our fund's outperformance of the benchmark.
Careful stock selection has rewarded us with companies that have exceeded not
only market expectations but also their own historic performance. For example,
Nedcor and Dimension Data in South Africa and Akbank in Turkey reported annual
income above forecasts and double-digit revenue and earnings growth. We seek
firms that have consistently delivered excellent profitability ratios and that
excel in difficult environments due to their market leadership positions and
operating efficiencies. These companies carry minimal debt, generate high
operating cash flow and have ample interest rate coverage, such as SM Prime in
the Philippines, Grupo Modelo in Mexico and Fedsure Holdings in South Africa.
If the emerging market countries continue to implement policies of
deleveraging and exercise fiscal restraint, 1999 should see improving market
conditions that will help lift earnings and confidence levels. We remain fully
invested, having added to Asia in the fourth quarter. When we are ready to
commit new assets to Asia, we will reduce our exposure to EMEA accordingly.
Our year-end regional allocation was as follows:
MSCI EMF
at 12.31.98
EMEA (Europe, Middle East. Africa) 48.4% 28.5%
Asia 23.5% 36.4%
Latin America 21.1% 35.1%
Fabrizio Pierallini, Fund Manager
Rajiv Jain, Associate Fund Manager
January 19, 1999
<PAGE>
[GRAPH GOES HERE]
EMERGING MARKETS MSCI
EQUITY FUND EMF
09/01/97 $ 10,000.00 $ 10,000.00
12/31/97 $ 9,420.00 $ 7,664.82
12/31/98 $ 7,310.00 $ 6,110.00
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998
Number of Market
Shares Security Description Value
- -------- --------------------- --------
Common Stock: 96.15%
Botswana: 2.02%
2,000 Barclays Bank of Botswana (Banking) $8,127
17,000 Sechaba Breweries Ltd. (Beverages) 19,655
900 Standard Chartered Bank of Botswana (Banking) 4,738
-----
32,520
------
Croatia: 1.55%
1,500 Pliva DD GDR * (Medical-Drugs) 24,900
------
Great Britain: 3.00%
1,800 HSBC Holdings PLC (Banking) 48,357
------
Greece: 7.87%
477 Alpha Credit Bank (Banking) 49,731
1,300 Hellenic Bottling Co. (Beverages) 40,100
343 Hellenic Telecommunications Organization S.A. 9,118
(Telecommunications)
500 Panafon Hellenic Telecommunications S.A. GDR * 13,250
(Telecommunications-Cellular)
300 Panafon Hellenic Telecommunications S.A. * 8,028
(Telecommunications-Cellular)
200 STET Hellas Telecommunications S.A. ADR * 6,475
(Telecommunications) -----
126,702
-------
Hungary: 0.27%
100 Gedeon Richter Ltd. GDR (Medical-Drugs) 4,275
-----
Israel: 7.00%
600 ECI Telecommunications Ltd. * 21,375
(Telecommunications Equipment)
663 Formula Systems (1985) Ltd * (Software) 16,414
300 Gilat Satellite Networks Ltd. * 16,538
(Telecommunications - Satellite)
27,686 Bank Leumi Le Israel (Banking) 39,130
7,780 Super-Sol Ltd. B Shs. (Retail-Food) 19,318
------
112,775
-------
Mauritius: 1.19%
26,500 State Bank Mauritius * (Banking) 19,181
------
Poland: 2.15%
1,500 Bank Handlowy GDR (Banking) 19,500
800 Prokom Software SA GDR * (Software) 15,080
------
34,580
------
Portugal: 5.99%
600 Brisa Auto Estrada de Portugal S.A. 35,283
(Construction-Motorways)
300 Telecel Comunicacaoes Pessoais S.A. 61,263
(Telecommunications-Cellular) ------
96,546
------
South Africa: 10.72%
1,400 Amalgamated Beverage Industries Ltd.(Beverages) 9,032
3,500 Comparex Holding Ltd (Technology) 28,403
2,012 Coronation Holdings Ltd. N Shs.(Financial Services) 27,327
10,771 Dimension Data Holdings *(Technology) 45,715
800 Investec Group Ltd. (Financial) 27,164
1,312 Metropolis Transactive (Technology) 635
