VONTOBEL FUNDS, INC.
A "Series" INVESTMENT COMPANY
1500 Forest Avenue PROSPECTUS
Suite 223 Dated May 1, 1999
Richmond, Virginia 23229
Telephone: 1-800-527-9500
987325536VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
VONTOBEL EMERGING MARKETS EQUITY FUND
VONTOBEL EASTERN EUROPEAN EQUITY FUND
VONTOBEL INTERNATIONAL BOND FUND
VONTOBEL EASTERN EUROPEAN DEBT FUND
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As with all mutual funds, the U.S. Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the accuracy or
completeness of this prospectus. It is a criminal offense to suggest otherwise.
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TABLE OF CONTENTS
RISK/RETURN SUMMARY..........................................................3
VONTOBEL U.S. VALUE FUND...............................................3
VONTOBEL INTERNATIONAL EQUITY FUND.....................................4
VONTOBEL EMERGING MARKETS EQUITY FUND..................................6
VONTOBEL EASTERN EUROPEAN EQUITY FUND..................................7
VONTOBEL INTERNATIONAL BOND FUND.......................................9
VONTOBEL EASTERN EUROPEAN DEBT FUND...................................10
FUND FEES AND EXPENSES......................................................12
INVESTMENT OBJECTIVES/STRATEGIES AND RISKS..................................16
OTHER PRINCIPAL RISKS.......................................................23
MANAGEMENT ORGANIZATION AND CAPITAL STRUCTURE...............................24
SHAREHOLDER INFORMATION.....................................................26
PURCHASING SHARES...........................................................26
REDEEMING SHARES............................................................27
OTHER SHAREHOLDER SERVICES..................................................28
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS...................................29
DISTRIBUTIONS AND TAXES.....................................................29
DISTRIBUTION ARRANGEMENTS...................................................30
FINANCIAL HIGHLIGHTS........................................................31
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RISK/RETURN SUMMARY
Vontobel U.S. Value Fund ("Value Fund")
Investment Objective Long-Term Capital Return
Principal Investment Under normal circumstances, the Value Fund will
Strategies invest at least 65% of its assets in equity
securities that are traded on U.S. exchanges.
The Fund may also invest in fixed-income
securities and cash equivalents, such as
overnight repurchase agreements and short-term
U.S. Treasuries.
Principal Investment Risks The Value Fund's investments are subject to
market, economic and business risks. These risks
will cause the Value Fund's net asset value
("NAV") to fluctuate over time. Therefore, the
value of your investment in the Value Fund could
decline. Also, there is no assurance that the
Investment Advisor will achieve the Fund's
objective.
The Value Fund operates as a non-diversified fund
for purposes of the Investment Company Act of
1940, as amended (the "1940 Act"). As such, the
Fund may invest a larger portion of its assets in
fewer issuers. Consequently, adverse effects on
the Fund's security holdings may affect a larger
portion of the Fund's total assets and cause the
value of your investment to decline.
An investment in the Value Fund is not a bank
deposit and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any
other government agency.
Investor Profile You may want to invest in the Value Fund if you
are seeking long-term capital return, together
with relative safety of principal in the
long-term, and are willing to accept share prices
that may fluctuate, sometimes significantly, over
the short-term. You should not invest in the
Value Fund if you are seeking current income.
Performance Information
The bar chart below shows how the Value Fund's performance has varied from one
year to another. The table below the chart shows what the return would equal if
you averaged out actual performance over various lengths of time. Please keep in
mind that the Value Fund's past performance may not indicate how it will perform
in the future.
Graph goes here:
Vontobel U.S. Value Fund
Year........ Total Return
1990*....... - 9.90%
1990 37.29%
1991 16.30%
1992 6.00%
1993 0.02$
1994 40.36%
1995 21.28%
1996 34.31%
1997 14.70%
Best Calendar Quarter 1st Q 1991 up 21.90%
Worst Calendar Quarter 3rd Q 1990 down 21.80%
* Shows non-annualized return for the period from March 31, 1990, commencement
of operations, to December 31, 1990.
The following table compares the performance of the Value Fund and the S&P
500. The S&P 500 is an unmanaged index of the common stock of the 500 largest
publicly traded U.S. companies. Returns include dividends and distributions
and are expressed in U.S. dollars.
Average Annual Total Returns
(for the periods ending December 31, 1998)
1 Year 5 Years Since Inception
(March 30, 1990)
Value Fund 14.70% 21.27% 17.12%
S&P 500 Index 28.38% 23.84% 18.70%
VONTOBEL INTERNATIONAL EQUITY FUND ("International Equity Fund")
Investment Objective Capital Appreciation
Principal Investment Under normal circumstances the International
Strategies Equity Fund will invest at least 65% of its
assets in equity securities of companies in
Europe and the Pacific Basin. The Fund intends
to diversify its investments broadly among
countries and normally to have represented in
the portfolio business activities of not less
than three different countries. The Fund will
primarily hold securities listed on a security
exchange or quoted on an established
over-the-the counter market.
Principal Investment Risks The International Equity Fund's investments are
subject to market, economic and business risks.
These risks may cause the International Equity
Fund's NAV to fluctuate over time. Therefore,
the value of your investment in the Fund could
decline. Also, there is no assurance that the
Investment Advisor will achieve the Fund's
objective.
The International Equity Fund will invest in
foreign countries. These investments may involve
financial, economic or political risks that are
not ordinarily associated with U.S. securities.
Hence, the International Equity Fund's NAV may
be affected by changes in exchange rates between
foreign currencies and the U.S. dollar,
different regulatory standards, less liquidity
and increased volatility, taxes and adverse
social or political developments.
The Fund may also invest in securities that
trade in newly developed markets. In addition to
the typical risks that are associated with
investing in foreign countries, companies in
developing countries generally do not have
lengthy operating histories. Consequently, these
markets may be subject to more substantial
volatility and price fluctuations than
securities traded on more developed markets.
An investment in the International Equity Fund
is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Investor Profile You may want to invest in the International
Equity Fund if you are seeking capital
appreciation and wish to diversify your existing
investments. The International Equity Fund may
be particularly suitable for you if you wish to
take advantage of opportunities in the
securities markets of Europe and the Pacific
Basin and are willing to accept the risks
associated with foreign investing.
Performance Information
The bar chart below shows how the International Equity Fund's performance has
varied from one year to another. The table below the chart shows what the return
would equal if you averaged out actual performance over various lengths of time.
Please keep in mind that the International Equity Fund's past performance may
not indicate how it will perform in the future.
Vontobel International Equity Fund
Graph goes here:
Year ...... Total Return
1990* ...... -12.42%
1990 18.74%
1991 - 2.37%
1992 40.80%
1993 - 5.28%
1994 10.91%
1995 16.98%
1996 9.19%
1997 16.77%
Best Calendar Quarter 4th Q 1998 up 18.60%
Worst Calendar Quarter 3rd Q 1990 down 19.40%
* Represents a period during which the Fund was advised by other investment
advisors. On July 6, 1990, the Fund's current investment advisor was
appointed and the Fund's investment objective was changed to its current
status.
The following table compares the performance of the International Equity Fund
and Morgan Stanley Capital International's Europe, Australia and Far East Index
("EAFE Index"). The EAFE Index is an unmanaged index of more than 1100 common
stock securities issued by foreign companies. Returns include dividends and
distributions and are expressed in U.S. dollars.
Average Annual Total Returns
(for the periods ending December 31, 1998)
......
Since Inception
1 Year 5 Years (July 6, 1990)
International Equity Fund 16.77% 9.38% 9.89%
EAFE Index 20.00% 9.19% 6.75%
VONTOBEL EMERGING MARKETS EQUITY FUND ("Emerging Markets Fund")
Investment Objective Long-Term Capital Appreciation
Principal Investment Under normal circumstances the Emerging Markets
Strategies Fund will invest at least 65% of its total
assets in the equity securities of companies in
developing countries. The Fund intends to
diversify its investments broadly among
countries and normally to have represented in
the portfolio business activities of not less
than three different countries. The Fund will
primarily hold securities listed on a security
exchange or quoted on an established
over-the-counter market. The Emerging Markets
Fund may also invest in American Depository
Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs")
and Registered Depository Certificates ("RDCs").
Principal Investment Risks The Emerging Markets Fund's investments
are subject to market, economic and business
risks. These risks may cause the Fund's NAV
to fluctuate over time. Therefore, the value
of your investment in the Fund could decline.
Also, there is no assurance that the Investment
Advisor will achieve the Fund's objective.
The Emerging Markets Fund will invest in foreign
countries. These investments may involve
financial, economic or political risks that are
not ordinarily associated with U.S. securities.
Hence, the Fund's NAV may be affected by changes
in exchange rates between foreign currencies and
the U.S. dollar, different regulatory standards,
less liquidity and increased volatility, taxes
and adverse social or political developments.
The Fund also invests in securities that trade
in newly developed markets. In addition to the
typical risks that are associated with investing
in foreign countries, companies in developing
countries generally do not have lengthy
operating histories. Consequently, these markets
may be subject to more substantial volatility
and price fluctuations than securities traded on
more developed markets.
An investment in the Emerging Markets Fund is
not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Investor Profile You may wish to invest in the Emerging Markets
Fund if you are seeking long-term capital
appreciation and wish to diversify your current
investments beyond equities of companies in
developed markets. You should not invest in the
Fund if you are not willing to accept the risks
associated with foreign investing.
Performance Information
The bar chart below shows how the Emerging Markets Fund's performance has varied
from one year to another. The table below the chart shows what the return would
equal if you averaged out actual performance over various lengths of time.
Please keep in mind that the Emerging Markets Fund's past performance may not
indicate how it will perform in the future.
Vontobel Emerging Markets Fund
Year ...... Total Return
1997* ...... - 5.80%
1998 ...... -22.40%
Best Calendar Quarter 4th Q 1998 up 14.04%
Worst Calendar Quarter 3rd Q 1998 down 24.77%
* Shows non-annualized return for the period from September 1, 1997,
commencement of operations, to December 31, 1997.
The following table compares the performance of the Emerging Markets Fund and
the Morgan Stanley Capital International Emerging Markets Free Index ("the EMF
Index"). The EMF Index is a market capitalization weighted aggregate index
comprised of equities traded on listed markets in 26 emerging countries. Index
returns do not include dividends and distributions and are expressed in U.S.
dollars.
Average Annual Total Returns
(for the periods ending December 31, 1998)
1 Year Since Inception
(September 1, 1997)
Emerging Markets Fund -22.40% -20.97%
EMF Index -27.52% -30.91%
VONTOBEL EASTERN EUROPEAN EQUITY FUND ("E. European Equity Fund")
Investment Objective Capital Appreciation
Principal Investment Under normal circumstances, the E. European
Strategies Equity Fund will invest at least 65% of its
assets in equity securities of companies located
in Eastern Europe or which conduct a significant
portion of their business in countries which are
generally considered to comprise Eastern Europe.
The Fund normally will have represented in the
portfolio business activities of not less than
three different countries.
Principal Investment Risks The E. European Equity Fund's investments are
subject to market, economic and business risks.
These risks may cause the Fund's NAV to
fluctuate over time. Therefore, the value of
your investment in the Fund could decline.
Also, there is no assurance that the Investment
Advisor will achieve the E. European Equity
Fund's objective.
The E. European Equity Fund will invest in
foreign countries. These investments may involve
financial, economic or political risks that are
not ordinarily associated with U.S. securities.
Hence, the Fund's NAV may be affected by changes
in exchange rates between foreign currencies and
the U.S. dollar, different regulatory standards,
less liquidity and increased volatility, taxes
and adverse social or political developments.
The Fund also invests in securities that trade
in newly developed markets. In addition to the
typical risks that are associated with investing
in foreign countries, companies in developing
countries generally do not have lengthy
operating histories. Consequently, these markets
may be subject to more substantial volatility
and price fluctuations than securities traded on
more developed markets.
An investment in the E. European Equity Fund is
not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Investor Profile You may wish to invest in the E. European
Equity Fund if you seek to diversify your
your current equity holdings and to take
advantage of opportunities in the newly
reorganized markets of Eastern Europe.
Performance Information
The bar chart below shows how the E. European Equity Fund's performance has
varied from one year to another. The table below the chart shows what the return
would equal if you averaged out actual performance over various lengths of time.
Please keep in mind that the E. European Equity Fund's past performance may not
indicate how it will perform in the future.
Vontobel E. European Equity Fund
Year ...... Total Return
1996* ...... 48.80%
1997 ...... 8.74%
1996 -46.62%
Best calendar quarter 2nd Q 1996 up 25.74%
Worst calendar quarter 3rd Q 1998 down 40.48%
* Shows non-annualized return for the period from February 15, 1996,
commencement of operations, to December 31, 1996.
The following table compares the performance of the E. European Equity Fund and
the Nomura Research Institute's Central and Eastern European Equity Index
("Nomura Composite-11 Index"). The Nomura Composite-11 Index is comprised of
equities traded on listed markets in Poland, the Czech Republic, Hungary,
Slovakia, Croatia, Romania, Slovenia, Estonia, Latvia, Lithuania and Russia.
Returns do not include dividends and distributions and are expressed in U.S.
dollars.
Average Annual Total Returns
(for the periods ending December 31, 1998)
1 Year Since Inception
(February 15, 1996)
E. European Equity Fund -46.62 -4.95%
Nomura Composite 11 Index -21.84% 2.07%
VONTOBEL INTERNATIONAL BOND FUND ("Bond Fund")
Investment Objective To Maximize Total Return from Capital Growth and
Income
Principal Investment Under normal circumstances the Bond Fund will
Strategies invest at least 65% of its total assets in high
grade bonds issued (i) in countries other than
the U.S.; (ii) by issuers which are organized in
a country other than the U.S. or have at least
50% of their assets or derive at least 50% of
their revenues in such country (notwithstanding
the currency in which such bonds are
denominated); or (iii) by national or
international authorities other than the U.S.
The Advisor actively manages currency, bond
market and maturity exposure. The Bond Fund will
normally invest at least 65% of its total assets
in bonds denominated in foreign currencies,
however, generally foreign currency denominated
bonds will constitute 90% of its portfolio. The
Fund normally has investments in securities of
issuers from a minimum of three different
countries.
Principal Investment Risks The Bond Fund's investments are
subject to interest rate risk. Interest rate
risk may cause the NAV to fluctuate over time
and the value of the Bond Fund could decline.
There is no assurance that the Bond Fund will
achieve its objective.
The Bond Fund's investments will be denominated
in foreign currencies. These investments may
involve financial, economic or political risks
that are not ordinarily associated with U.S.
securities. Hence, the Fund's investments may be
affected by changes in exchange rates between
foreign currencies and the U.S. dollar,
different regulatory standards, less liquidity,
taxes and adverse social or political
developments.
The Bond Fund operates as a non-diversified fund
for purposes of the 1940 Act. As such, the Fund
may invest a larger portion of its assets in
fewer issuers. Consequently, adverse effects on
the Fund's security holdings may affect a larger
portion of the Fund's total assets and cause the
value of your investment to decline.
An investment in the Bond Fund is not a bank
deposit and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any
other government agency.
Investor Profile You may wish to invest in the Bond Fund if you
are seeking to maximize your total return and
diversify your investments. The Bond Fund may
be particularly suited for you if you wish to
take advantage of opportunities in bond markets
outside the U.S. You should not invest in the
Bond Fund if you are not willing to accept the
risks associated with foreign investing.
Performance Information
The bar chart below shows how the Bond Fund's performance has varied from one
year to another. The table below the chart shows what the return would equal if
you averaged out actual performance over various lengths of time. Please keep in
mind that the Bond Fund's past performance may not indicate how it will perform
in the future.
Graph goes here
Vontobel International Bond Fund
Year ...... Total Return
1994* ...... 1.98%
1995 17.60%
1996 7.51%
1997 -6.04%
1998 14.85%
Best calendar quarter 3rd Q 1998 up 10.00%
Worst calendar quarter 4th Q 1994 down 6.60%
* Shows non-annualized return from the period from March 1, 1994, commencement
of operations, to December 31, 1994.
The following table compares the performance of the Bond Fund and the J.P.
Morgan Government Bond Index (ex-U.S.) ("J.P. Morgan Index"). The J.P. Morgan
Index is an unmanaged index of the world's 12 major government bond markets
(Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, the
Netherlands, Spain, Sweden and the UK). Returns do include income and are
expressed in U.S. dollars.
Average Annual Total Returns
(for the periods ending December 31, 1998)
1 Year Since Inception
(March 1, 1994)
Bond Fund 14.85% 7.07%
J.P. Morgan Index 18.28% 9.00%
VONTOBEL EASTERN EUROPEAN DEBT FUND ("E. European Debt Fund")
Investment Objective To Maximize Total Return from Capital Growth and
Income
Principal Investment Under normal circumstances the E. European Debt
Strategies Fund will invest at least 65% of its total
assets in fixed-income instruments that are
issued by borrowers located in Eastern European
countries. The Fund will normally invest at
least 65% of its total assets in debt
instruments denominated in foreign currencies.
Generally, however, foreign currency denominated
debt instruments will constitute 90% of its
portfolio.
The Fund will invest principally in instruments
that bear the rating of BBB- or better by S&P or
Baa3 or higher by Moody's, or unrated securities
that the Advisor believes to be of comparable
quality to such instruments with ratings of
BBB-or higher by S&P or Baa3 or higher by
Moody's. The Fund may invest substantial amounts
in issuers from one or more countries and will
normally have investments in securities of
issuers from a minimum of three different
countries.
Principal Investment Risks The E. European Debt Fund's investments
are subject to interest rate risk. Interest
rate risk may cause the NAV to fluctuate
over time and the value of the E. European
Debt Fund could decline or increase. There
is no assurance that the E. European Debt Fund
Fund will achieve its objective.
The E. European Debt Fund's investments will be
denominated in foreign currencies. These
investments may involve financial, economic or
political risks that are not ordinarily
associated with U.S. securities. Hence, the
Fund's investments may be affected by changes in
exchange rates between foreign currencies and
the U.S. dollar, different regulatory standards,
less liquidity, taxes and adverse social or
political developments.
The E. European Debt Fund operates as a
non-diversified fund for purposes of the 1940
Act. As such, the Fund may invest a larger
portion of its assets in fewer issuers.
Consequently, adverse effects on the Fund's
security holdings may affect a larger portion of
the Fund's total assets and cause the value of
your investment to decline.
An investment in the E. European Debt Fund is
not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Investor Profile You may wish to invest in the E. European Debt
Fund if you are seeking to maximize your total
return and diversify your investments. The Fund
may be especially suitable for you if you are
willing to take advantage of opportunities in
the developing debt markets of Eastern Europe.
You should not invest in the E. European Debt
Fund if you are not willing to accept the risks
associated with foreign investing.
Performance Information
The bar chart below shows how the E. European Debt Fund's performance has varied
from one year to another. The table below the chart shows what the return would
equal if you averaged out actual performance over various lengths of time.