1,535 Nedcor Ltd. (Banking) 26,060
7,800 Softline Limited * (Software) 8,409
-----
172,745
-------
Turkey: 6.70%
112,500 Akbank T.A.S. (Banking) 2,282
331,000 Aksigorta S.A. (Insurance) 10,073
100,000 Carsi Buyuk Magazacilik A.S.(Retail) 4,200
45,000 Migros Turk T.A.S. (Retail-Food) 44,934
226,000 Vestel Electronik Sanayai ve Ticaret A.S. * (Audio/Video) 18,627
1,979,300Yapi Kredi Bankasi A.S. (Banking) 22,901
475,032 Yapi Kredi Bankasi Receipts * (Banking) 4,894
-----
107,911
-------
India: 5.52%
1,500 India Tobacco Ltd. GDR 144A (Tobacco) 33,188
3,000 Mahanagar Telephone Nigam GDR * (Telecommunications) 37,125
1,500 Videsh Sanchar Nigam Ltd. GDR * 144A (Telecommunications) 18,563
------
88,876
------
Indonesia: 1.09%
12,000 PT Gudang Garam TBK (Tobacco) 17,475
------
Malaysia: 7.72%
25,000 IOI Corporation Berhad (Diversified) 14,342
500 Matav-Cable Systems Ltd. ADR (Broadcasting) 9,688
25,000 Resorts World Berhad (Resorts) 28,816
10,000 RJ Reynolds Berhad (Tobacco) 11,316
25,000 Sime Darby Berhad (Diversified) 28,684
12,000 Telekom Malaysia (Telecommunications) 31,579
------
124,425
-------
Pakistan: 0.87%
28,000 Hub Power Co. Ltd. * (Utilities) 7,204
500 Lever Brothers Pakistan Ltd. * (Diversified) 6,854
-----
14,058
------
Philippines: 3.19%
10,800 Cosmos Bottling Corp.(Beverages) 1,013
500 Philippine Long Distance Telephone Spon. ADR 12,969
(Telephone-Integrated)
197,000 SM Prime Holdings (Real Estate) 37,476
------
51,458
------
Singapore: 1.02%
1,500 Singapore Press Holdings New 98(Publishing) 16,364
------
Taiwan: 0.81%
2,000 Yageo Corp. GDR * (Electronics) 13,000
------
Thailand: 3.26%
7,000 Thailand International Fund (Other) 52,500
------
Argentina: 2.15%
2,800 Perez Companc SA Spon. ADR (Oil and Gas) 23,450
400 YPF SA Spon. ADR (Oil and Gas) 11,175
------
34,625
------
Brazil: 8.56%
2,300 Companhia Cervejaria Spon. ADR (Beverages) 21,706
734 Companhia Energetica Spon ADR (Utilities-Electric) 13,212
30,000 Investimentos Itau SA (Diversified) 16,636
60,000 Banco Itau SA (Banking) 29,298
400 Telebras Holders Pfd Blk ADR *(Telecommunications) 29,075
1,600 Telesp Celular Participacoes SA Spon. ADR * 28,000
(Telecommunications-Cellular) ------
137,927
-------
Chile: 2.07%
800 Chilectra SA Spon. ADR (Utilities) 17,412
1,100 Embotelladora Andina ADR (Beverages) 15,950
------
33,362
------
Mexico: 8.30%
40,000 Biper S.A. * (Telecommunications) 7,673
9,920 Corporacion Interamericana de Entretenimiento 27,041
S.A.-B * (Entertainment)
1,322 Corporacion Interamericana de Entretenimiento 2,736
S.A.-L * (Entertainment)
400 Coca Cola Femsa S.A. ADR (Beverages) 5,300
11,000 Crupo Continental, S.A.(Beverages) 26,598
4,800 Grupo Modelo S.A. - C (Beverages) 10,152
800 Grupo Televisa S.A. GDR * (Broadcasting) 19,750
1,400 Kimberly Clark de Mexico ADR (Manufacturing - 21,700
Paper and Paper Products)
1,900 TV Azteca S.A. ADR (Broadcasting) 12,706
------
133,656
-------
United States: 3.13%
2,100 Mexico Fund (Other) 23,494
3,000 The Argentina Fund, Inc. (Other) 27,000
------
50,494
------
Total Investments:
(Cost: $1,795,928)** 96.15% 1,548,712
Other assets, net 3.85% 62,019
---- ------
Net Assets 100.00% $1,610,731
====== ==========
* Non-income producing
** Cost for Federal income purposes is $1,795,928 and net unrealized
depreciation consists of:
Gross unrealized appreciation $117,811
Gross unrealized depreciation (365,027)
--------
Net unrealized depreciation ($247,216)
=========
ADR--Security represented is held by the custodian bank in the form of American
Depository Receipts.
GDR--Security represented is held by the custodian bank in the form of Global
Depository Receipts.
144A-Restricted security. May be resold to qualified institutional buyers. The
aggregate market value of these securities at 12/31/98 was $51,751 which
represented 3.21% of the Fund's net assets.
See Notes to Financial Statements
<PAGE>
DECEMBER 31, 1998
INDUSTRY PERCENTAGE BASED ON NET ASSETS
BANKING/FINANCIALS 20%
TELECOMMUNICATIONS 19%
MISCELLANEOUS/OTHER 17%
CONSUMER PRODUCTS 12%
BEVERAGES 9%
TECHNOLOGY 8%
MEDIA 5%
DIVERSIFIED 4%
UTILITIES 2%
-
96%
OTHER ASSETS, NET 4%
-
NET ASSETS 100%
===
<PAGE>
Statement of Assets and Liabilities
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments at value (identified
cost of $1,795,928)(Notes 1 & 3) $1,548,712
Receivables:
Investments sold 26,670
Capital stock sold 3,822
Dividends 5,687
-----
36,179
Deferred organizational costs 51,076
Other assets 4,439
-----
TOTAL ASSETS 1,640,406
---------
LIABILITIES
Payables:
Bank overdraft 9,675
Due to Manager 20,000
------
TOTAL LIABILITIES 29,675
------
NET ASSETS $1,610,731
==========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($1,610,731 / 220,413 shares outstanding) $7.31
=====
At December 31, 1998 there were 50,000,000 shares of $.01 par value stock
authorized and the components of net assets are:
Paid in capital $2,574,350
Net unrealized loss on investments
and currency transactions (246,619)
Accumulated net realized loss on
investments and currency transactions (720,383)
Undistributed net investment income 3,383
-----
Net Assets $1,610,731
==========
See Notes to Financial Statements
<PAGE>
Statement of Operations
Year ended December 31, 1998
- --------------------------------------------------------------------------------
Investment Income
Income:
Dividend (Net of foreign tax withheld of $4,452) $57,464
-------
Expenses:
Investment management fees (Note 2) 35,051
Custodian and accounting fees (Note 3) 51,846
Recordkeeping and administrative services (Note 2) 15,255
Filing and registration fees (Note 2) 14,605
Transfer agent fees (Note 2) 14,059
Organizational costs 14,060
Shareholder servicing and reports (Note 2) 11,322
Legal and audit fees 9,880
Other 5,929
-----
Total expenses 172,007
Management fee waiver and reimbursed expenses (Note 2) (105,051)
Custody credits (Note 3) (8,918)
------
Expenses, net 58,038
------
Net investment loss (574)
----
REALIZED AND UNREALIZED LOSS ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized loss on investments (613,178)
Net realized loss on foreign currencies conversions (11,890)
Net change in unrealized depreciation
on investments and foreign currencies (139,157)
--------
Net loss on investments (764,225)
--------
Net decrease in net assets resulting from operations ($764,799)
=========
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
September 1*
Year ended to
December 31, December 31,
1998 1997
----------- ------------
OPERATIONS
Net investment loss ($574) ($16,689)
Net realized loss on investments and foreign
currency transactions (625,068) (108,947)
Net change in unrealized depreciation
of investments and foreign currencies (139,157) (107,462)
-------- --------
Net decrease in net assets resulting from
operations (764,799) (233,098)
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net assets
resulting from capital share transactions**(1,225,012) 3,833,640
---------- ---------
Net increase (decrease)in net assets (1,989,811) 3,600,542
Net assets at beginning of period 3,600,542 -0-
--------- ---------
NET ASSETS at end of period (including
undistributed net investment income of
$3,383 and $0,respectively) $1,610,731 $3,600,542
========== ==========
**A summary of capital share transactions follows:
September 1,*
Year ended to
December 31, December 31
1998 1997
---------------------- ------------------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold 85,805 $769,477 406,059 $4,075,864
Shares redeemed (247,612) (1,994,489) (23,839) (242,224)
-------- ---------- ------- --------
Net increase (161,807) ($1,225,013) 382,220 $3,833,640
(decrease) ======== =========== ======= ==========
* Commencement of operations
See Notes to Financial Statements
<PAGE>
Financial Highlights
For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
Year September 1, *
ended to
December 31, December 31,
1998 1997
---- ----
Per Share Operating Performance
Net asset value, beginning of period $9.42 $10.00
----- ------
Income from investment operations-
Net investment loss 0.00 (0.04)
Net realized and unrealized loss on
investments (2.11) (0.54)
----- -----
Total from investment operations (2.11) (0.58)
---- -----
Net asset value, end of period $7.31 $9.42
==== =====
Total Return (22.40%) (5.80%)
Ratios/Supplemental Data
Net assets, end of period (000's) $1,611 $3,601
Ratio to average net assets- (A)
Expenses (B) 2.38% 2.41%**
Expenses-net (C) 2.07% 2.20%**
Net investment loss (0.02%) (1.42%)**
Portfolio turnover rate 130.59% 16.36%
(A) Management fee waivers and expense reimbursements reduced the expense ratio
and increased net investment income ratio by 3.75% and 1.25%, in 1998 and
1997, respectively.