Please keep in mind that the E. European Debt Fund's past performance may not
indicate how it will perform in the future.
Vontobel E. European Debt Fund
Year ...... Total Return
1997* ...... - 0.55%
1997 24.54%
Best calendar quarter 4th Q 1998 up 6.72%
Worst calendar quarter 4th Q 1997 down 1.14%
* Shows non-annualized return for the period from September 1, 1997,
commencement of operations, to December 31, 1997.
The following table compares the performance of the E. European Debt Fund and
the Bank-Austria-Creditanstalt Eastern European Bond Index
("Bank-Austria-Creditanstalt Index"). The Bank Austria-Creditanstalt Index is a
market-weighted index of government and corporate debt instruments issued in
local currency and traded on exchanges in Hungary, Poland, Russia, the Czech
Republic and Slovakia. Returns do not include income and are expressed in U.S.
dollars.
Average Annual Total Returns
(for the periods ending December 31, 1998)
1 Year Since Inception
(September 1, 1997)
E. European Debt Fund 24.54% 17.43%
Bank-Austria-Creditanstalt -27.78% -22.86%
Index
FUND FEES AND EXPENSES
Costs are an important consideration in choosing a mutual fund. Shareholders
indirectly pay the costs of operating a fund, plus any transaction costs
associated with buying and selling the securities a fund holds. These costs will
reduce a portion of the gross income or capital appreciation a fund achieves.
Even small differences in the expenses can, over time, have a significant effect
on a Fund's performance.
The following table describes the fees and expenses that you will pay in
connection with purchases or redemptions of shares of the Value Fund, the
International Equity Fund, the Emerging Markets Fund, the E. European Equity
Fund, the Bond Fund and the E. European Debt Fund (collectively, the "Funds").
The annual operating expenses, which cover the cost of investment management,
administration, accounting and shareholder communications, are shown as a
percentage of the average daily net assets.
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__________________________________________________VALUE FUND___________________
Shareholder transaction Fees (fees paid directly from your investment)
Maximum Sales Charge (Load Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fees (1) None
Exchange Fees (3) None
Annual Fund Operating Expenses (Expenses that are deducted from Fund assets)
Management Fees 0.86%
Distribution (12b-1 Fees) None
Other Expenses 0.60%
Total Annual Fund Operating Expenses 1.46%
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________________________________________INTERNATIONAL EQUITY FUND______________
Shareholder transaction Fees (fees paid directly from your investment)
Maximum Sales Charge (Load Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fees (1) None
Exchange Fees (3) None
Annual Fund Operating Expenses (Expenses that are deducted from Fund assets)
Management Fees 0.90%
Distribution (12b-1 Fees) None
Other Expenses 0.50%
Total Annual Fund Operating Expenses 1.40%
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_________________________________________ EMERGING MARKETS EQUITYFUND_________
Shareholder transaction Fees (fees paid directly from your investment)
Maximum Sales Charge (Load Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fees (1) 2.0%(2)
Exchange Fees (3) None
Annual Fund Operating Expenses (Expenses that are deducted from Fund assets)
Management Fees 1.25%
Distribution (12b-1 Fees) None
Other Expenses 4.88%
Total Annual Fund Operating Expenses 6.13%*
*Management Fee waivers, expense reimbursements and expense credits reduced the
Total Annual Fund Operating Expenses to 2.07% during the year ended December 31,
1998.
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________________________________________E. EUROPEAN EQUITY FUND________________
Shareholder transaction Fees (fees paid directly from your investment)
Maximum Sales Charge (Load Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fees (1) 2.0%(2)
Exchange Fees (3) None
Annual Fund Operating Expenses (Expenses that are deducted from Fund assets)
Management Fees 1.25%
Distribution (12b-1 Fees) None
Other Expenses 1.32%
Total Annual Fund Operating Expenses 2.57%
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__________________________________________BOND FUND___________________________
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Shareholder transaction Fees (fees paid directly from your investment)
Maximum Sales Charge (Load Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fees (1) None
Exchange Fees (3) None
Annual Fund Operating Expenses (Expenses that are deducted from Fund assets)
Management Fees 1.00%
Distribution (12b-1 Fees) None
Other Expenses 0.86%
Total Annual Fund Operating Expenses 1.86%
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________________________________________E. EUROPEAN DEBT FUND__________________
Shareholder transaction Fees (fees paid directly from your investment)
Maximum Sales Charge (Load Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fees (1) 2.0%(2)
Exchange Fees (3) None
Annual Fund Operating Expenses (Expenses that are deducted from Fund assets)
Management Fees 1.25%
Distribution (12b-1 Fees) None
Other Expenses 1.14%
Total Annual Fund Operating Expenses 2.39%
(1) A shareholder electing to redeem shares by telephone will be charged $10
for each such redemption request.
(2) A 2% redemption fee is charged on shares held less than six (6) months.
(3) A shareholder may be charged a $10 fee for each telephone exchange.
The purpose of these tables is to assist investors in understanding the
various costs and expenses that they will bear directly or indirectly.
Management expects that as each Fund increases in size, its annual operating
expenses stated as "Other Expenses" above will decline as an annual percentage
rate reflecting economies of scale.
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The following expense examples show the expenses that you could pay over time.
They will help you compare the costs of investing in the Funds with the costs of
investing in other mutual funds. Each example assumes that you invest $10,000 in
the Fund and then redeem all of your shares at the end of the periods indicated.
Each example assumes that you earn a 5% annual return, with no change in Fund
expense levels. Because actual return and expenses will be different, the
examples are for comparison only. Based on these assumptions, your costs would
be:
EXAMPLE
...... 1 Year 3 Year 5 Year 10 Year
Value Fund.. $ 150 $ 465 $ 803 $1,757
International Equity Fund $ 143 $ 443 $ 766 $1,680
Emerging Markets Fund
With Redemption Fee $ 810 $2,008 $3,180 $5,995
W/O Redemption Fee $ 610 $1,808 $2,980 $5,795
Expenses - net* $ 210 $ 649 $1,114 $2,400
E. European Equity Fund
With Redemption Fee $ 460 $ 999 $1,565 $3,105
W/O Redemption Fee $ 260 $ 799 $1,365 $2,905
Bond Fund... $ 189 $ 585 $1,006 $2,180
E. European Debt Fund
With Redemption Fee $ 442 $ 945 $1,475 $2,926
W/O Redemption Fee $ 242 $ 745 $1,275 $2,726
*Expenses reflect the effect of management fee waivers, reimbursed expenses and
custodian credits to offset custodian fees.
INVESTMENT OBJECTIVES/STRATEGIES AND RISKS
Value Fund
The Value Fund's investment objective is to achieve long-term capital returns in
excess of the broad market by investing in common stocks and securities that are
convertible into common stocks, such as warrants, convertible bonds, debentures
or convertible preferred stock. Under normal circumstances the Fund will invest
at least 65% of its assets in common stocks or securities that are convertible
into common stock. The Value Fund typically invests in securities that are
traded on U.S. exchanges. The Value Fund also invests in fixed-income
instruments and cash equivalents, such as overnight repurchase agreements and
short-term U.S. Treasuries. The Advisor uses the S&P 500 Index as the benchmark
for the broad market against which the performance of the Value Fund is
measured.
Vontobel USA Inc. (the "Advisor"), the investment adviser for each of the Funds,
employs a bottom-up approach to stockpicking, with an emphasis on qualitative
criteria in evaluating a company's potential as a prospective investment
opportunity. Although the Value Fund's return will be compared to that provided
by the broad market, the Advisor seeks to achieve attractive absolute returns
over the "risk-free" rate, defined as the rate of return available on 10-year
U.S. Government securities. The Advisor's utilization of an "absolute" rather
than a "relative" valuation yardstick is designed to achieve not only a
satisfactory return over the risk-free rate but at the same time ensure safety
of principal. The Advisor considers the riskiness of an investment to be a
function of the company's business rather than the volatility of its stock
price. Therefore the Advisor seeks to identify companies whose businesses are
predictable or that exhibit elements of a franchise. Ideally, such companies
must have a history of competitive returns on invested capital, reliable growth
in earnings growth and free cash flow, low debt and effective management.
The Value Fund is subject to stock market risk. Stock market risk is the
possibility that stock prices overall will decline over short or long periods.
Because stock market prices tend to fluctuate, the value of your investment in
the Value Fund may increase or decrease. The Value Fund's investment success
depends on the skill of the Advisor in evaluating, selecting and monitoring the
portfolio assets. If the Advisor's conclusions about growth rates or securities
values are incorrect, the Value Fund may not perform as anticipated.
As noted above, the Advisor seeks to achieve its investment objective by
investing principally in equity securities. Nonetheless, the Advisor may
construct, and in fact has at times constructed, a portfolio in which cash and
cash equivalents (including, but not limited to, overnight repurchase agreements
and short-term U.S. Treasuries), and/or fixed-income instruments, comprise a
significant portion of the Value Fund's total assets. The Advisor views its
"cash position" as a residual measure of the ability of its investment personnel
to identify enough stocks that meet their rigorous investment criteria.
The Value Fund is a "non-diversified" investment company under Federal
securities laws, and therefore may invest a larger portion of its assets in
certain issuers, including foreign governments and domestic issuers other than
the U.S. government. Consequently, adverse effects on the Fund's security
holdings may affect a larger portion of the Fund's assets and cause the value of
your investment to decline.
The Value Fund may invest more than 5% of its assets in government debt
securities of the U.S. However, because it intends to qualify as a "regulated
investment company" for purposes of Subchapter M of the Code, at least 50% of
its total assets must be invested in cash, U.S. government securities, and
securities of issuers (including foreign governments), in which it has invested
not more than 5% of its assets. A regulated investment company is also limited
in its purchases of voting securities of any issuer.
International Equity Fund
The International Equity Fund's investment objective is to achieve capital
appreciation by investing in common stocks and securities that are convertible
into common stocks. Under normal circumstances the Fund will invest at least 65%
of its assets in securities of companies in Europe and the Pacific Basin. The
International Equity Fund will invest most of its assets in equity securities of
countries which are generally considered to have developed markets, such as the
United Kingdom, the eleven euro-zone countries (France, Germany, Italy, Spain,
Portugal, Finland, Ireland, Belgium, the Netherlands, Luxembourg and Austria),
Switzerland, Norway, Japan, Hong Kong, Australia, and Singapore. The Advisor
will decide when and how much to invest in each of those markets. Investments
may also be made in equities issued by companies in "developing countries" or
"emerging markets," such as Taiwan, Malaysia, Indonesia, and Brazil, included in
Morgan Stanley Capital International's Emerging Markets Free Index ("EMF") . The
portfolio of the International Equity Fund will be diversified. The Fund
typically invests in the securities of medium to large capitalization companies,
but is not limited to investing in securities of companies of any size. Using a
bottom-up investment approach, the Advisor seeks to invest in companies that
have a long record of successful operations in their core business and earnings
growth through increasing market share and unit sales volumes. These companies
are typically among the leaders in their industry, having demonstrated
consistent growth in cash flow, sales, operating profits, returns on equity and
returns on invested capital, and little or no debt. The Fund generally holds its
core positions for at least two years.
The International Equity Fund may select its investments from companies which
are listed on a securities exchange or from companies whose securities have an
established over-the-counter market, and may make limited investments in "thinly
traded" securities.
Under normal circumstances the International Equity Fund will have at least 65%
of its assets invested in European and Pacific Basin equity securities. The
International Equity Fund intends to diversify broadly investments among
countries and normally to have represented in the portfolio business activities
of not less than three different countries. The securities the International
Equity Fund purchases may not always be purchased on the principal market. For
example, American Depository Receipts ("ADRs") may be purchased if trading
conditions make them more attractive than the underlying security.
The Fund's investments in foreign securities may involve risks that are not
ordinarily associated with U.S. securities. Foreign companies are not generally
subject to the same accounting, auditing and financial reporting standards as
are domestic companies. Therefore, there may be less information available about
a foreign company than there is about a domestic company. Certain countries do
not honor legal rights enjoyed in the U.S. In addition, there is the possibility
of expropriation or confiscatory taxation, political or social instability, or
diplomatic developments, which could affect U.S. investments in those countries.
Many foreign securities have substantially less trading volume than in the U.S.
market, and securities in some foreign issuers are less liquid and more volatile
than securities of domestic issuers. These factors make foreign investment more
expensive for U.S. investors. Mutual funds offer an efficient way for
individuals to invest abroad, but the overall expense ratios of mutual funds
that invest in foreign markets are usually higher than those of mutual funds
that invest only in U.S. securities.
The International Equity Fund is subject to stock market risk. Stock market risk
is the possibility that stock prices overall will decline over short or long
periods. Because stock prices tend to fluctuate, the value of your investment in
the International Equity Fund may increase or decrease. The Fund's investment
success depends on the skill of the Advisor in evaluating, selecting and
monitoring the portfolio assets. If the Advisor's conclusions about growth rates
or securities values are incorrect, the International Equity Fund may not
perform as anticipated.
In addition to common stocks and securities that are convertible into common
stocks, the International Equity Fund invests in shares of closed-end investment
companies. These investment companies invest in securities that are consistent
with the International Equity Fund's objective and strategies. By investing in
other investment companies the Fund indirectly pays a portion of the expenses
and brokerage costs of these companies as well as its own expenses. Also,
federal and state securities laws impose limits on such investments, which may
affect the ability of the Fund to purchase or sell these shares.
The International Equity Fund has the authority to enter into forward contracts
to purchase or sell foreign currencies, purchase and write covered call options
on foreign currencies and enter into contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). The
International Equity Fund may also assume a temporary defensive position in
response to extreme or adverse market, economic or other conditions.
Emerging Markets Fund
The Emerging Markets Fund's investment objective is to achieve long-term capital
appreciation by investing in common stocks and securities that are convertible
into common stock. Under normal circumstances the Emerging Markets Fund will
invest at least 65% of its total assets in securities of companies that are
located in developing countries. The Fund may acquire these securities directly
in their principal markets or through the use of Depository Receipts. The
portfolio of the Fund will be diversified.
The Emerging Markets Fund considers countries having developing markets to be
all countries included in the EMF, generally considered to be developing or
emerging markets countries by the International Bank for Reconstruction and
Development (more commonly referred to as the World Bank) or the International
Finance Corporation, as well as countries that are classified by the United
Nations or otherwise regarded by their authorities as developing. In addition,
as used in this prospectus, emerging markets equity securities means (i) equity
securities of companies that the principal securities trading market for which
is an emerging market country, as defined above, (ii) equity securities traded
in any market, of companies that derive a substantial portion of their total
revenue or potential revenue from either goods or services produced in
developing countries or sales made in emerging market countries, or (iii) equity
securities of companies organized under the laws of, and with a principal office
in, an emerging market country.
The Emerging Markets Fund intends to diversify investments broadly among
countries and normally to have represented in the portfolio business activities
of not less than three different countries. It is anticipated that the Emerging
Markets Fund will invest in three or more of the countries in the following
list, which is meant to be representative and not exhaustive:
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Argentina Greece Pakistan South Africa
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Brazil Hong Kong Panama South Korea
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Chile Hungary Peru Sri Lanka
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China India Philippines Taiwan
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Colombia Indonesia Poland Thailand
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Czech Republic Israel Portugal Turkey
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Egypt Malaysia Russia Venezuela
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Ghana Mexico Singapore
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The securities the Emerging Markets Fund purchases may not always be purchased
on the principal market of the country. For example, ADRs, European Depository
Receipts ("EDRs"), Global Depository Receipts ("GDRs") or Registered Depository
Certificates ("RDC") may be purchased if trading conditions make them more
attractive than the underlying security. ADRs are described above in the
"Vontobel International Equity Fund" section. Similar to ADRs, EDRs, GDRs and
RDCs represent receipts for a foreign security issued in a location outside the
U.S., and may involve risks comparable to ADRs, as well as the fact that the
EDR, GDR or RDC is itself issued outside the U.S. RDCs involve risks associated
with Russian securities transactions. Please refer to the Statement of
Additional Information for more information on ADRs, EDRs, GDRs and RDCs.
The Fund typically invests in the securities of medium to large capitalization
companies, but is not limited to investing in securities of companies of any
size. Using a bottom-up investment approach, the Advisor seeks to invest in
companies that have a long record of successful operations in their core
businesses and earnings growth through increasing market share and unit sales
volumes. These companies are typically among the leaders of their industry,
having demonstrated consistent growth in cash flow, sales, operating profits,
returns on equity and returns on invested capital, and little or no debt. The
Advisor does not currently actively manage currency risk.
The Fund's investments in developing countries involve those same risks that are
associated with foreign investing in general (see "Other Principal Risks"
below). In addition to those risks, companies in developing countries generally
do not have lengthy operating histories. Consequently, these markets may be
subject to more substantial volatility and price fluctuations than securities
that are traded on more developed markets. Also the value of your investment in
the Emerging Markets Fund may decline due to stock market risk. Stock market
risk is the possibility that stock prices overall will decline over short or
long periods. The Emerging Markets Fund's investment success depends on the
skill of the Advisor in evaluating, selecting and monitoring the portfolio
assets. If the Advisor's conclusions about growth rates or securities values are
incorrect, the Emerging Markets Fund may not perform as anticipated.
While the Emerging Markets Fund intends to remain substantially invested in
common stock and securities that are convertible into common stock, it also
invests in shares of closed-end investment companies. These investment companies
invest in securities that are consistent with the Emerging Market Fund's
objective and strategies. By investing in other investment companies the Fund
indirectly pays a portion of the expenses and brokerage costs of these companies
as well as its own expenses. Also, federal and state securities laws impose
limits on such investments, which may affect the ability of the Fund to purchase
or sell these shares.
The Emerging Markets Fund may also invest in unlisted securities. Unlisted
securities include securities that are neither listed on a stock exchange or
traded-over-the counter and privately placed securities. Investing in unlisted
securities may involve a higher degree risk than publicly traded securities and
may result in substantial losses. These securities may also be less liquid than
publicly traded securities because they are not traded publicly.
E. European Equity Fund
The E. European Equity's Fund investment objective is to achieve capital
appreciation by investing in common stocks and securities that are convertible
into common stock. Under normal market conditions the Fund will invest at least
65% of its assets in securities of companies that are located in or conduct a
significant portion of their business in Eastern Europe. The Advisor's
investment universe consists of companies that are located in, or listed on the
exchanges of, the former Soviet Bloc countries, as well as companies that derive
at least two-thirds of their sales from such countries. Not all these countries
have a functioning stock exchange and others still have an illiquid securities
market; consequently, the Advisor concentrates on the markets of Hungary,
Poland, Slovenia, the Czech Republic, Slovakia, Russia, Croatia and the Baltic
states (Estonia, Latvia and Lithuania). In Poland, Hungary, the Czech Republic
and Slovakia, the Advisor can invest in local shares. Elsewhere, due to the lack
of local subcustodians or liquidity, the Advisor currently invests only through
GDR or ADR programs.