(B) Expense ratio has been increased to include additional custodian fees which
were offset by custodian fee credits.
(C) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
* Commencement of operations
** Annualized
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel Emerging Markets
Equity Fund (the"Fund") is a series of Vontobel Funds, Inc. ("VFI") which is
registered under The Investment Company Act of 1940, as amended, as a
diversified open-end management company. The Fund commenced operations in
September, 1997 as a series of VFI which has allocated to the Fund 50,000,000 of
its 500,000,000 shares of $.01 par value common stock.
The objective of the Fund is to seek to achieve long-term capital
appreciation by investing in a carefully selected and continuously managed
diversified portfolio consisting primarily of equity securities of issuers in
developing countries around the world.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Investments traded on stock exchanges are valued at the
last quoted sales price on the exchange on which the securities are traded
as of the close of business on the last day of the period or, lacking any
sales, at the last available bid price. In cases where securities are
traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Fund's Board of Directors.
Securities traded in the over-the-counter market are valued at the last
available sale price in the over-the-counter market prior to time of
valuation. Securities for which market quotations are not readily available
are valued on a consistent basis at fair value as determined in good faith
by or under direction of the Fund's officers in a manner specifically
authorized by the Board of Directors of the Fund. Temporary investments in
U.S. dollar denominated short-term investments are valued at amortized
cost, which approximates market. Portfolio securities which are primarily
traded on foreign exchanges are generally valued at the closing price on
the exchange on which they are traded, and those values are then translated
into U.S. dollars at the current exchange rate.
B. Federal Income Taxes. The Fund intends to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required. The Fund has capital loss
carryforwards, available to offset future capital gains, if any, of
$664,417 which expires in 2006.
C. Security Transactions and Dividends. Security transactions are accounted
for on the trade date. The cost of securities sold is determined generally
on a first-in, first-out basis. Dividends are recorded on the ex-dividend
date.
D. Currency Translation. The market values of foreign securities, currency
holdings, other assets and liabilities initially expressed in foreign
currencies are recorded in the financial statements after translation to
U.S. dollars based on the exchange rates at the end of the period. The cost
of such holdings is determined using historical exchange rates. Income and
expenses are translated at approximate rates prevailing when accrued or
incurred. The Fund does not isolate that portion of gains and losses on
investments which is due to changes in foreign exchange rates from that
which is due to changes in market prices of the investments. Such
fluctuations are included with the net realized and unrealized gains and
losses from investments. Foreign securities and currency transactions may
involve certain considerations and risks not typically associated with
those of domestic origin.
E. Distribution to Shareholders. Distribution from net investment income and
realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions, net operating losses and
post-October capital and currency losses.
F. Deferred Organizational Expenses. All of the expenses of the Fund incurred
in connection with its organization and the public offering of its shares
have been assumed by the Fund. The organization expenses allocable to the
Fund are being amortized over a period of sixty (60) months.
G. Use of Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS AND
OTHER--Pursuant to an Investment Advisory Agreement, the Advisor, Vontobel USA,
Inc. ("VUSA") provides investment services for an annual fee of 1.25% on the
first $500 million of average daily net assets and 1.00% on average daily net
assets over $500 million.
As provided in the Administrative Agreement, the Fund reimbursed
Commonwealth Shareholder Services, Inc. ("CSS"), its administrative agent,
$18,245 for providing shareholder services, recordkeeping, administrative
services and blue-sky filings. The Fund compensates CSS for blue-sky and certain
shareholder servicing on an hourly rate basis. For other administrative
services, CSS receives 0.20% of average daily net assets.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $13,408 for its services for the year ending December 31,
1998.
To discourage short term investing and recover certain administrative,
transfer agency, shareholder servicing and other costs associated with such
short term investing, the Fund charges a 2% fee on such redemption of shares
held less than six months. Such fees amounted to $3,789 for the year ending
December 31, 1998, representing 0.14% of average net assets.
Certain officers and/or directors of the Fund are also officers and/or
directors of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY--Purchases and sales of securities other than
short-term notes aggregated $2,549,314 and $3,260,019, respectively. The
custodian has provided credits in the amount of $8,918 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund .
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of
Vontobel Emerging Markets Equity Fund, a series of Vontobel Funds, Inc.,
including the schedule of portfolio investments as of December 31, 1998, and the
related statement of operations for the year then ended, the statement of
changes in net assets and the financial highlights for the year then ended and
for the period September 1, 1997 (commencement of operations) to December 31,
1997. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Vontobel Emerging Markets Equity Fund as of December 31, 1998, the results of
its operations for the year then ended, the changes in its net assets and the
financial highlights for the year then ended and for the period September 1,
1997 to December 31, 1997, in conformity with generally accepted accounting
principles.
Tait, Weller and Baker
Philadelphia, Pennsylvania
January 22, 1999
<PAGE>
VONTOBEL EASTERN EUROPEAN DEBT FUND
ANNUAL REPORT 1998
Dear Shareholder:
At December 31st, 1998, the fund's closing Net Asset Value stood at $10.21,
and net assets totaled $7,881,885, vs. $14,437,925 at year-end 1997.
The global repercussions of excess capacity in Asia, the crisis in Russia,
and anticipation of a devaluation in Brazil managed to pretty well obliterate
the arguments in favor of investing in emerging markets securities last year.
The stunning exception was Eastern European local currency debt, which earned
double-digit returns for US-dollar-based investors and continued to outperform
other regional emerging markets debt.
We are pleased to report that Vontobel Eastern European Debt Fund produced
a total return of 24.54% for the year, vs. the -14.5% loss of the J.P. Morgan
Emerging Market Bonds Index of US-dollar-denominated securities, including Brady
bonds. On December 10th, the fund paid a per-share distribution of $1.64 in
ordinary income, $0.16 in short-term capital gains and $0.05 in long term
capital gains to shareholders of record as of December 2nd.
Eastern European bond yields declined in absolute terms as well as in
relation to German yields during the last quarter. Between September 30th and
December 31st, five-year yields fell from 14% to 11% in Poland, from 17% to 13%
in Hungary, and from 11% to 7.8% in the Czech Republic following interest rate
cuts in all three countries.
From a macroeconomic standpoint, it's useful to divide the region into
three groups: those countries that have been invited by the EU (European Union)
to negotiate an EU membership, those that have not yet been invited (like
Bulgaria and Romania), and those that have strong ties to the Russian market,
like Ukraine and Belarus. In the first group are the so-called Central European
countries, Hungary, Poland and the Czech Republic, as well as Estonia and
Slovenia. These countries can be differentiated from the other two groups in
their strong commitment to democracy, market-oriented reforms and consistent
monetary and fiscal policy. Investors have begun to decouple these countries
from the general "emerging markets malaise", as evidenced by the rebound in
capital inflows to these countries during the last quarter of the year.
The Hungarian and Polish economies are expected to show strong growth in
1999 (4% and 4.8%, respectively), although lower than in 1998 due to the slowing
pace of growth in Western Europe, the main trading partner of both countries.
Increases in consumer prices should be held to the one-digit level thanks to
domestic monetary discipline and the continuous restructuring in economic
sectors that is bringing prices down to competitive international levels.
Current account deficits, though higher than in the past, are likely to stay
within the critical level of 5% of GDP. Moreover, it is expected that a
significant portion of these deficits will continue to be financed through
foreign direct investment. External debt service is not expected to be a burden,
especially for Poland.
The Czech Republic, in contrast to Hungary and Poland, will grow modestly,
at best. Politics continues to overshadow the restructuring process, and the
stalled effort to privatize the banking system is putting a brake on the
transformation of the economy. Monetary authorities have tried to stoke the
economy by aggressively cutting interest rates, but monetary medicine alone is a
palliative, not a cure, for the country's ills. On a more positive note,
inflation growth should be kept under control and may even decline from its
current 10.7% annualized rate (December 1998). Trade and current account
deficits are not likely to exceed critical levels of GDP.