Trading volume of the stock exchanges of these markets may be substantially
lower than that in developed markets, and the purchase and sale of portfolio
securities may not always be made at an advantageous price. The Advisor
generally will decide when and how much to invest in these developing markets
based upon its assessment of their continuing development. As stock markets in
the region develop and more investment opportunities emerge, the Fund will
broaden its portfolio to include securities of companies located in or which
conduct a significant portion of their business in countries in this region.
The portfolio of the E. European Equity Fund will be diversified. Management
expects that the Fund will have a low turnover ratio (not exceeding 100%
annually). The selection of the securities in which the Fund will invest will
not be limited to companies of any particular size, or to securities traded in
any particular marketplace, and will be based only upon the expected
contribution such security will make to its investment objective. Currently, the
Advisor considers only about 200 stocks as investable, based upon their market
capitalization and liquidity. The Advisor expects this number to increase
dramatically in the years to come. Together, these 200 stocks represent a market
capitalization of approximately US$ 50 billion.
The Fund faces those same risks that are associated with investing in foreign
and developing markets (see "Other Principal Risks" below). Also the value of
your investment in the E. European Equity Fund may decline due to stock market
risk. Stock market risk is the possibility that stock prices overall will
decline over short or long periods. The E. European Equity Fund's investment
success depends on the skill of the Advisor in evaluating, selecting and
monitoring the portfolio assets. If the Advisor's conclusions about growth rates
or securities values are incorrect, the E. European Equity Fund may not perform
as anticipated. Generally, the Fund holds core positions for longer than one
year.
The E. European Equity Fund also invests in shares of closed-end investment
companies. These investment companies invest in securities that are consistent
with the Emerging Market Fund's objective and strategies. By investing in other
investment companies the Fund indirectly pays a portion of the expenses and
brokerage costs of these companies in addition to its own expenses. Also,
federal and state securities laws impose limits on such investments, which may
affect the ability of the Fund to purchase or sell these shares. The Fund does
not actively manage currency risk.
Bond Fund
The Bond Fund's investment objective is to maximize total return from capital
growth and income. The Bond Fund seeks to achieve its objective by investing in
fixed-income securities that are traded in bond markets outside the U.S. Foreign
government, governmental agency and supranational agency obligations and foreign
currency Eurobond issues represent the most common types of investments used in
the Fund's portfolio.
The portfolio investments of the Bond Fund will be selected on the basis of,
among other things, yields, credit quality, and the fundamental outlooks for
currency and interest rate trends in different parts of the globe, taking into
account the ability to hedge a degree of currency or local bond price risk. The
Bond Fund will normally invest at least 65% of its total assets in bonds
denominated in foreign currencies, however, generally foreign currency
denominated bonds will constitute 90% of its portfolio.
Under normal market conditions, at least 65% of the Bond Fund's assets will be
invested in foreign securities that are rated A or higher by S&P or Moody's
Investors Service, Inc. ("Moody's") or unrated bonds which the Advisor believes
are comparable in quality; however, the Fund generally invests 90% of its total
assets in foreign debt securities. The Bond Fund may invest in lower rated
securities in order to take advantage of the higher yields available with these
securities. However, no more than 5% of the total assets may be invested in
securities that are rated below investment grade (i.e., below BBB by S&P or Baa
by Moody's) or which are unrated but are of comparable quality as determined by
the Advisor. Securities that are rated below investment grade entail greater
risk than investment grade debt securities. After purchase by the Bond Fund,
debt securities may cease to be rated or their rating may be reduced. Neither
event would require the Fund to dispose of the debt security.
The Bond Fund intends to select its investments from a number of country and
market sectors. It may invest substantial amounts in issuers from one or more
countries and would normally have investments in securities of issuers from a
minimum of three different countries; however, it may invest substantially all
of its assets in securities of issuers located in the U.S. for temporary or
emergency purposes. A non-governmental issuer will be considered to be "from" a
country in which it is organized, in which it has at least 50% of its assets, or
from which it derives at least 50% of its revenues.
To protect against adverse movements of interest rates and for liquidity, the
Bond Fund may also invest all or a portion of its net assets in short-term
obligations denominated in U.S. and foreign currencies such as, but not limited
to, bank deposits; bankers' acceptances; certificates of deposit; commercial
paper; short-term government, government agency, supranational agency and
corporate obligations; and repurchase agreements.
While the Bond Fund intends to invest primarily in foreign securities, it may
invest substantially all of its assets in securities of issuers located in the
U.S. for temporary or emergency purposes. Under normal circumstances the Bond
Fund will not invest more than 35% of its total assets in U.S. debt securities;
however, the Fund generally invests less than 10% of its total assets in U.S.
debt securities. The Fund may also hedge using U.S. dollars in certain
situations.
The selection of bonds for the Bond Fund is dependent upon the Advisor's
evaluation of those factors influencing interest rates. The Advisor considers
the rates of return available for any particular maturity and compares that to
the rates for other maturities in order to determine the relative and absolute
differences as they relate to income and the potential for market fluctuation.
The market values of fixed income securities tend to vary inversely with the
level of interest rates. When interest rates rise, the market values of such
securities tend to decline and vice versa. Although under normal market
conditions longer term securities yield more than short-term securities of
similar quality, longer term securities are subject to greater price
fluctuations. There are no restrictions on the maturity composition of the Bond
Fund. Fluctuations in the value of the investments will be reflected in the NAV
of the Bond Fund.
The Bond Fund is non-diversified for purposes of the 1940 Act. As a
non-diversified fund, the Bond Fund may invest a larger portion of its assets in
fewer issuers. Consequently, adverse effects on the Fund's security holdings may
affect a larger portion of the Fund's assets and cause the value of your
investment to decline.
Cash may be held in U.S. dollars and/or in any of the major trading currencies.
The Fund's cash position is first and foremost a function of the Advisor's
currency allocation decision and secondarily a function of the Advisor's
duration selection. If the outlook for U.S. dollar cash returns is more
attractive than that for cash and bond returns in all other currencies, the Fund
will hold a U.S. dollar cash position generally not in excess of 25% of its
total assets. Conversely, if the outlook for foreign currency cash returns is
more attractive, the Fund will hold foreign cash positions not in excess of
approximately 25% of its total assets.
Maturity selection is based on the Advisor's total return forecasts, i.e., the
Advisor focuses on investments that the Advisor expects to produce the highest
total return in local currency along the yield curve in each market in the
Advisor's universe for the planned holding period. Maturity selection or, more
precisely, duration selection, is the second most important factor in the
Advisor's process. Duration is the expected life of a fixed-income security,
taking into account its coupon yield, interest payments, maturity and call
features. Duration attempts to measure actual maturity, as opposed to final
maturity, by measuring the average time required to collect all payments of
principal and interest. The duration of a callable bond, also called its
effective duration, may be considerably shorter than its stated maturity in a
period of rising interest rates. Thus, as market interest rates rise, the
duration of a financial instrument decreases. For example, a 30-year
conventional mortgage may have an effective duration of only 11 to 12 years,
which means the loan will probably be paid off in about one-third of the time it
is supposedly carried by the originating lender as an earning asset. Duration
differs from other measurements such as average life and half life. Duration
measures the time required to recover a dollar of price in present value terms
(including principal and interest), whereas average life computes the average
time needed to collect one dollar of principal. The Advisor's selection of
duration is based on the Advisor's total return forecasts. Particular yield
curve shapes and/or anomalies are also taken into account. As indicated in the
preceding paragraph, U.S. dollar and/or foreign cash positions are a function of
both currency allocation and duration selection decisions.
Foreign government, governmental agency and supranational agency obligations and
foreign currency Eurobond issues represent the most common types of investment
used in the Fund's portfolio construction. Credit quality of most issuers in
these markets tends to be very high. Quality and sector management are therefore
not as complex as for domestic U.S. bonds. The Advisor focuses its issue
selection on the highest credit quality since opportunities to achieve
significant incremental returns in sector selection are limited.
E. European Debt Fund
The E. European Debt Fund's objective is to maximize total return from capital
growth and income. The Fund seeks to achieve its investment objective by
investing in fixed-income securities that are issued by borrowers in Eastern
European countries. The Fund will normally invest at least 65% of its total
assets in debt instruments denominated in foreign currencies. Generally,
however, foreign currency denominated debt instruments will constitute 90% of
its portfolio.
Under normal market conditions, the E. European Debt Fund will invest at least
65% of its assets in foreign securities that are rated BBB- or higher by S&P or
Baa3 by Moody's or unrated bonds which the Advisor believes are comparable in
quality; however, the Fund generally invests 90% of its total assets in foreign
debt securities. Due to the relative scarcity and small size of many securities
offerings in the Eastern European market, the number of securities that are
rated by S&P and Moody's is limited. The Advisor reserves the right to determine
that certain securities are of comparable quality where such securities have not
been rated due to the small size of the offering or other factors. After
purchase by the E. European Debt Fund, debt securities may cease to be rated or
their rating may be reduced. Neither event would require the Fund to dispose of
the debt security.
The Advisor's investment universe encompasses two distinct markets: (1) the
local currency debt markets of Eastern Europe, the Russian market and the
markets of the newly formed countries that belonged to the former Soviet Union,
and (2) the Eurocurrency markets that are used by public and private sector
borrowers in the Advisor's market universe to raise capital in the major trading
currencies, including the U.S. dollar. For investments in local currency debt
instruments, the Advisor's core markets are the Czech Republic, Slovakia,
Hungary, Poland, Slovenia, the Baltic states, Croatia, Romania and Russia.
The Fund intends to select its investments from a number of country and market
sectors. The Fund may invest substantial amounts in issuers from one or more
countries and will normally have investments in securities of issuers from a
minimum of three different countries. While the E. European Debt Fund intends to
invest primarily in foreign securities, it may invest substantially all of its
assets in securities of issuers located in the U.S. for temporary or emergency
purposes. Under normal circumstances the E. European Debt Fund will not invest
more than 35% of its total assets in U.S. debt securities; however, the Fund
generally invests less than 10% of its total assets in U.S. debt securities. In
circumstances where the outlook for U.S. dollar is more attractive than that for
cash and bond returns in all other currencies, the Fund will hold a U.S. dollar
cash position of up to 35% of the Fund's total assets. Conversely, if the
outlook for Eastern European currency cash returns is more attractive, the Fund
will hold foreign cash positions of up to 25% of the Fund's total assets. From
time to time, the Advisor may hold up to 90% of the Fund's total assets in
securitized money market instruments, such as government short-term paper,
treasury bills issued by governments of Eastern European countries, commercial
paper and corporate short-term paper with maturities of up to one year.
The selection of bonds for the E. European Debt Fund is dependent upon the
Advisor's evaluation of those factors influencing interest rates. The Advisor
considers the rates of return available for any particular maturity and compares
that to the rates for other maturities in order to determine the relative and
absolute differences as they relate to income and the potential for market
fluctuation.
The Advisor focuses on issuers of the highest available credit quality and uses
international and supranational issuers with credit ratings at least equal to
those of local borrowers. Quality and sector management are therefore not as
complex as for domestic U.S. bonds. Because the Advisor focuses its issue
selection on the highest available credit quality, opportunities to achieve
significant incremental returns in sector selection are limited.
Issue selection within the quality constraints referred to above is principally
aimed at achieving duration and yield curve targets determined in accordance
with the Advisor's top-down market allocation decision. The Advisor is conscious
of the need for liquidity and therefore invests only in issues within a sector
which the Advisor deems to have the greatest future marketability.
The market values of fixed income securities tend to vary inversely with the
level of interest rates. When interest rates rise, the market values of such
securities tend to decline and vice versa. Although under normal market
conditions longer term securities yield more than short-term securities of
similar quality, longer term securities are subject to greater price
fluctuations. There are no restrictions on the maturity composition of the E.
European Debt Fund. Maturity selection is based on the Advisor's total return
forecasts. Currently, most local currency debt instruments tend to have
short-term maturities of one year or less. Eurocurrency instruments, on the
other hand, that have short- to intermediate-term maturities, generally are
priced at a spread over the interest rate applicable to the same-maturity
government bond of the country in whose currency the debt instrument is issued.
To protect against adverse movements of interest rates and for liquidity, the
Fund may also invest all or a portion of its net assets in short-term
obligations, such as bank deposits, bankers' acceptances, certificates of
deposit, commercial paper, short-term government, government agency,
supranational agency and corporate obligations and repurchase agreements. The
Advisor also attempts to protect the Fund from rising interest rates by selling
interest rate future contracts or purchasing put options on interest rate
futures contracts.
The E. European Debt Fund is non-diversified for purposes of the 1940 Act. As a
non-diversified fund, the E. European Debt Fund may invest a larger portion of
its assets in fewer issuers. Consequently, adverse effects on the Fund's
security holdings may affect a larger portion of the Fund's assets and cause the
value of your investment to decline.
OTHER PRINCIPAL RISKS
Year 2000 Issue
Like other mutual funds and financial or business organizations around the
world, Vontobel Funds, Inc. (the "Company") could be adversely affected if its
computer systems or the computer systems of its service providers do not
properly process and calculate date-related information and data as of and after
January 1, 2000. This is commonly known as the "Year 2000 Issue." The Company
has taken steps that it believes are reasonably designed to address the Year
2000 Issue with respect to computer systems that it uses and to obtain
reasonable assurances that comparable steps are being taken by its major service
providers. These steps include identifying system problems, remediation and
testing the system fixes. The Company and each of its major service providers
are in the stage of testing the system fixes that have been implemented. At this
time, however, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Company. The Advisor has reviewed the types of
securities and debt obligations held as investments by the Funds to determine
the impact of the Year 2000 Issue on the returns and relative safety of
principal of such securities and debt obligations. Based on this review, the
Advisor does not believe the Year 2000 Issue poses any substantial risk for such
returns and safety of principal.
European Currency
Several European countries are participating in the European Economic and
Monetary Union, which established a common European currency for participating
countries. This currency is commonly known as the "Euro." Each participating
country replaced its existing currency with the Euro as of January 1, 1999.
Additional European countries may elect to participate in the common currency in
the future. The conversion presents unique uncertainties, including, among
others: (1) whether the payment and operational systems of banks and other
financial institutions will function properly; (2) how certain outstanding
financial contracts that refer to existing currencies rather than the Euro will
be treated legally; (3) how exchange rates for existing currencies and the Euro
will be established; and (4) how suitable clearing and settlement payment
systems for the Euro will be managed. If any of the Funds invests in securities
of countries that have converted to the Euro or convert in the future, the Fund
could be adversely affected if these uncertainties cause adverse affects on
these securities. The Fund could also be adversely affected if the computer
systems used by its major service providers are not properly prepared to handle
the implementation. The Company has taken steps to obtain satisfactory
assurances that the major service providers of each of the Funds have taken
steps reasonably designed to address these matters. There can be no assurances
that these steps will be sufficient to avoid any adverse impact on the
operations and investment returns of the Funds. To date the conversion of the
Euro has had negligible impact on the operations and investment returns of the
Funds.
Foreign Investing
A Fund's investments in foreign securities may involve risks that are not
ordinarily associated with U.S. securities. Foreign companies are not generally
subject to the same accounting, auditing and financial reporting standards as
are domestic companies. Therefore, there may be less information available about
a foreign company than there is about a domestic company. Certain countries do
not honor legal rights enjoyed in the U.S. In addition, there is the possibility
of expropriation or confiscatory taxation, political or social instability, or
diplomatic developments, which could affect U.S. investments in those countries.
Many foreign securities have substantially less trading volume than in the U.S.
market, and securities in some foreign issuers are less liquid and more volatile
than securities of domestic issuers. These factors make foreign investment more
expensive for U.S. investors. Mutual funds offer an efficient way for
individuals to invest abroad, but the overall expense ratios of mutual funds
that invest in foreign markets are usually higher than those of mutual funds
that invest only in U.S. securities. A Fund's investment in securities
denominated in foreign currencies is subject to movements in foreign currency
exchange rates versus the U.S. dollar. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy. Each of the Funds that
engages in currency transactions in order to hedge the value of portfolio
holdings denominated in particular currencies against fluctuations in relative
value is subject to some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to a Fund if it
is unable to deliver or receive currency or funds in settlement of obligations
and could also cause hedges the Fund has entered into to be rendered useless,
resulting in full currency exposure and transaction costs. Buyers and sellers of
currency futures are subject to the same risks that apply to the use of futures
generally. Furthermore, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures is relatively new, and the ability to
establish and close out positions on such options is subject to the maintenance
of a liquid market which may not always be available. Although forward foreign
currency contracts and currency futures tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they tend to limit any potential
gain which might result should the value of such currency increase.
Emerging and Developing Markets
A Fund's investments in emerging and developing countries involve those same
risks that are associated with foreign investing in general (see above). In
addition to those risks, companies in such countries generally do not have
lengthy operating histories. Consequently, these markets may be subject to more
substantial volatility and price fluctuations than securities that are traded on
more developed markets.
Depository Receipts
ADRs are receipts typically issued in the U.S. by a bank or trust company
evidencing ownership of an underlying foreign security. The International Equity
Fund may invest in ADRs which are structured by a U.S. bank without the
sponsorship of the underlying foreign issuer. In addition to the risks of
foreign investment applicable to the underlying securities, such unsponsored
ADRs may also be subject to the risks that the foreign issuer may not be
obligated to cooperate with the U.S. bank, may not provide additional financial
and other information to the bank or the investor, or that such information in
the U.S. market may not be current. Please refer to the Statement of Additional
Information for more information on ADRs.
Temporary Defensive Positions
When the Advisor believes that investments should be deployed in a temporary
defensive posture because of economic or market conditions, each of the Funds
may invest up to 100% of its assets in U.S. Government securities (such as
bills, notes, or bonds of the U.S. Government and its agencies) or other forms
of indebtedness such as bonds, certificates of deposits or repurchase agreements
(for the risks involved in repurchase agreements see the Statement of Additional
Information). For temporary defensive or emergency purposes, however, the Bond
Fund may invest without limit in investment grade U.S. debt securities,
including short-term money market securities. For temporary defensive purposes,
each of the International Equity Fund, E. European Equity Fund and Bond Fund may
hold cash or debt obligations denominated in U.S. dollars or foreign currencies.
These debt obligations include U.S. and foreign government securities and
investment grade corporate debt securities, or bank deposits of major
international institutions. When a Fund is in a temporary defensive position, it
is not pursuing its stated investment policies. The Advisor decides when it is
appropriate to be in a defensive position. It is impossible to predict for how
long such alternative strategies will be utilized.