Barring any new crises in Asia or Latin America, Central European
currencies, with the exception of the Czech koruna, should remain relatively
stable. In Poland, despite the expected widening of the currency band to +/-15%,
the currency is not likely to appreciate against the central parity, as it did
over the last 12 months, due to lower interest rates and a higher current
account deficit. The change in the composition of the currency basket against
which the zloty is valued to 55% euro and 45% USD (formerly 45% USD, 35% German
mark, 5% French franc, 5% Swiss franc, 10% British pound) will not have a
significant effect on the zloty's valuation.
Hungary also changed the composition of its currency basket to 70% euro and
30% USD (formerly 70% German mark, 30% USD). Contrary to Poland's exchange rate
policy, the National Bank of Hungary has not yet decided to allow for a more
flexible exchange rate. The present +/-2.25 exchange rate band leaves very
little scope for appreciation of the Hungarian forint.
We expect that 1999 will be another good year for Central European debt
markets, while Russia, together with some of its neighboring countries, will
remain in crisis. Falling inflation is likely to lead to further interest rate
cuts, mainly in Poland and Hungary. As a consequence, bond yields will again
decline, though at a slower pace than in 1998. Our year-end currency allocation
was as follows: Czech crown 26.8%, Hungarian forint 18.1%, Polish zloty 32.1%,
Russian ruble 1.7%, and cash 21.3%.
Volker Wehrle
Fund Manager
January 15, 1999
<PAGE>
[GRAPH GOES HERE]
EASTERN EUROPEAN BANK AUSTRIA-CREDITANSTALT
DEBT FUND EASTERN EUROPEAN BOND INDEX
09/01/97 $10,000.00 $10,000.00
12/31/97 $ 9,944.00 $ 9,630.00
12/31/97 $12,385.33 $ 6,955.00
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998
Principal Security Description Market
Amount* Value
- --------- ----------------------------------------- --------
Bonds: 78.70%
CZECH CROWN: 26.80%
8,000,000 Czech Republic 12.2% 15 Aug 2002
Government Bond $300,708
14,000,000 Deutsche Bank Finance NV 10.5% 21 Jan 2000
Corporate Bond 471,680
20,000,000 ING Verzekeringen 10.625% 20 Jan 2000
Corporate Bond 674,161
20,000,000 SBC Jersey 10.625% 28 Jan 1999
Corporate Bond 665,634
-------
2,112,183
-----------
HUNGARY FORINT: 18.05%
25,000,000 Government of Hungary 21.0% 24 Oct 1999
Government Bond 120,420
135,000,000 Government of Hungary 16.0% 12 May 2000
Government Bond 636,018
140,000,000 Government of Hungary 14.0% 24 Jun 2002
Government Bond 666,532
-------
1,422,970
---------
POLISH ZLOTY: 32.15%
3,000,000 Government of Poland 15.0% 12 Oct 1999
Government Bond 862,051
2,100,000 Republic of Austria 19.25% 11 Jun 1999
Government Bond 605,171
1,600,000 International Finance Company 0% 28 May 1999
Supranational Bond 430,769
2,200,000 International Bank for Recon & Dev 19.5% 17 Jun 1999
Supranational Bond 636,182
-------
2,534,173
---------
RUSSIAN RUBLE: 1.70%
4,000,000 International Finance Corp 25.0% 15 Apr 1999
Corporate Bond 133,643
-----------
Total Investments:
(Cost:$6,280,880)** 78.70% 6,202,969
Other assets, net 21.30% 1,678,916
-------- -----------
100.00% $7,881,885
======== ===========
* Stated in local currencies
** Cost for Federal income tax purposes is $6,280,880 and net unrealized
depreciation consists of:
Gross unrealized appreciation $ 484,280
Gross unrealized depreciation (562,191)
-----------
Net unrealized depreciation $ (77,911)
===========
See Notes to Finanacial Statements
<PAGE>
Statement of Assets and Liabilities
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments at value (identified cost of
$6,280,880 ) (Notes 1 & 3) $6,202,969
Cash 1,142,478
Receivables:
Capital stock sold 45,629
Interest 448,137
-------
493,766
Deferred organizational costs 52,060
---------
TOTAL ASSETS 7,891,273
---------
LIABILITIES
Payables:
Capital stock redeemed 5,025
Accrued expenses 4,363
-------
TOTAL LIABILITIES 9,388
---------
NET ASSETS $7,881,885
=========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE ($7,881,885 / 771,630 shares outstanding) $10.21
=========
At December 31, 1998 there were 50,000,000 shares
of $.01 par value stock authorized and components of net
assets are:
Paid in capital $7,994,587
Net unrealized depreciation on investments and
currency transactions (112,702)
---------
Net Assets $7,881,885
=========
See Notes to Financial Statements
<PAGE>
Statement of Operations