MANAGEMENT ORGANIZATION AND CAPITAL STRUCTURE
Investment Advisor - Vontobel USA Inc., 450 Park Avenue, New York, N.Y. 10022
(the "Advisor"), manages the investments of each Fund pursuant to separate
Investment Advisory Agreements (each, an "Advisory Agreement"). The Advisor is a
wholly owned and controlled subsidiary of Vontobel Holding Ltd., a Swiss bank
holding company, having its registered offices in Zurich, Switzerland. As of
December 31, 1998, the Advisor manages in excess of $1.9 billion. The Advisor
also acts as the advisor to three series of a Luxembourg fund organized by an
affiliate of the Advisor. That fund does not accept investments from the U.S.
The Advisor has provided investment advisory services to mutual fund clients
since 1990.
Pursuant to the Advisory Agreements, the Advisor provides the Funds with
investment management services and with office space. The Advisor pays the
office and clerical expenses that are associated with investment research,
statistical analysis, and the supervision of the Fund's portfolios. The Advisor
also pays the salaries (and other forms of compensation) of the Company's
directors and officers or employees of the Company who are also officers,
Directors or employees of the Advisor. Each Fund is responsible for all other
expenses that are not specifically assumed by the Advisor. Such expenses include
(but are not limited to) brokerage fees and commissions, legal fees, auditing
fees, bookkeeping and record keeping fees, custodian and transfer agency fees
and registration fees.
As compensation for its service as investment advisor for each of the Funds, the
Advisor receives a fee. That fee is payable monthly an annualized rate that is
equal to a percentage of the Fund's average daily net assets. The percentages
are set forth below. These fees are higher than those charged to most other
investment companies, but are comparable to fees paid by investment companies
with investment objectives and policies similar to the Funds' investment
objectives and policies.
For the fiscal year ended December 31, 1998, the Advisor earned $1,903,694 for
the Value Fund, $1,505,510 for the International Equity Fund, $35,051 for the
Emerging Markets Fund, $1,003,342, for the E. European Equity Fund, $80,161 for
the Bond Fund and $154,111 for the E. European Debt Fund. The Advisor waived
fees of $22,500 for the Value Fund, $35,051 for the Emerging Market Fund,
$80,161 for the Bond Fund and $50,475 for the E. European Debt Fund.
E. Bond E.
Value InternatEmerging European Fund European
Fund Equity Markets Equity Debt
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Amount of Assets Managed
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$0-$100 million %1.00 1.00 1.25 1.25 1.00 1.25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
More than $100 million to 0.75 0.75 1.25 1.25 1.00 1.25
$500 million
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
More than $500 million 0.75 0.75 1.00 1.00 1.00 1.00
Mr. Edwin Walczak is a Senior Vice President of the Advisor. Mr. Walczak
joined the Advisor in 1988 and has been the President and portfolio manager of
the Value Fund since its inception in March 1990. Mr. Mark Robertson, who is a
Vice President of the Advisor, is the associate portfolio manager of the Value
Fund. He joined the Advisor in September 1991.
Mr. Fabrizio Pierallini, who is a Senior Vice President of the Advisor, has been
the President and portfolio manager of the International Equity Fund since May
1994 and the Emerging Markets Fund since its inception on August 18, 1997. From
September 1988 to April 1991 Mr. Pierallini worked with Swiss Bank Corporation
(now UBS), as a Vice President/Portfolio Manager in its Zurich office and from
May 1991 to April 1994 as an Associate Director/Portfolio Manager in its New
York office. Mr. Rajiv Jain joined the Advisor in November 1994. He is a Vice
President of the Advisor and the associate portfolio manager of the
International Equity and Emerging Markets Funds. From 1993 to 1994 Mr. Jain
worked as an analyst with Swiss Bank Corporation, New York.
Mr. Luca Parmeggiani, who is a Vice President of the Advisor, has been the
portfolio manager of the E. European Equity Fund since October 1, 1997. Mr.
Parmeggiani is a First Vice President of Vontobel Asset Management, Switzerland,
which he joined in September 1997 as head of Eastern European equity research
and management. He was formerly a Vice President of Lombard Odier & Cie, Geneva,
which he joined as a quantitative analyst in 1992 and where he was the portfolio
manager of its closed-end Polish Investment Fund and its Luxembourg-based
Eastern Europe Fund. He is an EFFAS certified financial analyst (European
Federation of Financial Analysts and Statisticians).
Dr. Monica Mastroberardino is a Vice President of the Advisor, and was appointed
the portfolio manager of the International Bond Fund in February 1999. She is
also the Associate Fund Manager of the E. European Debt Fund. Dr.
Mastroberardino has been a macroeconomic analyst with Vontobel Asset Management,
Zurich, since February 1998 and is the Associate Fund Manger of its
Luxembourg-based Eastern European Debt Fund. From February 1995 to January 1998
she worked as a macroeconomic and financial analyst for Credit Suisse, Zurich.
Mr. Volker Wehrle is a Vice President of the Advisor. He has been the President
and portfolio manager of the E. European Debt Fund since its inception on August
18, 1997. Mr. Wehrle is also a Vice President and the head of fixed income
management of Vontobel Asset Management, Zurich, which he joined in October
1994. From January 1989 to September 1994 he managed fixed income investments
for the Group Treasury Department of Sandoz AG in Basel, Switzerland.
SHAREHOLDER INFORMATION
Each Fund's share price, called its NAV, is determined as of the close of
trading on the New York Stock Exchange ("NYSE") (currently 4:00 p.m., Eastern
Time) on each business day ("Valuation Time") that the NYSE is open; however,
the Company's management may compute the NAV more frequently in order to protect
shareholders' interests. As of the date of this prospectus, the Fund is informed
that the NYSE will be closed on the following holidays: New Year's Day, Martin
Luther King Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. NAV per share is computed by
adding the total value of the investments and other assets, subtracting any
liabilities and then dividing by the total number of shares outstanding.
The Fund's securities are generally valued at current market prices. Investments
in securities traded on the national securities exchanges or included in the
NASDAQ National Market System are valued at the last reported sale price. Other
securities traded in the over-the-counter market and listed securities for which
no sales are reported on that date are valued at the last reported bid price.
Short-term debt securities (less than 60 days to maturity) are valued at their
fair market value using amortized cost pricing procedures. Other assets for
which market prices are not readily available are valued at their fair value as
determined in good faith under procedures set by the Board of Directors.
Depository Receipts (i.e., ADRs, EDRs and GDRs) will be valued at the closing
price of the instrument last determined prior to the Valuation Time unless the
Company is aware of a material change in value. Securities for which such a
value cannot be readily determined on any day will be valued at the closing
price of the underlying security adjusted for the exchange rate.
Foreign securities may trade on weekends or other days when the Fund does not
price its shares. While the NAV may change on these days, you will not be able
to purchase or redeem Fund shares on these days.
PURCHASING SHARES
You may purchase shares of the Fund directly from Vontobel Fund Distributors
(the "Distributor") or through brokers or dealers who are members of the
National Association of Securities Dealers, Inc. When you acquire or redeem
shares through a securities broker or dealer, you may be charged a transaction
fee. The offering price per share is equal to the NAV next determined after the
Fund receives your purchase order.
The minimum initial investment for the Value Fund, Emerging Markets Fund, E.
European Equity Fund, Bond Fund and E. European Debt Fund is $1,000. The minimum
initial investment in the International Equity Fund is $200,000. Subsequent
investments for all Funds must be $50 or more. The Company may waive the minimum
initial investment requirement for purchases made by Directors, officers and
employees of the Company. The Company may also waive the minimum investment
requirement for purchases by its affiliated entities and certain related
advisory accounts and retirement accounts (such as IRAs).
Purchase by Mail - To purchase shares of a Fund by mail complete and sign the
attached application form (the "Account Application") and mail it together with
your check to Fund Services, Inc., (the "Transfer Agent"), at P.O. Box 26305,
Richmond, VA 23260. All checks should be made payable to the applicable Fund.
For subsequent purchases, include the tear-off stub from a prior purchase
confirmation with your check. Otherwise, identify the name(s) of the registered
owner(s) and social security number(s).
Investing by Wire - You may purchase shares by requesting your bank to wire
funds directly to the Transfer Agent. To invest by wire please call the Transfer
Agent for instructions, then notify the Distributor by calling 800-776-5455.
Your bank may charge you a small fee for this service. Once you have arranged to
purchase shares by wire, please complete and mail an Account Application
promptly to the Transfer Agent. This application is required to complete the
Funds' records. You will not have access to your shares until the Funds' records
are complete. Once your account is opened, you may make additional investments
using the wire procedure described above. Be sure to include your name and
account number in the wire instructions that you provide your bank.
The Transfer Agent will automatically establish and maintain an open account for
the Funds' shareholders. The open account reflects a shareholder's shares. This
service facilitates the purchase, redemption or transfer of shares, eliminates
the need to issue or safeguard certificates and reduces time delays in executing
transactions. Stock certificates are not required and are not normally issued.
Stock certificates for full shares will be issued by the Transfer Agent upon
written request but only after payment for the shares is collected by the
Transfer Agent.
REDEEMING SHARES
You may redeem shares of the Funds at any time and in any amount by mail or
telephone. For your protection, the Transfer Agent will not redeem your shares
until it has received all information and documents necessary for your request
to be considered in "proper order." (See "Signature Guarantees.") The Transfer
Agent will promptly notify you if your redemption request is not in proper
order.
The Company's procedure is to redeem shares at the NAV determined after the
Transfer Agent receives the redemption request in proper order. The Company
deducts a 2% redemption fee from proceeds of Emerging Markets Fund shares, E.
European Equity Fund shares or E. European Debt Fund shares redeemed less than
six months after purchase (including shares to be exchanged). The applicable
Fund retains this amount to offset the Fund's costs of purchasing or selling
securities.
After the Transfer Agent receive your request in proper order, the Company will
mail redemption proceeds to your registered address within seven days. The
Company will make payments payable to the registered owner(s) unless you specify
otherwise in your redemption request.
Please note that (1) the Transfer Agent cannot accept redemption requests which
specify a particular date for redemption, or which specify any special
conditions; and (2) if the shares you are redeeming were purchased less than 15
days prior to the receipt of your redemption request, the Transfer Agent must
determine the check you used to pay for the shares you are redeeming has cleared
before it disburses the redemption proceeds. If you anticipate that you may make
a redemption within 15 days after you purchase shares, you should make your
purchase by wire, or by a certified, treasurer's or cashier's check.
The Company may suspend the right to redeem shares for any period during which
the NYSE is closed or the Securities and Exchange Commission determines that
there is an emergency. In such circumstances you may withdraw your redemption
request or permit your request to be held for processing at the net asset value
per share next computed after the suspension is terminated.
Redemption by Mail - To redeem shares by mail, send a written request for
redemption, signed by the registered owner(s) exactly as the account is
registered. Certain written requests to redeem shares may require signature
guarantees. For example, signature guarantees may be required if you sell a
large number of shares or if you ask that the proceeds be sent to a different
address or person. Signature guarantees are used to help protect you and the
Funds. You can obtain a signature guarantee from most banks or securities
dealers, but not from a Notary Public. Please call the Transfer Agent to learn
if a signature guarantee is needed or to make sure that it is completed
appropriately.
There is no charge to shareholders for redemptions by mail.
Redemption by Telephone - You may redeem your shares by telephone provided that
you requested this service on your initial Account Application. If you request
this service at a later date, you must send a written request along with a
signature guarantee to the Transfer Agent. Once your telephone authorization is
in effect, you may redeem shares by calling the Transfer Agent at (800)
628-4077. There is no charge for establishing this service, but the Transfer
Agent will charge your account a $10.00 service fee for each telephone
redemption. The Transfer Agent may change the amount of this service charge at
any time without prior notice.
You cannot redeem shares by telephone if you hold a stock certificate
representing the shares you are redeeming or if you paid for the shares with a
personal, corporate, or government check and your payment has been on the books
of the Company for less than 15 days.
If it should become difficult to reach the Transfer Agent by telephone during
periods when market or economic conditions lead to an unusually large volume of
telephone requests, a shareholder may send a redemption request to the Transfer
Agent by overnight mail.
The Company employs reasonable procedures designed to confirm the authenticity
of your instructions communicated by telephone and, if it does not, it may be
liable for any losses due to unauthorized or fraudulent transactions.
Redemption by Wire - If you request that your redemption proceeds be wired to
you, please call your bank for instructions prior to writing or calling the
Transfer Agent. Be sure to include your name, Fund account number, your account
number at your bank and wire information from your bank in your request to
redeem by wire.
Signature Guarantees - To help to protect you and the Company from fraud,
signature guarantees are required for: (1) all redemptions ordered by mail if
you require that the check be payable to another person or that the check be
mailed to an address other than the one indicated on the account registration;
(2) all requests to transfer the registration of shares to another owner; and
(3) all authorizations to establish or change telephone redemption service,
other than through your initial Account Application.
In the case of redemption by mail, signature guarantees must appear on either:
(a) the written request for redemption; or (b) a separate instrument of
assignment (usually referred to as a "stock power") specifying the total number
of shares being redeemed. The Company may waive these requirements in certain
instances.
The following institutions are acceptable signature guarantors: (a) participants
in good standing of the Securities Transfer Agents Medallion Program ("STAMP");
(b) commercial banks which are members of the Federal Deposit Insurance
Corporation ("FDIC"); (c) trust companies; (d) firms which are members of a
domestic stock exchange; (e) eligible guarantor institutions qualifying under
Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended, that are
authorized by charter to provide signature guarantees (e.g., credit unions,
securities dealers and brokers, clearing agencies and national securities
exchanges); and (f) foreign branches of any of the above. In addition, the
Company will guarantee your signature if you personally visit its offices at
1500 Forest Avenue, Suite 223, Richmond, VA 23229. The Transfer Agent cannot
honor guarantees from notaries public, savings and loan associations, or savings
banks.
Small Accounts - Due to the relatively higher cost of maintaining small
accounts, the Company may deduct $10 per year from your account or may redeem
the shares in your account, if it has a value of less than $1,000. The Company
will advise you in writing sixty (60) days prior to deducting the annual fee or
closing your account, during which time you may purchase additional shares in
any amount necessary to bring the account back to $1,000. The Company will not
close your account if it falls below $1,000 solely because of a market decline.
OTHER SHAREHOLDER SERVICES
Individual Retirement Accounts (IRA's) - IRA accounts are available. Please call
(800)-527-9500 for information and to request forms.
Invest-A-Matic Account - Existing shareholders, who wish to make regular monthly
investments in amounts of $50 or more, may do so through the Invest-A-Matic
Account.
Exchange Privileges Account - You may exchange all or a portion of your shares
in each Fund for the shares of certain other Funds having different investment
objectives, provided that the share of the Fund you are exchanging into are
registered for sale in your state of residence. Your account may be charged $10
for a telephone exchange. An exchange is treated as a redemption and purchase
and may result in realization of a gain or loss on the transaction.
How To Transfer Shares
If you wish to transfer shares to another owner, send a written request to the
Transfer Agent. Your request should include (1) the name of the Fund and
existing account registration; (2) signature(s) of the registered owner(s); (3)
the new account registration, address, Social Security Number or taxpayer
identification number and how dividends and capital gains are to be distributed;
(4) any stock certificates which have been issued for the shares being
transferred; (5) signature guarantees (See "Signature Guarantees"); and (6) any
additional documents which are required for transfer by corporations,
administrators, executors, trustees, guardians, etc. If you have any questions
about transferring shares, call the Transfer Agent at (800) 628-4077.
Account Statements And Shareholder Reports
Each time you purchase, redeem or transfer shares of a Fund, you will receive a
written confirmation. You will also receive quarterly statements, year-end
statement and a statement of your account if any dividends or capital gains have
been distributed and an annual and a semi-annual report.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Dividends from net investment income, if any, are declared annually by each
Fund. Each of the Funds intends to distribute annually any net capital gains.
Dividends will automatically be reinvested in additional shares, unless you
elect to have the distributions paid to you in cash. If you do not wish to have
your dividends reinvested in additional shares, you should send a written
request to that effect to the Transfer Agent. There are no sales charges or
transaction fees for reinvested dividends and all shares will be purchased at
NAV. If the investment in shares is made with an IRA, all dividends and capital
gain distributions must be reinvested.
Unless you are investing through a tax deferred retirement account, such as an
IRA, it is not to your advantage to buy shares of a Fund shortly before the next
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." To avoid buying a dividend, check each Fund's distribution
schedule before you invest. Shareholders will be subject to tax on all dividends
and distributions whether paid to them or reinvested in shares of the Fund.
DISTRIBUTIONS AND TAXES
Tax Considerations
In general, Fund distributions are taxable to you as either ordinary income or
capital gains. This is true whether you reinvest your distributions in
additional shares of a Fund or receive them in cash. Any capital gains a Fund
distributes are taxable to you as long-term capital gains no matter how long you
have owned your shares.
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your Fund shares, you may have a capital gain or loss. For tax
purposes, an exchange of your Fund shares for shares of a different series of
the Company is the same as a sale. The individual tax rate on any gain from the
sale or exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your Fund shares will
generally be subject to state and local income tax. Any foreign taxes paid by a
Fund that invests more than 50% of its assets in foreign securities may be
passed through to you as a foreign tax credit. Non-U.S. investors may be subject
to U.S. withholding and estate tax. You should consult with your tax adviser
about the federal, state, local or foreign tax consequences of your investment
in a Fund.
By law, a Fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs a Fund to do so.
DISTRIBUTION ARRANGEMENTS
The Funds are offered through financial supermarkets, investment advisers and
consultants, financials planners, brokers, dealers and other investment
professionals, and directly through the Distributor. The shares are offered and
sold without any sales charges imposed by the Funds or the Distributor. However,
investment professionals who offer shares may request fees from their individual
clients. If you invest through a third party, the policies and fees may be
different than those described in the Prospectus. for example, third parties may
charge transaction fees or set different minimum investment amounts.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the table represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). The Funds' financial highlights for the
period presented have been audited by Tait, Weller and Baker, independent
auditors, whose unqualified report thereon is included in the SAI. The Funds'
financial statements, notes to financial statements and report of independent
accountants are included in the SAI as well as in the Funds' Annual Report to
Shareholders (the "Annual Report"). Additional performance information for the
Funds is included in the Annual Report. The Annual Report and the SAI are
available at no cost from the Fund at the address and telephone number noted on
the back card page of this Prospectus. The following information should be read
in conjunction with the financial statements and notes thereto.
Vontobel U.S. Value Fund
For a Share Outstanding Throughout Each Period
Years ended
December 31,
-----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Per Share Operating Performance
Net asset value, $16.51 $13.78 $13.25 $10.26 $12.64
beginning of year
------- ------- ------ ------ ------
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 istributions
Distributions from net (0.16) (0.10) (0.19) (0.04) (0.23)
investment income
Distributions from realized (1.90) (1.88) (2.10) (1.11) (2.16)
gain on investments
------- ------- ------ ------ ------
------- ------- ------ ------ ------
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 ncome 0.93% 0.72% 0.63% 0.38% 0.76%
Portfolio turnover rate 122.71% 89.76% 108.36% 95.93% 98.90%
(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.
Vontobel International Equity Fund
For a Share Outstanding Throughout Each Period
Years ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
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 incom (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 opertions 2.99 1.71 2.88 1.77 (0.91)
------ ------ ------ ------ ------
Less distributions-
Distributions from net 0.00 0.00 (0.03) (0.17) (0.08)
investment income
Distributions from realized (0.96) (1.78) (1.76) (0.70) 0.00
gains
------ ------ ------ ------ ------
------ ------ ------ ------ ------
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 $151,71 $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%
(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.
Vontobel Eastern European Equity Fund
For a Share Outstanding Throughout Each Period
Years ended
December 31, February 15,* to
1998 1997 December 31, 1996
----- ----- -----------------
Per Share Operating Peformance
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-
Distributions from 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.
Vontobel International Bond Fund
For a Share Outstanding Throughout Each Period
March
1* to
December
Years ended December 31, 31,
1998 1997 1996 1995 1994
------- ----- ----- ----- -----
Per Share Operating
Performance
Net asset value,
Beginning of period $9.89 $10.93 $10.60 $9.48 $10.00
------- ----- ----- ----- -----
Income from investment
Operations-
Net investment income 0.62 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 investments (0.70) (0.38) (0.06) -- --
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 $10.66 $9.89 $10.93 $10.60 $9.48
period
======= ===== ===== ===== =====
Total Return 14.85% (6.04)% 7.51% 17.60% 1.98%
======= ===== ===== ===== =====
Ratios/Supplemental Data
Net assets, end of $6,983 $10,793 $26,879 $16,253 $10,235
period (000's)
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
(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.
Vontobel Emerging Markets Equity Fund
For a Share Outstanding Throughout Each Period
Year ended
December 31, September 1, * to
1998 December 31, 1997
----- -----------------
Per Share Operating
Performance
Net asset value,
beginning of $9.42 $10.00
period ----- ------
Income from
investment operations-
Net investment 0.00 (0.04)
loss
Net realized and
unrealized loss
on investments (2.11) (0.54)
----- --------
Total from investment
operations (2.11) (0.58)
----- --------
Net asset value, end $7.31 $9.42
of period
===== ========
Total Return (22.40)% (5.80)%
Ratios/Supplemental Data
Net assets, end of $1,611 $3,601
period (000's)
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 130.59% 16.36%
rate
(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
Vontobel Eastern European Debt Fund
For a Share Outstanding Throughout Each Period
Year ended September 1, to
December 31, December, 31
1998 1997
------ -------
Per Share Operating Performance
Net asset value, beginning of $9.70 $10.00
period
------ -------
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 operation 2.36 (0.06)
------ -------
Less distributions
Distributions from net (1.64) (0.24)
investment income
Distributions from (0.21) 0.00
capital gains
------ -------
Total Distributions (1.85) (0.24)
====== =======
Net asset value, end of $10.21 $9.70
period
====== =======
Total Return 24.54% (0.55)%
Ratios/Supplemental Data
Net assets, end of $7,882 $14,438
period (000's)
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% **
Portfolio turnover rate 21.36% 0.00%
*Commencement of operations
**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.
<PAGE>
For investors who want more information about the Funds, the following documents
are available, free of charge, upon request:
Annual and Semi-Annual Reports:
Additional information about the Funds' investments is available in the Funds'
annual and semi-annual reports to shareholders. In each Fund's annual report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information ("SAI")
The SAI provides more detailed information about the Funds and is incorporated
into this prospectus by reference.
You can receive free copies of the reports and the SAI, request other
information and discuss your questions about the Funds by the contacting the
Funds directly at:
VONTOBEL FUNDS, INC.
1500 Forest Avenue, Suite 223
Richmond, Virginia 23229
1-800-527-9500
You can review the Funds' reports and SAI at the Public Reference Room of the
SEC. You can receive text-only copies:
For a fee, by writing the Public Reference Section of the SEC,
Washington, D.C. 20549-6009 or call 1-800-SEC-0330
Free from the SEC's Internet Website at http://www.sec.gov.
(Investment Company Act File No. 811-3551)
VONTOBEL FUNDS, INC.
(THE "COMPANY")
1500 FOREST AVENUE, SUITE 223, RICHMOND, VA 23229
1-800-527-9525
STATEMENT OF ADDITIONAL INFORMATION
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
VONTOBEL EMERGING MARKETS EQUITY FUND
VONTOBEL EASTERN EUROPEAN EQUITY FUND
VONTOBEL INTERNATIONAL BOND FUND
VONTOBEL EASTERN EUROPEAN DEBT FUND
This Statement of Additional Information ("SAI") is not a prospectus. It should
be read in conjunction with the current Prospectus of the Vontobel U.S. Value
Fund, Vontobel International Equity Fund (formerly named Vontobel EuroPacific
Fund), Vontobel Emerging Markets Equity Fund, Vontobel Eastern European Equity
Fund, Vontobel International Bond Fund and Vontobel Eastern European Debt Fund
(collectively, the "Funds"), dated May 1, 1999. You may obtain the Prospectus of
the Funds, free of charge, by writing to Vontobel Funds, Inc. at 1500 Forest
Avenue, Suite 223, Richmond, VA 23229 or by calling 1-800-527-9525.
The Fund's audited financial statements and notes thereto for the year ended
December 31, 1998 and the unqualified report of Tait, Weller & Baker, on such
financial statements (the "Report") are incorporated by reference in this SAI
and are included in the Fund's 1998 annual report to shareholders (the "Annual
Report"). A copy of the Annual Report accompanies this SAI and an investor may
obtain a copy of the Annual Report by writing to the Fund or calling
(800)-527-9500.
The date of this SAI is May 1, 1999.
<PAGE>
TABLE OF CONTENTS
PAGE
General Information.................................................. 3
Investment Objectives................................................ 3
Strategies and Risks................................................. 3
Investment Programs.................................................. 3
Convertible Securities........................................ 3
Warrants...................................................... 3
Illiquid Securities........................................... 3
Debt Securities............................................... 4
International Bonds........................................... 4
Strategic Transactions........................................ 4
Options....................................................... 5
Futures....................................................... 8
Currency Transactions......................................... 9
Combined Transactions......................................... 10
Eurocurrency Instruments...................................... 10
Use of Segregated and Other Special Accounts.................. 11
Depository Receipts........................................... 12
Temporary Defensive Positions................................. 12
U.S. Government Securities.................................... 12
Repurchase Agreements......................................... 12
Reverse Repurchase Agreements................................ 12
When-Issued Securities........................................ 13
Other Investments.................................................... 13
Investment Restrictions.............................................. 13
Management of the Company............................................ 15
Principal Securities Holders......................................... 18
Investment Advisor and Advisory Agreement............................ 19
Management-Related Services.......................................... 20
Portfolio Transactions............................................... 22
Portfolio Turnover................................................... 23
Capital Stock and Dividends.......................................... 23
Dividends and Distributions.......................................... 23
Additional Information about Purchases and Sales..................... 24
Eligible Benefit Plans............................................... 24
Tax Status........................................................... 26
Investment Performance............................................... 28
Financial Information................................................ 30
<PAGE>
GENERAL INFORMATION
Vontobel Funds, Inc. (the "Company") was organized as a Maryland corporation on
February 28, 1997. The Company is an open-end, management investment company
(commonly known as a "mutual fund"), registered under the Investment Company Act
of 1940, as amended (the "1940 Act"). This SAI relates to the Vontobel U.S.
Value Fund ("Value Fund"), Vontobel International Equity Fund ("International
Equity Fund"), Vontobel Emerging Markets Equity Fund ("Emerging Markets Fund"),
Vontobel Eastern European Equity Fund ("E. European Equity Fund"), Vontobel
International Bond Fund (the "Bond Fund") and Vontobel Eastern European Debt
Fund ("E. European Debt Fund") (individually, a "Fund," collectively, the
"Funds"). Each Fund is a separate investment portfolio or series of the Company
(see "Capital Stock" below). Each of the International Equity, Emerging Markets
and E. European Equity Funds is a "diversified" series," as that term is defined
in the 1940 Act. The Value, Bond and E. European Debt Funds are "non-
diversified" series.
INVESTMENT OBJECTIVES
The Value Fund's investment objective is to achieve long-term capital return.
The investment objective of each of the International Equity and E. European
Equity Funds is to achieve capital appreciation and the investment objective of
the Emerging Markets Fund is to achieve long-term capital appreciation. The
investment objective of each of the Bond and E. European Debt Funds is to
maximize total return from capital growth and income.
All investments entail some market and other risks. For instance, there is no
assurance that a Fund will achieve its investment objective. You should not rely
on an investment in a Fund as a complete investment program.
STRATEGIES AND RISKS
The following discussion of investment techniques and instruments supplements,
and should be read in conjunction with, the investment information in the Funds'
Prospectus. In seeking to meet its investment objective, each Fund may invest in
any type of security whose characteristics are consistent with its investment
program described below.
INVESTMENT PROGRAMS
Convertible Securities: Each of the Value, International Equity, Emerging
Markets and E. European Equity Funds may invest in convertible securities.
Traditional convertible securities include corporate bonds, notes and preferred
stocks that may be converted into or exchanged for common stock, and other
securities that also provide an opportunity for equity participation. These
securities are convertible either at a stated price or a stated rate (that is,
for a specific number of shares of common stock or other security). As with
other fixed income securities, the price of a convertible security generally
varies inversely with interest rates. While providing a fixed income stream, a
convertible security also affords the investor an opportunity, through its
conversion feature, to participate in the capital appreciation of the common
stock into which it is convertible. As the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the price of a convertible security tends to rise as a reflection of
higher yield or capital appreciation. In such situations, the Funds have to pay
more for a convertible security than the value of the underlying common stock.
Warrants: Each of the Value, International Equity, Emerging Markets and E.
European Equity Funds may invest in warrants. Warrants are options to purchase
equity securities at a specific price for a specific period of time. They do not
represent ownership of the securities, but only the right to buy them. Hence,
warrants have no voting rights, pay no dividends and have no rights with respect
to the assets of the corporation issuing them. The value of warrants is derived
solely from capital appreciation of the underlying equity securities. Warrants
differ from call options in that the underlying corporation issues warrants,
whereas call options may be written by anyone.
Illiquid Securities: Each Fund may invest up to 15% of its net assets in
illiquid securities. For this purpose, the term "illiquid securities" means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities. Illiquid securities include generally, among other things, certain
written over-the-counter options, securities or other liquid assets as cover for
such options, repurchase agreements with maturities in excess of seven days,
certain loan participation interests and other securities whose disposition is
restricted under the federal securities laws.
Debt Securities: Each of the Bond and E. European Debt Funds invest primarily in
debt securities. The Bond Fund will invest in securities rated A or higher by
Moody's Investors Service, Inc. ("Moody's"), or Standard & Poor's Rating Group
("S&P) at the time of purchase, or unrated securities which the Advisor believes
are of comparable quality. The Bond Fund may also invest in securities rated (at
the time of purchase): Baa or higher by Moody's; BBB or higher by S&P; or
foreign securities not subject to standard credit ratings, which the Advisor
believes are of comparable quality. Securities rated as BBB or Baa are generally
regarded as having adequate capacity to pay interest and repay principal. Under
normal circumstances, the Value Fund will have at least 65% of its assets
invested in common stocks or securities convertible into common stocks. The Fund
may also acquire fixed income investments where these fixed income securities
are convertible into equity securities. The fixed income securities in which the
Value Fund may invest will be rated at the time of purchase Baa or higher by
Moody's, or BBB or higher by S&P, or foreign securities not subject to standard
credit ratings, which the Adviser believes are of comparable quality.]
The E. European Debt Fund may purchase debt securities that are rated Baa3 or
higher by Moody's or BBB- or higher by S&P, or unrated securities which the
Advisor believes are of comparable quality. The Fund reserves the right,
however, to invest its assets in lower rated securities (including unrated
securities which the Advisor believes to be of such lower quality). The Fund
will invest no more than 5% of its assets in securities rated below BBB- by S&P
or Baa3 by Moody's or which are unrated but are of comparable quality as
determined by the Advisor. Bonds rated Baa3 or BBB- may have speculative
elements as well as investment-grade characteristics. The Fund may invest in
debt securities which are rated as low as C by Moody's or D by S&P. Such
securities may be in default with respect to payment of principal or interest.
International Bonds: International bonds are bonds issued in countries other
than the United States. The Bond Fund's investments in international bonds may
include debt securities issued or guaranteed by a foreign national government,
its agencies, instrumentalities or political subdivisions, debt securities
issued or guaranteed by supranational organizations, foreign corporate debt
securities, bank or holding company debt securities and other debt securities
including those convertible into common stock. The investments of the E.
European Debt Fund may include debt securities issued or guaranteed by an
Eastern European national government, its agencies, instrumentalities or
political subdivisions, corporate debt securities issued by borrowers in Eastern
European countries and Eastern European or bank holding company debt securities.
Strategic Transactions
Each of the Funds may utilize a variety of investment strategies to hedge
various market risks (such as interest rates, currency exchange rates, and broad
specific equity or fixed-income market movements), to manage the effective
maturity or duration of fixed-income securities, or to enhance potential gain
(strategies described in more detail below). Such strategies are generally
accepted as modern portfolio management and are regularly utilized by many
mutual funds and institutional investors. Techniques and instruments may change
over time as new instruments and strategies develop and regulatory changes
occur.
In the course of pursuing these investment strategies, each Fund may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions").
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as they are in the United States, may not involve a
clearing mechanism and related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities,
currencies and other instruments. The value of such positions could also be
adversely affected by: (i) other complex foreign political, legal and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
Options
Each of the Funds may purchase and sell options as described in the Prospectus
and herein.
Put and Call Options
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. A Fund may
purchase a put option on a security to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in market value by giving the Fund the right to sell such instrument at
the option exercise price. Such protection is, of course, only provided during
the life of the put option when the Fund is able to sell the underlying security
at the put exercise price regardless of any decline in the underlying security's
market price. By using put options in this manner, the Fund will reduce any
profit it might otherwise have realized in its underlying security by the
premium paid for the put option and by transaction costs.
A call option, upon payment of a premium, gives the purchaser of the option the
right to buy, and the seller the obligation to sell, the underlying instrument
at the exercise price. The Fund's purchase of a call option on a security,
financial future, index, currency or other instrument might be intended to
protect the Fund against an increase in the price of the underlying instrument.
When writing a covered call option, the Fund, in return for the premium, gives
up the opportunity to profit from a market increase in the underlying security
above the exercise price, but conversely retains the risk of loss should the
price of the security decline. If a call option which the Fund has written
expires, it will realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying security during
the option period. If the call option is exercised, the Fund will realize a gain
or loss from the sale of the underlying security.
The premium received is the market value of an option. The premium the Fund will
receive from writing a call option, or, which it will pay when purchasing a put
option, will reflect, among other things, the current market price of the
underlying security, the relationship of the exercise price to such market
price, the historical price volatility of the underlying security, the length of
the option period, the general supply and demand for credit conditions, and the
general interest rate environment. The premium received by the Fund for writing
covered call options will be recorded as a liability in its statement of assets
and liabilities. This liability will be adjusted daily to the option's current
market value, which will be the latest sale price at the time at which the
Fund's net asset value per share is computed (close of the New York Stock
Exchange ("NYSE")), or, in the absence of such sale, the latest asked price. The
liability will be extinguished upon expiration of the option, the purchase of an
identical option in a closing transaction, or delivery of the underlying
security upon the exercise of the option.
The premium paid by the Fund when purchasing a put option will be recorded as an
asset in its statement of assets and liabilities. This asset will be adjusted
daily to the option's current market value, which will be the latest sale price
at the time at which the Fund's net asset value per share ("NAV") is computed
(close of the NYSE), or, in the absence of such sale, the latest bid price. The
asset will be extinguished upon expiration of the option, the selling (writing)
of an identical option in a closing transaction, or the delivery of the
underlying security upon the exercise of the option.
The purchase of a put option will constitute a short sale for federal tax
purposes. The purchase of a put at a time when the substantially identical
security held long has not exceeded the long term capital gain holding period
could have adverse tax consequences. The holding period of the long position
will be cut off so that even if the security held long is delivered to close the
put, short term gain will be recognized. If substantially identical securities
are purchased to close the put, the holding period of the securities purchased
will not begin until the closing date. The holding period of the substantially
identical securities not delivered to close the short sale will commence on the
closing of the short sale.
The Fund will purchase a call option only to close out a covered call option it
has written. It will write a put option only to close out a put option it has
purchased. Such closing transactions will be effected in order to realize a
profit on an outstanding call or put option, to prevent an underlying security
from being called or put, or, to permit the sale of the underlying security.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option, or purchase another put option, on the underlying security
with either a different exercise price or expiration date or both. If the Fund
desires to sell a particular security from its portfolio on which it has written
a call option, or purchased a put option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security. There is,
of course, no assurance that the Fund will be able to effect such closing
transactions at a favorable price. If it cannot enter into such a transaction,
it may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security. This could
result in higher transaction costs, including brokerage commissions. The Fund
will pay brokerage commissions in connection with the writing or purchase of
options to close out previously written options. Such brokerage commissions are
normally higher than those applicable to purchases and sales of portfolio
securities.
Options written by the Fund will normally have expiration dates between three
and nine months from the date written. The exercise price of the options may be
below, equal to, or above the current market values of the underlying securities
at the time the options are written. From time to time, the Fund may purchase an
underlying security for delivery in accordance with an exercise notice of a call
option assigned to it, rather than delivering such security from its portfolio.
In such cases, additional brokerage commissions will be incurred.
The Fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from the
writing of the option; however, any loss so incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
simultaneous or subsequent sale of a different call or put option. Also, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
An American style put or call option may be exercised at any time during the
option period while a European style put or call option may be exercised only
upon expiration or during a fixed period prior thereto. The Fund is authorized
to purchase and sell exchange-listed options and over-the-counter options ("OTC
options"). Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although cash
settlement may become available in the future. Index options and Eurocurrency
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange-listed put or call option is dependent, in part, upon liquidity of
the option market. Among the possible reasons for the absence of a liquid option
market on an exchange are: (i) insufficient trading interest in certain options;
(ii) restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities including reaching daily price
limits; (iv) interruption of the normal operations of the OCC or an exchange;
(v) inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through a direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days.
Although it is not required to do so, the Fund generally expects to enter into
OTC options that have cash settlement provisions.
Unless the parties provide otherwise, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Advisor must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank of
New York as "primary dealers," or broker dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that OTC options purchased by a Fund and portfolio securities
"covering" the amount of a Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to a fund's limitation on investing no more than 10%
of its assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge against a decrease in the value of the underlying securities or
instruments in its portfolio. The premium may also increase the Fund's income.
The sale of put options can also provide income.