Year ended December 31, 1998
- --------------------------------------------------------------------------------
Investment income
Interest $1,727,388
----------
Expenses:
Investment managementfees (Note 2) 154,111
Custodian and accounting fees 47,846
Recordkeeping and administrative services (Note 2) 24,708
Filing and registration fees (Note 2) 17,338
Organizational costs 14,230
Shareholder servicing and reports (Note 2) 10,229
Transfer agent fees (Note 2) 9,859
Legal and audit 8,713
Other 7,910
--------
Total expenses 294,944
Management fee waiver (Note 2) (50,475)
--------
Expenses, net 244,469
-------
Net investment income 1,482,919
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 249,642
Net realized loss on forward currency contracts and
foreign currency conversions (67,044)
Change in unrealized depreciation of
investments and foreign currencies 443,033
--------
Net gain on investments 625,631
--------
Net increase in net assets resulting from operations $2,108,550
========
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Year ended to
December 31, December 31,
1998 1997
--------- ---------
OPERATIONS
Net investment income $1,482,919 $378,510
Net realized gain on investments and foreign
currency transactions 182,598 87,300
Net change in unrealized depreciation on
investments and foreign currencies 443,033 (555,735)
---------- --------
Net increase (decrease) in net assets
resulting from operations 2,108,550 (89,925)
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income ($1.64 and $.24
per share, respectively) (1,089,508) (345,224)
Realized gains on investments ($.21 and $.00
per share, respectively) (139,510) -
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net assets resulting
from capital share transactions** (7,435,572) 14,873,074
--------- ---------
Net increase (decrease) in net assets (6,556,040) 14,437,925
Net assets at beginning of period 14,437,925 --
----------- -------
NET ASSETS at the end of the period
(Includes undistributed net investment income of
$0 and $120,586, respectively) $7,881,885 $14,437,925
=========== ==========
**A summary of capital share transactions follows:
Year ended September 1,* to
December 31, December 31,
1998 1997
------------------- -----------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold 193,930 $2,052,642 1,479,779 $14,800,400
Shares reinvested
from distributions 113,695 1,148,320 31,417 298,459
Shares redeemed (1,024,536) (10,636,534) (22,655) (225,785)
-------- --------- ------- ---------
Net increase
(decrease) (716,911) ($7,435,572) 1,488,541 $14,873,074
========== ============ ========= ===========
*Commencement of operations
See Notes to Financial Statements
<PAGE>
Financial Highlights
For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
Year ended September 1*
December 31, to December 31
1998 1997
----- ------
Per Share Operating Performance
Net asset value, beginning of period $9.70 $10.00
----- ------
Income from investment operations
Net investment income 1.27 0.26
Net realized and unrealized gain (loss) on
investments 1.09 (0.32)
----- ------
Total from investment operations 2.36 (0.06)
----- ------
Less distributions
Distributions from net investment income (1.64) (0.24)
Distributions from capital gains (0.21) 0.00
----- ------
Total Distributions (1.85) (0.24)
===== ======
Net asset value, end of period $10.21 $9.70
===== ======
Total Return 24.54% (0.55%)
Ratios/Supplemental Data
Net assets, end of period (000's) $7,882 $14,438
Ratio to average net assets -(A)
Expenses - (B) 1.98% 2.38%**
Expenses - net (C) 1.98% 2.19%**
Net investment income 12.03% 8.28%**
* Commencement ofoperations
** Annualized
(A) Management fee waivers reduced the expense ratio and increased the ratio of
net investment income by .41% in 1998.
(B) Expense ratio has been increased to include additional custodian fees which
were offset by custodian fee credits.
(C) Expense ratio - net reflects the effect of the custodian fee credits the
Fund received.
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel Eastern European Debt
Fund (the"Fund") is a series of Vontobel Funds, Inc. ("VFI") which is registered
under The Investment Company Act of 1940, as amended, as a non-diversified
open-end management company. The Fund was established in September, 1997 as a
series of VFI which has allocated to the Fund 50,000,000 of its 500,000,000
shares of $.01 par value common stock.