The Funds may purchase and sell call options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, and Eurocurrency instruments (see "Eurocurrency Instruments" below
for a description of such instruments) that are traded in U.S. and foreign
securities exchanges and in the over-the-counter markets, and futures contracts.
Each of the International Equity, European Equity and Bond Funds (collectively,
the International Funds) may purchase and sell call options on currencies. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Funds may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, convertible securities, and Eurocurrency
instruments (whether or not it holds the above securities in its portfolio), and
futures contracts (except each of the Bond and E. European Debt Funds may not
purchase or sell futures contracts on individual corporate debt securities.) The
International Funds may purchase and sell put options on currencies. The Fund
will not sell put options if, as a result, more than 50% of the Fund's assets
would be required to be segregated to cover its potential obligations under such
put options other than those with respect to futures and options thereon. In
selling put options, there is a risk that the Fund may be required to buy the
underlying security at a disadvantageous price above the market price. For tax
purposes, the purchase of a put is treated as a short sale, which may cut off
the holding period for the security. Consequently, the purchase of a put is
treated as generating gain on securities held less than three months or short
term capital gain (instead of long term) as the case may be.
Options on Securities Indices and Other Financial Indices
The Funds may also purchase and sell call and put options on securities indices
and other financial indices. By doing so, the Funds can achieve many of the same
objectives that they would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement. For example, an option on an index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the index upon which the option is based exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option. This amount of cash is equal to the excess of the closing price
of the index over the exercise price of the option, which also may be multiplied
by a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or any other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
Futures
The International Funds may enter into financial futures contracts or purchases
or sell put and call options on such futures as a hedge against anticipated
interest rate or currency market changes and for risk management purposes. The
Bond and E. European Debt Funds, may enter into financial futures contracts or
purchases or sell put and call options on such futures for duration management.
The use of futures for hedging is intended to protect an International Fund from
(i) the risk that the value of its portfolio of investments in a foreign market
may decline before it can liquidate its interest, or (ii) the risk that a
foreign market in which it proposes to invest may have significant increases in
value before it actually invests in that market. In the first instance, the
International Fund will sell a future based upon a broad market index which it
is believed will move in a manner comparable to the overall value of securities
in that market. In the second instance, the International Fund will purchase the
appropriate index as an "anticipatory" hedge until it can otherwise acquire
suitable direct investments in that market. As with the hedging of foreign
currencies, the precise matching of financial futures on foreign indices and the
value of the cash or portfolio securities being hedged may not have a perfect
correlation. The projection of future market movement and the movement of
appropriate indices is difficult, and the successful execution of this
short-term hedging strategy is uncertain.
Regulatory policies governing the use of such hedging techniques require the
International Funds to provide for the deposit of initial margin and the
segregation of suitable assets to meet their obligations under futures
contracts. Futures are generally bought and sold on the commodities exchanges
where they are listed with payment of initial and variation margin as described
below. The sale of a futures contract creates a firm obligation by an
International Fund, as seller, to deliver to the buyer the specific type of
financial instrument called for in the contract at a specific future time for a
specified price (or, with respect to index futures and Eurocurrency instruments,
the net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such position.
The International Funds' use of financial futures and options thereon will in
all cases be consistent with applicable regulatory requirements, particularly
the rules and regulations of the Commodity Futures Trading Commission. The
International Funds will use such techniques only for bona fide hedging, risk
management (including duration management) or other portfolio management
purposes. Typically, maintaining a futures contract or selling an option thereon
requires the International Fund to deposit an amount of cash or other specified
assets (initial margin), which initially is typically 1% to 10% of the face
amount of the contract (but may be higher in some circumstances) with a
financial intermediary as security for its obligations. Additional cash or
assets (variation margin) may be required to be deposited thereafter on a daily
basis as the mark to market value of the contract fluctuates. The purchase of an
option on financial futures involves payment of a premium for the option without
any further obligation on the part of the International Fund. If the
International Fund exercises an option on a futures contract, it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position. Futures contracts and options thereon are
generally settled by entering into an offsetting transaction, but there can be
no assurance that the position can be offset prior to settlement at an advantage
price or that delivery will occur.
An International Fund will not enter into a futures contract or related option
(except for closing transactions) if immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the International Fund's total assets (taken at
current value); however, in the case of an option that is in-the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating the
5% limitation. The segregation requirements with respect to futures contracts
and options thereon are described below.
Currency Transactions
Each of the International Funds may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange-listed currency
futures, exchange-listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract between the
parties, at a specified price. These contracts are traded in the interbank
market and conducted directly between currency traders (usually large,
commercial banks) and their customers. A forward foreign currency contract
generally has no deposit requirement or commissions charges. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies. Currency swaps operate similarly to an interest rate swap
(described below). The International Funds may enter into currency transactions
with Counterparties which have received (or the guarantors of the obligations of
which have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO, or (except for OTC
currency options) are determined to be of equivalent credit quality by the
Advisor.
The International Funds' dealings in forward currency contracts and other
currency transactions such as futures, options on futures, options on currencies
and swaps will be limited to hedging involving either specific transactions
("Transaction Hedging") or portfolio positions ("Position Hedging").
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Furthermore, there is the risk that the
perceived linkage between various currencies may not be present or may not be
present during the particular time an International Fund is engaging in proxy
hedging (see "Proxy Hedging," below). If an International Fund enters into a
currency hedging transaction, it will comply with the asset segregation
requirements described below. Cross currency hedges may not be considered
"directly related" to the International Funds' principal business of investing
in stock or securities (or options and futures thereon), resulting in gains
therefrom not qualifying under the "less than 30% of gross income" test of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to an
International Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges the International Fund has
entered into to be rendered useless, resulting in full currency exposure and
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Furthermore, settlement
of a currency futures contract for the purchase of most currencies must occur at
a bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy. Although forward foreign currency contracts and currency
futures tend to minimize the risk of loss due to a decline in the value of the
hedged currency, they tend to limit any potential gain which might result should
the value of such currency increase.
Transaction Hedging
Transaction Hedging occurs when a fund enters into a currency transaction with
respect to specific assets or liabilities. These specific assets or liabilities
generally arise in connection with the purchase or sale of a fund's portfolio
securities or the receipt of income therefrom. The International Funds may use
transaction hedging to preserve the United States dollar price of a security
when they enter into a contract for the purchase or sale of a security
denominated in a foreign currency. An International Fund will be able to protect
itself against possible losses resulting from changes in the relationship
between the United States dollar and foreign currencies during the period
between the date the security is purchased or sold and the date on which payment
is made or received by entering into a forward contract for the purchase or
sale, for a fixed amount of dollars, of the amount of the foreign currency
involved in the underlying security transactions.
Position Hedging
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The International Funds may use position hedging when the Advisor believes that
the currency of a particular foreign country may suffer a substantial decline
against the United States dollar. The International Funds may enter into a
forward foreign currency contract to sell, for a fixed amount of dollars, the
amount of foreign currency approximating the value of some or all of its
portfolio securities denominated in such foreign currency. The precise matching
of the forward foreign currency contract amount and the value of the portfolio
securities involved may not have a perfect correlation since the future value of
the securities hedged will change as a consequence of market movements between
the date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is difficult, and the
successful execution of this short-term hedging strategy is uncertain.
The International Funds will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging as described below.
Cross Hedging
The International Funds may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the International Funds
have or expect to have portfolio exposure.
Proxy Hedging
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the International Funds may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a fund's portfolio is exposed is difficult to hedge or to hedge against the U.S.
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the fund's portfolio securities
are or are expected to be denominated, and buying U.S. dollars. The amount of
the contract would not exceed the value of the International Fund's securities
denominated in linked currencies. For example, if the Advisor considers that the
Japanese yen is linked to the Euro, the International Funds hold securities
denominated in yen and the Advisor believes that the value of yen will decline
against the U.S. dollar, the Advisor may enter into a contract to sell Euros and
buy U.S. dollars.
Combined Transactions
The Funds may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward foreign currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction or when the Advisor believes that it is in the Fund's best interests
to do so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
are normally entered into based on the Advisor's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase such risks or hinder achievement of the portfolio management objective.
Eurocurrency Instruments
The International Funds may make investments in Eurocurrency instruments.
Eurocurrency instruments are futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR") or to the interbank rates
offered in other financial centers. Eurocurrency futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and sellers to obtain
a fixed rate for borrowings. The International Funds might use Eurocurrency
futures contracts and options thereon to hedge against changes in LIBOR and
other interbank rates, to which many interest rate swaps and fixed income
instruments are linked.
Segregated and Other Special Accounts
In addition to other requirements, many transactions require a Fund to segregate
liquid high grade assets with its custodian to the extent Fund obligations are
not otherwise "covered" through the ownership of the underlying security,
financial instruments or currency. In general, either the full amount of any
obligation by a Fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by a Fund
will require the Fund to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate liquid high grade securities sufficient to purchase and deliver the
securities if the call is exercised. A call option sold by a Fund on an index
will require the Fund to own portfolio securities which correlate with the index
or segregate liquid high grade assets equal to the excess of the index value
over the exercise price industry or other on a current basis. A put option
written by a Fund requires the Fund to segregate liquid, high grade assets equal
to the exercise price. A currency contract which obligates an International Fund
to buy or sell currency will generally require the Fund to hold an amount of
that currency or liquid securities denominated in that currency equal to the
Fund's obligations or to segregate liquid high grade assets equal to the amount
of the Fund's obligation.
OTC options entered into by a Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange-listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange-listed options sold by the Fund other than those
generally settle with physical delivery, and the Fund will segregate an amount
of liquid assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
sufficient liquid assets. Such assets may consist of cash, cash equivalents,
liquid debt securities or other liquid assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. An International Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the International Fund could purchase a put
option if the strike price of that option is the same or higher than the strike
price of a put option sold by the Fund. Moreover, instead of segregating assets,
if the International Fund held a futures or forward contract, it could purchase
a put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offered in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction, no segregation is required, but if it
terminates prior to such time, liquid assets equal to any remaining obligation
would need to be segregated.
An International Fund's activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Code for qualification as a
regulated investment company.
Depository Receipts
American Depository Receipts ("ADRs") are receipts typically issued in the U.S.
by a bank or trust company evidencing ownership of an underlying foreign
security. The International Equity Fund may invest in ADRs which are structured
by a U.S. bank without the sponsorship of the underlying foreign issuer. In
addition to the risks of foreign investment applicable to the underlying
securities, such unsponsored ADRs may also be subject to the risks that the
foreign issuer may not be obligated to cooperate with the U.S. bank, may not
provide additional financial and other information to the bank or the investor,
or that such information in the U.S. market may not be current.
Like ADRs, European Depository Receipts ("EDRs"), Global Depository Receipts
("GDRs"), and Registered Depository Certificates ("RDCs") represent receipts for
a foreign security. However, they are issued outside of the U.S. The Emerging
Markets Fund may invest in ADRs, EDRs, GDRs or RDCs and the E. European Equity
Fund may invest in ADRs and GDRs. EDRs, GDRs and RDCs involve risks comparable
to ADRs, as well as the fact that they are issued outside of the U.S.
Furthermore, RDCs involve risks associated with securities transactions in
Russia.
Temporary Defensive Positions
When the Advisor believes that investments should be deployed in a temporary
defensive posture because of economic or market conditions, each of the Funds
may invest up to 100% of its assets in U.S. Government securities (such as
bills, notes, or bonds of the U.S. Government and its agencies) or other forms
of indebtedness such as bonds, certificates of deposits or repurchase
agreements. For temporary defensive or emergency purposes, however, the Bond
Fund may invest without limit in investment grade U.S. debt securities,
including short-term money market securities. For temporary defensive purposes,
each of the International Equity, E. European Equity and Bond Funds may hold
cash or debt obligations denominated in U.S. dollars or foreign currencies.
These debt obligations include U.S. and foreign government securities and
investment grade corporate debt securities, or bank deposits of major
international institutions. When a Fund is in a temporary defensive position, it
is not pursuing its stated investment policies. The Advisor decides when it is
appropriate to be in a defensive position. It is impossible to predict for how
long such alternative strategies will be utilized.
U.S. Government Securities
The Funds may invest in U.S. Government Securities. The term "U.S. Government
Securities" refers to a variety of securities which are issued or guaranteed by
the United States Treasury, by various agencies of the U.S. Government, and by
various instrumentalities which have been established or sponsored by the U.S.
Government. U.S. Treasury securities are backed by the full faith and credit of
the United States. Securities issued or guaranteed by U.S. Government agencies
or U.S. Government sponsored instrumentalities may or may not be backed by the
full faith and credit of the United States. In the case of securities not backed
by the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim
directly against the United States in the event the agency or instrumentality
does not meet its commitment. An instrumentality of the U.S. Government is a
government agency organized under Federal charter with government supervision.
Repurchase Agreements
As a means of earning income for periods as short as overnight, the Funds may
enter into repurchase agreements that are collateralized by U.S. Government
Securities. The Funds may enter into repurchase commitments for investment
purposes for periods of 30 days or more. Such commitments involve investment
risks similar to those of the debt securities in which the Funds invest. Under a
repurchase agreement, a Fund acquires a security, subject to the seller's
agreement to repurchase that security at a specified time and price. A purchase
of securities under a repurchase agreement is considered to be a loan by a Fund.
The Advisor monitors the value of the collateral to ensure that its value always
equals or exceeds the repurchase price and also monitors the financial condition
of the seller of the repurchase agreement. If the seller becomes insolvent, a
Fund's right to dispose of the securities held as collateral may be impaired and
the Fund may incur extra costs. Repurchase agreements for periods in excess of
seven days may be deemed to be illiquid.
Reverse Repurchase Agreements
As a means of enhancing income, the Bond and E. European Debt Funds may enter
into reverse repurchase agreements with selected banks and broker/dealers. Under
a reverse repurchase agreement, a Fund sells securities subject to an obligation
to repurchase those securities at a specified time and price. In order to comply
with U.S. regulatory conditions applicable to investment companies, the Fund
will recognize gains or losses on such obligations each day, and will segregate
cash, U.S. government securities, or other high-grade debt instruments in an
amount sufficient to satisfy its repurchase obligation. The Fund will also mark
the value of the assets to market daily, and post additional collateral if
necessary. The Fund may invest the payment received for such securities prior to
fulfilling its obligation to repurchase the securities. Reverse repurchase
agreements are considered to be borrowings under the 1940 Act. Therefore, the
Fund's investment in reverse repurchase agreements is subject to the borrowing
limitations of the 1940 Act (See "Investment Restrictions").
If the buyer under a repurchase agreement becomes insolvent, the Fund's right to
reacquire its securities may be impaired. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the buyer of the securities
before repurchase of the securities under a reverse repurchase agreement, it may
encounter delay and incur costs before being able to apply the cash held to
purchase replacement securities. Also, the value of such securities may increase
before it is able to purchase them.
When-issued Securities
The Emerging Markets and Bond Funds may purchase securities on a when-issued or
forward delivery basis, for payment and delivery at a later date. The price and
yield of the securities are generally fixed on the date of commitment to
purchase. During the period between purchase and settlement, no interest accrues
to the Fund. At the time of settlement, the market value of the security may be
more or less than the purchase price. The Fund reflects gains or losses on such
commitments each day, and segregates assets sufficient to meet its obligation
pending payment for the securities.
OTHER INVESTMENTS
The Board of Directors may, in the future, authorize one or more of the Funds to
invest in securities other than those listed in this SAI and in the prospectus,
provided such investments would be consistent with Fund's investment objective
and that such investments would be consistent with the fund's investment
objective and that such investment would not violate the Fund's fundamental
investment policies or restrictions.
INVESTMENT RESTRICTIONS
Fundamental Investment Policies and Restrictions: The Funds have adopted the
following fundamental investment restrictions. The fundamental investment
restrictions cannot be changed without approval by the vote of a "majority of
the outstanding voting securities" of each Fund.
As a matter of fundamental policy, a Fund will not:
1) Except for the Value, Bond and E. European Debt Funds, as to 75% of its
assets, purchase the securities of any issuer (other than obligations
issued or guaranteed as to principal and interest by the Government of
the United States or any agency or instrumentality thereof) if, as a
result of such purchase, more than 5% of its total assets would be
invested in the securities of such issuer.
2) Except for the Value, Bond and E. European Debt Funds, purchase stock
or securities of an issuer (other than the obligations of the United
States or any agency or instrumentality thereof) if such purchase would
cause the Fund to own more than 10% of any class of the outstanding
voting securities of such issuer or, except for the Emerging Markets
Fund, more than 10% of any class of the outstanding stock or securities
of such issuer.
3) Act as an underwriter of securities of other issuers, except that each
of the International Equity and E. European Equity Funds may invest up
to 10% of the value of its total assets (at time of investment) in
portfolio securities which the Fund might not be free to sell to the
public without registration of such securities under the Securities Act
of 1933, as amended, or any foreign law restricting distribution of
securities in a country of a foreign issuer.
4) Buy or sell commodities or commodity contracts, provided that each of
the International Equity and E. European Equity Funds may utilize not
more than 1% of its assets for deposits or commissions required to
enter into, for the International Equity Fund, forward foreign currency
contracts, and for the E. European Equity Fund, financial futures
contracts, for hedging purposes as described under "Investment
Policies" and "Additional Information on Policies and Investments
Strategic Transactions." (Such deposits or commissions are not required
for forward foreign currency contracts.)
5) As to the International Equity and E. European Equity Funds, borrow
money except for temporary or emergency purposes and then only in an
amount not in excess of 5% of the lower of value or cost of its total
assets, in which case the Fund may pledge, mortgage or hypothecate any
of its assets as security for such borrowing but not to an extent
greater than 5% of its total assets. As to the Value, Emerging Markets,
Bond and E. European Debt Funds, borrow money, except as a temporary
measure for extraordinary or emergency purposes, or except in
connection with reverse repurchase agreements, provided that the Fund
maintains asset coverage of 300% in connection with the issuance of
senior securities. Notwithstanding the foregoing, to avoid the untimely
disposition of assets to meet redemptions, the Value, Emerging Markets
and E. European Debt Funds may borrow up to 33 1/3%, and the Bond Fund
may borrow up to 20%, of the value of the Fund's assets to meet
redemptions, provided that the Fund may not make other investments
while such borrowings are outstanding.
6) Make loans, except that a Fund may (1) lend portfolio securities; and
(2) enter into repurchase agreements secured by U.S. Government
securities and, with respect to the Bond and E. European Debt Funds,
except to the extent that the entry into repurchase agreements and the
purchase of debt securities in accordance with its investment objective
and policies may be deemed to be loans.
7) Invest more than 25% of a Fund's total assets in securities of one or
more issuers having their principal business activities in the same
industry, provided that, for the Emerging Markets Fund, Bond Fund and
E. European Debt Fund, there is no limitation with respect to
investments in obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, and, for the Bond Fund and E.
European Debt Fund, for the purpose of this restriction: telephone
companies are considered to be in a separate industry from gas and
electric public utilities, and wholly owned finance companies are
considered to be in the industry of their parents if their activities
are primarily related to financing the activities of their parents.
8) Except for the Emerging Markets Fund, Bond Fund and E. European Debt
Fund, invest in securities of other investment companies except by
purchase in the open market involving only customary broker's
commissions, or as part of a merger, consolidation, or acquisition of
assets.
9) Invest in interests in oil, gas, or other mineral explorations or
development programs.
10)Issue senior securities.
11)Participate on a joint or a joint and several basis in any
securities trading account.
12)Purchase or sell real estate (except that the Fund may invest in (i)
securities of companies which deal in real estate or mortgages, and
(ii) securities secured by real estate or interests therein, and that
the Fund reserves freedom of action to hold and to sell real estate
acquired as a result of the Fund's ownership of securities).
13)Invest in companies for the purpose of exercising control.
14)Purchase securities on margin, except that it may utilize such
short-term credits as may be necessary for clearance of purchases or
sales of securities.
15)Engage in short sales.
Non-Fundamental Policies and Restrictions: In addition to the fundamental
policies and investment restrictions described above, and the various general
investment policies described in the Prospectus and elsewhere in the SAI, the
Funds will be subject to the following investment restrictions. Theses
restrictions are considered non-fundamental and may be changed by the Board of
Directors without shareholder approval.
As a matter of non-fundamental policy, a Fund may not:
1) Invest more than 15% of its net assets in illiquid securities.
In applying the fundamental investment policies and restrictions:
(a)Restrictions with respect to repurchase agreements shall be construed
to be for repurchase agreements entered into for the investment of
available cash consistent with the Fund's repurchase agreement
procedures, not repurchase commitments entered into for general
investment purposes.
(b)The Funds adhere to the percentage restrictions on investment or
utilization of assets set forth above at the time an investment is
made. A later change in percentage resulting from changes in the value
or the total cost of the Fund's assets will not be considered a
violation of the restriction.
MANAGEMENT OF THE COMPANY
Directors and Officers
The Company is governed by a Board of Directors, which is responsible for
protecting the interests of shareholders. The Directors are experienced
businesspersons who meet throughout the year to oversee the Company's
activities, review contractual arrangements with companies that provide services
to the Funds, and review performance. The names and addresses of the Directors
and officers of the Company, together with information as to their principal
occupations during the past five years, are listed below. The Directors who are
considered "interested persons" as defined in Section 2(a)(19) of the 1940 Act,
as well as those persons affiliated with the Advisor and principal underwriter,
and officers of the Company, are noted with an asterisk (*).
Name, Address and Birthdate Position(s) Held With Principal Occupation(s)
Company During the Past 5 Years
*John Pasco, III Chairman, Director and Mr. Pasco has served as
1500 Forest Ave, Suite 223 Treasurer Treasurer and Director of
Richmond, VA 23229 Commonwealth Shareholder
(4/10/45) Services, Inc. ("CSS"),
the Company's
Administrator, since
1985; Director, President
and Treasurer of
Commonwealth Capital
Management, Inc. (a
registered Investment
Advisor) since 1983;
Director and shareholder
of Fund Services, Inc.,
the Company's Transfer
and Disbursing Agent,
since 1987; shareholder
of Commonwealth Fund
Accounting, Inc., which
provides bookkeeping
services to Star Bank;
and Chairman, Director
and Treasurer of the
World Funds, Inc., a
registered investment
company, since May, 1997.
Mr. Pasco is also a
certified public
accountant.
*Henry Schlegel Director Mr. Schlegel has served
450 Park Avenue as a Director, the
New York, NY 10022 President and the Chief
(1/24/53) Executive Officer of
Vontobel USA Inc., a
registered investment
adviser, since 1988.
Samuel Boyd, Jr. Director Mr. Boyd has served as
10808 Hob Nail Court the Manager of the
Potomac, MD 20854 Customer Services
(9/18/40) Operations and Accounting
Division of the Potomac
Electric Power Company
since 1978 and as
Director of World Funds,
Inc., a registered
investment company, since
May, 1997. Mr. Boyd is
also a certified public
accountant.
William E. Poist Director Mr. Poist has served as a
5272 River Road financial and tax
Bethesda, MD 20816 consultant through his
(6/11/39) firm Management
Consulting for
Professionals since 1968
and as Director of World
Funds, Inc., a registered
investment company, since
May, 1997. Mr. Poist is
also a certified public
accountant.
Paul M. Dickinson Director Mr. Dickinson has served
8704 Berwickshire Drive as President of Alfred J.
Richmond, VA 23229 Dickinson, Inc., Realtors
(11/11/47) since April 1971 and as a
Director of World Funds,
Inc., a registered
investment company, since
May, 1997.
Mr. Walczak has served as
*Edwin D. Walczak Senior Vice President of Senior Vice President and
450 Park Avenue the Company and Chief Investment Officer
New York, NY 10022 President of the Vontobel of Vontobel USA Inc., a
(9/17/53) U.S. Value Fund registered investment
advisor, since 1988. From
1984 to 1988 Mr.Walczak
was an institutional
portfolio manager at
Lazard Freres Asset
Management, New York.
*Fabrizio Pierallini Senior Vice President of Mr. Pierallini has served
450 Park Avenue the Company, President as Senior Vice President
New York, N.Y. 10022 of the Vontobel of Vontobel USA Inc. and
(8/14/59) International Equity Fund has serviced as Portfolio
and the Vontobel Manager (International
Emerging markets and Emerging Markets
Equity Fund Equities) since April,
1994
*Monica Mastroberardino Vice President of the Ms Mastroberardino has
450 Park Avenue Company and President of served as
New York, NY 10022 the Vontobel Vice President of
(6/2/58) International Bond Fund Vontobel USA Inc. since
February, 1999. She has
been a macroeconomic
analyst with Vontobel
Asset Management,
Switzerland, since
February 1998, [and is
the Associate Fund Manger
of the Vontobel group's
Luxembourg-based and
SEC-based Eastern
European Debt Funds.]
From February 1995 to
January 1998 she was a
macroeconomic and
financial analyst with
Credit Suisse,
Switzerland.
*Luca Parmeggiani Vice President of the Mr. Parmeggiani has
450 Park Avenue Company and President of served as Vice President
New York, NY 10022 the Vontobel Eastern of Vontobel USA Inc., a
(3/23/62) European Equity Fund registered investment
adviser, since October
1997. Mr. Parmeggiani is
a first Vice President of
Vontobel Asset Management
where he is responsible
for Eastern European
equity research and
management. Prior to
joining the Vontobel
group, he was Vice
President and manager of
Lombard Odier Cie's
Invest Eastern Europe
Fund. He is an EFAS
Certified financial
analyst (European
Federation of Financial
Analyst and
Statisticians).
*Volker Wehrle Vice President of the Mr. Wehrle has served as
450 Park Avenue Company and President of Vice President of
New York, NY 10022 the Vontobel Eastern Vontobel USA Inc. since
(3/29/58) European Debt Fund May 1997 and as Vice
President of Vontobel
Asset Management,
Switzerland since October
1994. He is the head of
fixed income investments
for Vontobel Asset
Management, Switzerland.
From January 1989 to
September 1994, he
managed fixed income
investments for the Group
Treasury Department of
Sandoz AG Switzerland.
F. Byron Parker, Jr. Secretary Mr. Parker has served as
810 Lindsay Court Secretary of Commonwealth
Richmond, VA 23229 Shareholder Services,
(1/26/43) Inc. since 1986. He is
also a Partner in the law
firm Mustian & Parker.
Compensation of Directors: The Company does not compensate the Directors who are
officers or employees of the Advisor. The "independent" Directors receive an
annual retainer of $1,000 and a fee of $200 for each meeting of the Directors
which they attend in person or by telephone. Directors are reimbursed for travel
and other out-of-pocket expenses. The Company does not offer any retirement
benefits for Directors. As of December 31, 1998 the officers and Directors,
individually and as a group, owned beneficially less than 1% of the outstanding
shares of the Funds. For the fiscal year ended December 31, 1998, the Directors
received the following compensation from the Company:
Name and Aggregate Pension or Total
Position Held Compensation Retirement Compensation
From the Funds Benefits from the
Fiscal Year Accrued as Part Company
Ended December of Fund Expenses
31, 19981
John Pasco, III N/A
Director
Henry Schlegel N/A
Director
Samuel Boyd, Jr. 10,050.00 N/A 10,050.00
Director
William E. Poist 10,050.00 N/A 10,050.00
Director
Paul M. 10,050.00 N/A 10,050.00
Dickinson
Director
1This amount represents the aggregate amount of compensation paid to the
Directors for: (a) service on the Board of Directors for the Funds for the
fiscal year ended December 31, 1998.
PRINCIPAL SECURITIES HOLDERS
As of March 31, 1999, the following persons owned of record or beneficially
shares of the Funds in the following amounts.
Value Fund
Charles Schwab Reinvestment, 101 Montgomery Street, San Francisco CA 94104,
owned of record 3,699,032.275 outstanding shares (or 40.847%); and Bank J.
Vontobel and its affiliates for the benefit of its customers, Zv-Kontrollen
Bahnhofstrasse #3 CH-8022 Zurich Switzerland, owned of record 1,172,282.468
outstanding shares (or 12.945%).
International Equity Fund
Bank J. Vontobel and its affiliates for the benefit of its customers,
Zv-Kontrollen Bahnhofstrasse #3 CH-8022 Zurich Switzerland, owned of record
3,139,026.644 outstanding shares (or 40.071%); Riggs Bank P.O. Box 96211,
Washington, D.C. 20090-6211, owned of record 458,518.362 outstanding shares (or
5.853%); and Charles Schwab Reinvestment, 101 Montgomery Street, San Francisco,
CA 94104, owned of record 1,497,863.507 outstanding shares (or 19.121%).
E. European Equity Fund
Charles Schwab Reinvestment, 101 Montgomery Street, San Francisco, CA 94104,
owned of record 9945537.070 outstanding shares (or 24.772%); and Bank J.
Vontobel and its affiliates for the benefit of its customers, Zv-Kontrollen
Bahnhofstrasse #3 CH-8022 Zurich Switzerland, owned of record 574,658.584
outstanding shares (or 14.313%).
Bond Fund
Bank J. Vontobel and its affiliates for the benefit of its customers,
Zv-Kontrollen Bahnhofstrasse #3 CH-8022 Zurich Switzerland, owned of record
486,304.532 outstanding shares (or 69.273%); Charles Schwab Reinvestment, 101
Montgomery Street San Francisco, CA 94104, owned of record 75,059.966
outstanding shares (or 10.692%).
Emerging Markets Equity Fund
Charles Schwab Reinvestment 101 Montgomery Street, San Francisco, CA 94104,
owned of record 16,241.398 outstanding shares (or 8.372%); and Bank J. Vontobel
and its affiliates for the benefit of its customers ZV-Kontrollen Banhhofstrasse
#3 CH-8022 Zurich Switzerland, owned of record 54,666.501 outstanding shares (or
28.178%) and Vontobel USA Inc. 450 Park Avenue, New York, N.Y. 10022 for Acct. #
V202-039 owned of record 10,828.810 outstanding shares (or 5.582%).
E. European Debt Fund
Bank J. Vontobel and its affiliates for the benefit of its customers,
ZV-Kontrollen Bahnhofstrasse #3 CH-8022 Zurich Switzerland, owned of record
636,765.604 outstanding shares (or 85.996%); and Palenzona Ingeborg of
Bahnhofstrasse 33 Ch-8022 Zurich Switzerland owned of record 40,637.473
outstanding shares (or 5.488%).
INVESTMENT ADVISOR AND ADVISORY AGREEMENT
Vontobel USA Inc. (the "Advisor"), 450 Park Avenue, New York, N.Y. 10022, is
each Fund's investment adviser. The Advisor is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended, (the "Advisers
Act"). The Advisor is a wholly owned subsidiary of Vontobel Holding Ltd., a
Swiss bank holding company which is traded on the Swiss Stock Exchange.
The Advisor serves as investment adviser to the Funds pursuant to separate
Investment Advisory Agreements with the Company for each Fund (each an "Advisory
Agreement"). The Advisory Agreements of the Emerging Markets and E. European
Debt Funds are effective for a period of two years from August 18, 1997, and may
be renewed annually thereafter. The Advisory Agreements for the Value Fund,
International Equity Fund, Bond Fund and E. European Equity Fund are dated July
14, 1992, July 14, 1992, February 10, 1994, and February 14, 1996, respectively.
The Advisory Agreement for each such Fund may be renewed annually provided such
renewal is approved annually by: 1) the Company's Board of Directors; or 2) by a
majority vote of the outstanding voting securities of the Company and a majority
of the Directors who are not "interested persons" of the Company. The Advisory
Agreements will automatically terminate in the event of their "assignment," as
that term is defined in the 1940 Act, and may be terminated without penalty at
any time upon 60 days' written notice to the other party by: (i) the majority
vote of all the Directors or by vote of a majority of the outstanding voting
securities of the Fund; or (ii) the Advisor.
Under the Advisory Agreements, the Advisor, subject to the supervision of the
Directors, provides investment management advice with respect to securities and
other instruments. The Advisor makes all decisions and performs all duties in
accordance with the Funds' investment objectives, policies, and investment
restrictions.
The Advisor is responsible for effecting all security transactions on behalf of
the Funds, including the allocation of principal business and portfolio
brokerage and negotiation of commissions. In placing orders with brokers or
dealers, the Advisor will attempt to obtain the best price and execution for the
Fund's orders. The Advisor may allocate brokerage to an affiliated dealer in
accordance with written policies adopted by the Company's Board of Directors.
The Advisor is also permitted to purchase and sell securities to and from
brokers and dealers who provide the Advisor with research advice and other
statistical services. In such instances, the Advisor may be authorized to pay a
commission, which is higher than the commission that would be charged by another
broker. From time to time, and subject to the Advisor obtaining the best price
and execution for each Fund, the Board of Directors may authorize the Advisor to
allocate brokerage transactions to a broker in consideration of: (1) the sale of
Fund shares; or (2) payment of an obligation otherwise payable by the Funds.
Each Fund is obligated to pay the Advisor an advisory fee. That fee is payable
monthly at an annual rate that is equal to a percentage of the Fund's average
daily net assets. Both the Value and International Equity Funds pay the Advisor
at a rate of 1.00% on the first $100 million and 0.75% on assets in excess of
$100 million. Each of the Emerging Markets, E. European Equity and E. European
Debt Funds pay the Advisor at a rate of 1.25% on the first $500 million and
1.00% on assets in excess of $500 million. The Bond Fund pays the Advisor a flat
fee of 1.00%. The table below shows the total amount of advisory fees that each
Fund paid the Advisor for the last three fiscal years. The table also shows the
amount of investment advisory fees that the Advisor waived during the last three
fiscal years.
Years Ended December 31,
Fund 1996 Fee 1997 Fee 1998 Fee
- ----
Payable/Waived Payable/Waived Payable/Waived
Value Fund $620,780/22,437 $986,164/22,500 $1,903,694/22,500
International Equity Fund 1,280,135/0 1,443,062/0 $1,505,510/0
Emerging Markets Fund* N/A 14,720/14,720 35,051/35psi
E. European Equity Fund** 302,021/0 2,113,314/0 1,003,342/0
Bond Fund 248,407/48,630 193,299/115,099 80,161/80,161
E. European Debt Fund* N/A 57,164/0 154,111/50,475
* Fees paid and/or waived in 1997 reflect payments for the period from September
1, 1997, the commencement of operations, to December 31, 1997. ** Fees paid
and/or waived in 1996 reflect payments for the period from February 15, 1996,
the commencement of operations, to December 31, 1998.
Pursuant to the terms of the Advisory Agreements, the Advisor pays all expenses
it incurs in connection with rendering its management services. Each Fund is
responsible for all other expenses that are not specifically assumed by the
Advisor. Such expenses include (but are not limited to) brokerage fees and
commissions, legal fees, auditing fees, fees for bookkeeping and record keeping
services, custodian and transfer agency fees and registration fees. The services
furnished by the Advisor under the Advisory Agreements are not exclusive, and
the Advisor is free to perform similar services for others.
ADMINISTRATION
Pursuant to the Administrative Services Agreement with the Company, dated
January 7, 1999 (the "Service Agreements"), Commonwealth Shareholder Services,
Inc. ("CSS"), 1500 Forest Avenue, Suite 223, Richmond, Virginia 23229, serves as
the administrator of the Funds. CSS supervises all aspects of the operation of
the Funds, except those performed by the Advisor. John Pasco III, Chairman of
the Board of the Company, is the sole owner of CSS. CSS provides certain
administrative services and facilities for the Funds, including preparing and
maintaining certain books, records, and monitoring compliance with state and
federal regulatory requirements.
As administrator, CSS receives asset-based fees, computed daily and paid monthly
at annual rates of 0.20% of the average daily net assets of the Funds on the
first $500 million and 1.50% on assets in excess of $500 million (which includes
regulatory matters, backup of the pricing of shares of each Fund, administrative
duties in connection with execution of portfolio trades, and certain services in
connection with Fund accounting). CSS receives an hourly fee, plus certain
out-of-pocket expenses, for shareholder servicing and state securities law
matters.
<PAGE>
The table below shows the total amount of administrative fees that each Fund
paid CSS for the last three fiscal years.
Years Ended December 31,
Fund 1996 1997 1998
- ----
Value Fund $147,596 $318,571 $509,371
International Equity Fund 297,410 419,496 328,563
Emerging Markets Fund* N/A 11,074 18,245
E. European Equity Fund** 80,336 432,860 205,758
Bond Fund 58,468 59,783 28,517
E. European Debt Fund* N/A 14,359 36,769
* Fees paid in 1997 reflect payments for the period from September 1, 1997, the
commencement of operations, to December 31, 1997. ** Fees paid 1996 reflect
payments for the period from February 15, 1996, the commencement of operations,
to December 31, 1998.
CUSTODIAN AND ACCOUNTING SERVICES
Pursuant to the Custodian Agreement and Accounting Agency Agreement with the
Company dated November 1,1998, Brown Brothers Harriman & Co. ("BBH"), 40 Water
Street, Boston Massachusetts, 02109, acts as the custodian of the Funds'
securities and cash and as the Funds' accounting services agent. With the
consent of the Company, BBH has designated The Depository Trust Company of New
York, as its agent to secure a portion of the assets of the International Funds.
BBH is authorized to appoint other entities to act as sub-custodians to provide
for the custody of foreign securities which may be acquired and held by the
International Funds outside the U.S. Such appointments are subject to
appropriate review by the Company's Board of Directors. As the accounting
services agent of the International Funds, BBH maintains and keeps current the
books, accounts, records, journals or other records of original entry relating
to such Funds' business.
TRANSFER AGENT
Pursuant to a Transfer Agent Agreement with the Company dated September 1, 1987,
Fund Services, Inc. ("FSI") acts as the Company's transfer and disbursing agent.