The investment objective of the Fund is to seek to maximize total return
from capital growth and income by investing in a carefully selected and
continuously managed non-diversified portfolio consisting primarily of debt
instruments issued by borrowers located in Eastern European countries.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Money market investments with a remaining maturity of
less than sixty days are valued using the amortized cost method; debt
securities are valued by appraising them at prices supplied by a pricing
agent approved by the Fund, which prices may reflect broker-dealer supplied
valuations and electronic data processing techniques. Those values are then
translated into U.S. dollars at the current exchange rate. Securities for
which a pricing agent is unable to supply a valuation and are valued on a
consistent basis at fair market value as determined in good faith by or
under the direction of the Fund's officers in a manner specifically
authorized by the Board of Directors of the Fund.
B. Federal Income Taxes. The Fund intends to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required.
C. Security Transactions. Security transactions are accounted for on the trade
date. The cost of securities sold is determined on a first-in, first-out
basis.
D. Currency Translation. The market values of foreign securities, currency
holdings, other assets and liabilities initially expressed in foreign
currencies are recorded in the financial statements after translation to
U.S. dollars based on the exchange rates at the end of the period. The cost
of such holdings is determined using historical exchange rates. Income and
expenses are translated at approximate rates prevailing when accrued or
incurred. The Fund does not isolate that portion of gains and losses on
investments which is due to changes in foreign exchange rates from that
which is due to changes in market prices of the investments. Such
fluctuations are included with the net realized and unrealized gains and
losses from investments. Foreign securities and currency transactions may
involve certain considerations and risks not typically associated with
those of domestic origin.
E. Forward Currency Contracts. Forward sales of currencies are undertaken to
hedge certain assets denominated in currencies that Vontobel USA,
Inc.("VUSA"), the Fund's investment advisor, expects to decline in value in
relation to other currencies. A forward currency contract is an agreement
between two parties to buy or sell a currency at a set price on a future
date. Forward contracts are marked to market daily and the change in market
value is recorded by the Fund as an unrealized gain or loss. When a
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The Fund could be at risk if the
counterparties are unable to meet the terms of the contracts or if the
value of the currency changes unfavorably.
F. Deferred Organizational Expenses. All of the expenses of the Fund incurred
in connection with its organization and the public offering of its shares
have been assumed by the Fund. The organization expenses allocable to the
Fund are being amortized over a period of sixty (60) months.
G. Distribution to Shareholders. Distribution from net investment income and
realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions, equalization, forwards and
post-October capital and currency losses.
H. Accounting Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS--Pursuant to an
Investment Advisory Agreement, the Advisor, Vontobel USA, Inc.("VUSA") provides
investment services for an annual fee of 1.25% on the first $100 million of
average daily net assets.
As provided in the Administrative Agreement, the Fund reimbursed
Commonwealth Shareholder Services, Inc. ("CSS"), its administrative agent,
$36,769 for providing shareholder services, recordkeeping, administrative
services and blue-sky filings. The Fund compensates CSS for blue-sky and certain
shareholder servicing on an hourly rate basis. For other administrative
services, CSS receives 0.20% of average daily net assets.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $14,272 includes expense for its services for the year ended
December 31, 1998.
To discourage short term investing and recover certain administrative,
transfer agency, shareholder servicing and other costs associated with such
short term investing, the Fund charges a 2% fee on such redemption of shares
held less than six months. Such fees amounted to $29,033 for the year ending
December 31, 1998, representing 0.24% of average net assets.
Certain officers and/or directors of the Fund are also officers and/or
directors of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS--Purchases and sells of securities other than short-term
notes aggregated $2,345,687 and $8,558,484, respectively.
<PAGE>
Report of Independent Certified Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of
Vontobel Eastern European Debt Fund, a series of Vontobel Funds, Inc., including
the schedule of portfolio investments as of December 31, 1998, and the related
statement of operations for the year then ended and the statement of changes in
net assets and the financial highlights for the year then ended and the period
September 1, 1997 (commencement of operations) to December 31, 1997. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Vontobel Eastern European Debt Fund as of December 31, 1998, the results of its
operations for the year then ended, the changes in its net assets and the
financial highlights for the year then ended and the period September 1, 1997 to
December 31, 1997, in conformity with generally accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 22, 1999
<PAGE>
Vontobel Fund Distributors
a division of First Dominion Capital Corp.
member firm NASD
1500 Forest Avenue, Suite 223
Richmond, Virginia 23229
Telephone (800) 527-9500