FSI is located at 1500 Forest Avenue, Suite 111, Richmond, VA 23229. John Pasco,
III, Chairman of the Board of the Company and an officer and shareholder of CSS
(the Administrator of the Funds), owns one-third of the stock of FSI; therefore,
FSI may be deemed to be an affiliate of the Company and CSS.
FSI provides certain shareholder and other services to the Company, including
furnishing account and transaction information and maintaining shareholder
account records. FSI is responsible for processing orders and payments for share
purchases. FSI mails proxy materials (and receives and tabulates proxies),
shareholder reports, confirmation forms for purchases and redemptions and
prospectuses to shareholders. FSI disburses income dividends and capital
distributions and prepares and files appropriate tax-related information
concerning dividends and distributions to shareholders.
DISTRIBUTOR
Vontobel Fund Distributors, a division of First Dominion Capital Corp. (the
"Distributor"), 1500 Forest Avenue, Suite 223, Richmond, VA 23229, serves as the
principal underwriter of the Funds' shares pursuant to a Distribution Agreement
dated August 18, 1997. John Pasco, III, Chairman of the Board of the Company,
owns 100% of the Distributor, and is its President, Treasurer and a Director.
INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Tait, Weller & Baker, audit the Company's
annual financial statements, assists in the preparation of certain reports to
the U.S. Securities and Exchange Commission (the "SEC"), and prepares the
Company's tax returns. Tait, Weller & Baker is located at 8 Penn Center Plaza,
Suite 800, Philadelphia, PA 19103.
PORTFOLIO TRANSACTIONS
It is the policy of the Advisor, in placing orders for the purchase and sale of
each Fund's securities, to seek to obtain the best price and execution for
securities transactions, taking into account such factors as price, commission,
where applicable, (which is negotiable in the case of U.S. national securities
exchange transactions but which is generally fixed in the case of foreign
exchange transactions), size of order, difficulty of execution and the skill
required of the executing broker/dealer. After a purchase or sale decision is
made by the Advisor, the Advisor arranges for execution of the transaction in a
manner deemed to provide the best price and execution for the Fund.
Exchange-listed securities are generally traded on their principal exchange,
unless another market offers a better result. Securities traded only in the
over-the-counter market may be executed on a principal basis with primary market
makers in such securities, except for fixed price offerings and except where the
Fund may obtain better prices or executions on a commission basis or by dealing
with other than a primary market maker.
The Advisor, when placing transactions, may allocate a portion of a Fund's
brokerage to persons or firms providing the Advisor with investment
recommendations, statistical, research or similar services useful to the
Advisor's investment decision-making process. The term "investment
recommendations or statistical, research or similar services" means (1) advice
as to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, and (2) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, and portfolio strategy.
Such services are one of the many ways the Advisor can keep abreast of the
information generally circulated among institutional investors by
broker-dealers. While this information is useful in varying degrees, its value
is indeterminable. Such services received on the basis of transactions for a
Fund may be used by the Advisor for the benefit of other clients, and the Fund
may benefit from such transactions effected for the benefit of other clients.
While there is no formula, agreement or undertaking to do so, and when it can be
done consistent with the policy of obtaining best price and execution, a Fund
may consider sales of its shares as a factor in the selection of brokers to
execute portfolio transactions. The Advisor may be authorized, when placing
portfolio transactions for a Fund, to pay a brokerage commission in excess of
that which another broker might have charged for executing the same transaction
solely on account of the receipt of research, market or statistical information.
Except for implementing the policy stated above, there is no intention to place
portfolio transactions with particular brokers or dealers or groups thereof.
The Board of Directors of the Company has adopted policies and procedures
governing the allocation of brokerage to affiliated brokers. The Advisor has
been instructed not to place transactions with an affiliated broker-dealer,
unless that broker-dealer can demonstrate to the Company that the Fund will
receive (1) a price and execution no less favorable than that available from
unaffiliated persons, and (2) a price and execution equivalent to that which
that broker-dealer would offer to unaffiliated persons in a similar transaction.
The Board reviews all transactions which have been placed pursuant to those
policies and procedures at its Board meetings.
When two or more Funds that are managed by the Advisor are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated in a manner deemed equitable to each Fund. In some cases this
procedure could have a detrimental effect on the price or volume of the security
as far as a Fund is concerned. In other cases, however, the ability of such Fund
to participate in volume transactions will be beneficial for the Fund. The Board
of Directors of the Company believes that these advantages, when combined with
the other benefits available because of the Advisor's organization, outweigh the
disadvantages that may exist from this treatment of transactions.
The Funds paid brokerage commissions as follows:
Years Ended December 31,
Fund 1996 1997 1998
- ---- ---- ---- ----
Value Fund $ 198,787 290,165 $496,553
International Equity Fund 1,185,252 292,194 146,822
Emerging Markets Fund N/A 4,604 17,928
E. European Equity Fund 344,275 932,733 374,114
Bond Fund 0 0 0
E. European Debt Fund N/A 0 0
The Funds paid brokerage commissions to Vontobel Securities, Ltd. (an
affiliated broker-dealer) as follows:
Years ended December 31,
Fund 1996 1997 1998
Emerging Markets Fund N/A 0 0
E. European Equity Fund N/A 0 0
Bond Fund 0 0 0
E. European Debt Fund N/A 0 0
International Equity Fund
0
PORTFOLIO TURNOVER
Average annual portfolio turnover rate is the ratio of the lesser of sales or
purchases to the monthly average value of the portfolio securities owned during
the year, excluding from both the numerator and the denominator all securities
with maturities at the time of acquisition of one year or less. A higher
portfolio turnover rate involves greater transaction expenses to a Fund and may
result in the realization of net capital gains, which would be taxable to
shareholders when distributed. The Advisor makes purchases and sales for a
Fund's portfolio whenever necessary, in the Advisor's opinion, to meet the
Fund's objective. The Advisor anticipates that the average annual portfolio
turnover rate of each of the Funds will be less than 100%.
CAPITAL STOCK AND DIVIDENDS
The Company is a series investment company that currently offers one class of
shares. The Company is authorized to issue 500,000,000 shares of common stock,
with a par value of $0.01 per share. The Company has presently allocated
50,000,000 shares to each of the Funds. Each share has equal dividend, voting,
liquidation and redemption rights and there are no conversion or preemptive
rights. Shares of the Funds do not have cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
Directors can elect all of the directors if they choose to do so. In such event,
the holders of the remaining shares will not be able to elect any person to the
Board of Directors. Shares will be maintained in open accounts on the books of
FSI.
If they deem it advisable and in the best interests of shareholders, the
Directors may create additional series of shares, each of which represents
interests in a separate portfolio of investments and is subject to separate
liabilities, and may create multiple classes of shares of such series, which may
differ from each other as to expenses and dividends. If the Directors create
additional series or classes of shares, shares of each series or class are
entitled to vote as a series or class only to the extent required by the 1940
Act or as permitted by the Directors. Upon the Company's liquidation, all
shareholders of a series would share pro-rata in the net assets of such series
available for distribution to shareholders of the series, but, as shareholders
of such series, would not be entitled to share in the distribution of assets
belonging to any other series.
A shareholder will automatically receive all income dividends and capital gain
distributions in additional full and fractional shares of the applicable Fund at
its net asset value as of the date of payment unless the shareholder elects to
receive such dividends or distributions in cash. The reinvestment date normally
precedes the payment date by about seven days although the exact timing is
subject to change. Shareholders will receive a confirmation of each new
transaction in their account. The Company will confirm all account activity,
transactions made as a result of the Automatic Investment Plan described below.
Shareholders may rely on these statements in lieu of stock certificates.
ADDITIONAL INFORMATION ABOUT PURCHASES AND SALES
Each Fund's share price, called its NAV, is determined as of the close of
trading on the New York Stock Exchange ("NYSE") (currently 4:00 p.m., Eastern
Time) on each business day ("Valuation Time") that the NYSE is open; however,
the Company's management may compute the NAV more frequently in order to protect
shareholders' interests. As of the date of this prospectus, the Fund is informed
that the NYSE will be closed on the following holidays: New Year's Day, Martin
Luther King Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. NAV per share is computed by
adding the total value of the investments and other assets, subtracting any
liabilities and then dividing by the total number of shares outstanding.
The Fund's securities are generally valued at current market prices. Investments
in securities traded on the national securities exchanges or included in the
NASDAQ National Market System are valued at the last reported sale price. Other
securities traded in the over-the-counter market and listed securities for which
no sales are reported on that date are valued at the last reported bid price.
Short-term debt securities (less than 60 days to maturity) are valued at their
fair market value using amortized cost pricing procedures. Other assets for
which market prices are not readily available are valued at their fair value as
determined in good faith under procedures set by the Board of Directors.
Depository Receipts (i.e., ADRs, EDRs and GDRs) will be valued at the closing
price of the instrument last determined prior to the Valuation Time unless the
Company is aware of a material change in value. Securities for which such a
value cannot be readily determined on any day will be valued at the closing
price of the underlying security adjusted for the exchange rate.
PURCHASING SHARES
You may purchase shares of the Funds directly from the Distributor or through
brokers or dealers who are members of the National Association of Securities
Dealers, Inc. When you acquire or redeem shares through a securities broker or
dealer, you may be charged a transaction fee. The offering price per share is
equal to the NAV next determined after the Fund receives your purchase order.
The minimum initial investment for the Value Fund, Bond Fund, E. European Equity
Fund, Emerging Markets Fund and E. European Debt Fund is $1,000. The minimum
initial investment in the International Equity Fund is 4200,000. Subsequent
investments for all Funds must be $50 or more. The Company may waive the minimum
initial investment requirement for purchases made by Directors, officers and
employees of the Company. The Company may also waive the minimum investment
requirement for purchases by its affiliated entities and certain related
advisory accounts and retirement accounts (such as IRAs). You may purchase
shares of a Fund by mail or wire.
ELIGIBLE BENEFIT PLANS
An eligible benefit plan is an arrangement available to the (1) employees of an
employer (or two or more affiliated employers) having not less than ten
employees at the plan's inception (2) or such an employer on behalf of employees
of a trust or plan for such employees, their spouses and their children under
the age of 21 or a trust or plan for such employees, which provides for
purchases through periodic payroll deductions or otherwise. There must be at
least five initial participants with accounts investing or invested in shares of
one or more of the Funds and/or certain other funds.
The initial purchase by the eligible benefit plan along with prior purchases by
or for the benefit of the initial participants of the plan must aggregate not
less than $5,000. Subsequent purchases must be at least $50 per account and must
aggregate at least $250. The eligible benefit plan must make purchases using a
single order and a single check or federal funds wire. The eligible benefit plan
may not make purchases more often than monthly. The Company will establish a
separate account for each employee, spouse or child for which purchases are
made. The Company may modify the requirements for initiating or continuing
purchases or stop offering shares to such a plan at any time without prior
notice.
SELLING SHARES
You may redeem shares of the Funds at any time and in any amount by mail or
telephone. The Funds will use reasonable procedures to confirm that instructions
communicated by telephone are genuine and, if the procedures are followed, will
not be liable for any losses due to unauthorized or fraudulent telephone
transactions.
The Company's procedure is to redeem shares at the NAV determined after FSI
receives the redemption request in proper order. The Company deducts a 2%
redemption fee from proceeds of Emerging Markets Fund shares, E. European Equity
Fund shares or E. European Debt Fund shares redeemed less than six months after
purchase (including shares to be exchanged). The applicable Fund retains this
amount to offset the Fund's costs of purchasing or selling securities.
The Company may suspend the right to redeem shares for any period during which
the NYSE is closed or the SEC determines that there is an emergency. In such
circumstances you may withdraw your redemption request or permit your request to
be held for processing at the NAV next computed after the suspension is
terminated.
SMALL ACCOUNTS
Due to the relatively higher cost of maintaining small accounts, the Company may
deduct $10 per year from your account or may redeem the shares in your account,
if it has a value of less than $1,000. The Company will advise you in writing
sixty (60) days prior to deducting the annual fee or closing your account,
during which time you may purchase additional shares in any amount necessary to
bring the account back to $1,000. The Company will not close your account if it
falls below $1,000 solely because of a market decline.
SPECIAL SHAREHOLDER SERVICES
As described briefly in the Prospectus, each Fund offers the following
shareholder services:
Regular Account: A regular account allows a shareholder to make voluntary
investments and/or withdrawals at any time. Regular accounts are available to
individuals, custodians, corporations, trusts, estates, corporate retirement
plans and others. You may use the Account Application provided with the
Prospectus to open a regular account.
Telephone Transactions: You may redeem shares or transfer into another fund if
you request this service on your initial Account Application. If you do not
elect this service at that time, you may do so at a later date by sending a
written request and signature guarantee to FSI.
Each Fund employs reasonable procedures designed to confirm the authenticity of
your telephone instructions and, if it does not, it may be liable for any losses
caused by unauthorized or fraudulent transactions. As a result of this policy, a
shareholder that authorizes telephone redemption bears the risk of losses, which
may result from unauthorized or fraudulent transactions which the Fund believes
to be genuine. When you request a telephone redemption or transfer, you will be
asked to respond to certain questions. The Company has designed these questions
to confirm your identity as a shareholder of record. Your cooperation with these
procedures will protect your account and the Fund from unauthorized
transactions.
Invest-A-Matic Account: Invest-A-Matic Accounts allow shareholders to make
automatic monthly investments into their account. Upon request, FSI will
withdraw a fixed amount each month from a shareholder's checking account and
apply that amount to additional shares. This feature does not require you to
make a commitment for a fixed period of time. You may change the monthly
investment, skip a month or discontinue your Invest-A-Matic Plan as desired by
notifying FSI. In order to open an Invest-A-Matic Account, you must complete a
separate application. To obtain an application, or to receive more information,
please call the offices of the Company at 1-800-527-9500. Any shareholder may
utilize this feature.
Individual Retirement Account ("IRA"): All wage earners under 70-1/2, even those
who participate in a company sponsored or government retirement plan, may
establish their own IRA. You can contribute 100% of your earnings up to $2,000
(or $2,250 with a spouse who is not a wage earner, for years prior to 1997). A
spouse who does not earn compensation can contribute up to $2,000 per year to
his or her own IRA. The deductibility of such contributions will be determined
under the same rules that govern contributions made by individuals with earned
income. A special IRA program is available for corporate employers under which
the employers may establish IRA accounts for their employees in lieu of
establishing corporate retirement plans. Known as SEP-IRA's (Simplified Employee
Pension-IRA), they free the corporate employer of many of the recordkeeping
requirements of establishing and maintaining a corporate retirement plan trust.
If you have received a lump sum distribution from another qualified retirement
plan, you may rollover all or part of that distribution into your Fund IRA. A
rollover contribution is not subject to the limits on annual IRA contributions.
By acting within applicable time limits of the distribution you can continue to
defer Federal Income Taxes on your rollover contribution and on any income that
is earned on that contribution.
Roth IRA: A Roth IRA permits certain taxpayers to make a non-deductible
investment of up to $2,000 per year. Provided an investor does not withdraw
money from his or her Roth IRA for a 5 year period, beginning with the first tax
year for which contribution was made, deductions from the investor's Roth IRA
would be tax free after the investor reaches the age of 59-1/2. Tax free
withdrawals may also be made before reaching the age of 59-1/2 under certain
circumstances. Please consult your financial and/or tax professional as to your
eligibility to invest in a Roth IRA. An investor may not make a contribution to
both a Roth IRA and a regular IRA in any given year.
An annual limit of $2,000 applies to contributions to regular and Roth IRAs. For
example, if a taxpayer contributes $2,000 to a regular IRA for a year, he or she
may not make any contribution to a Roth IRA for that year.
How to Establish Retirement Accounts: Please call the Company to obtain
information regarding the establishment of individual retirement plan accounts.
Each plan's custodian charges nominal fees in connection with plan establishment
and maintenance. These fees are detailed in the plan documents. You may wish to
consult with your attorney or other tax advisor for specific advice concerning
your tax status and plans.
Exchange Privilege: Shareholders may exchange their shares for shares of any
other series of the Company, provided the shares of the fund the shareholder is
exchanging into are noticed for sale in the shareholder's state of residence.
Each account must meet the minimum investment requirements (currently $1,000).
You must complete an Exchange Privilege Authorization Form to make an exchange.
Also, to make an exchange, an exchange order must comply with the requirements
for a redemption or repurchase order and must specify the value or the number of
shares to be exchanged. Your exchange will take effect as of the next
determination of the Fund's NAV per share (usually at the close of business on
the same day). FSI will charge your account a $10.00 service fee each time you
make such an exchange. The Company reserves the right to limit the number of
exchanges or to otherwise prohibit or restrict shareholders from making
exchanges at any time, without notice, should the Company determine that it
would be in the best interest of its shareholders to do so. For tax purposes, an
exchange constitutes the sale of the shares of the Fund from which you are
exchanging and the purchase of shares of the Fund into which you are exchanging.
Consequently, the sale may involve either a capital gain or loss to the
shareholder for federal income tax purposes. The exchange privilege is available
only in states where it is legally permissible to do so. You may obtain Exchange
Privilege Authorization Forms by calling the Company at 1-800-527-9525.
TAX STATUS
DISTRIBUTIONS AND TAXES
Distributions of net investment income
The Funds receive income generally in the form of dividends and interest on
their investments. This income, less expenses incurred in the operation of a
Fund, constitutes a Fund's net investment income from which dividends may be
paid to you. Any distributions by a Fund from such income will be taxable to you
as ordinary income, whether you take them in cash or in additional shares.
Distributions of capital gains
The Funds may derive capital gains and losses in connection with sales or other
dispositions of their portfolio securities. Distributions from net short-term
capital gains will be taxable to you as ordinary income. Distributions from net
long-term capital gains will be taxable to you as long-term capital gain,
regardless of how long you have held your shares in a Fund. Any net capital
gains realized by a Fund generally will be distributed once each year, and may
be distributed more frequently, if necessary, in order to reduce or eliminate
excise or income taxes on the Fund.
Effect of foreign investments on distributions
Most foreign exchange gains realized on the sale of debt securities are treated
as ordinary income by a Fund. Similarly, foreign exchange losses realized by a
Fund on the sale of debt securities are generally treated as ordinary losses by
the Fund. These gains when distributed will be taxable to you as ordinary
dividends, and any losses will reduce a Fund's ordinary income otherwise
available for distribution to you. This treatment could increase or reduce a
Fund's ordinary income distributions to you, and may cause some or all of a
Fund's previously distributed income to be classified as a return of capital.
A Fund may be subject to foreign withholding taxes on income from certain of its
foreign securities. If more than 50% of a Fund's total assets at the end of the
fiscal year are invested in securities of foreign corporations, a Fund may elect
to pass-through to you your pro rata share of foreign taxes paid by the Fund. If
this election is made, the year-end statement you receive from a Fund will show
more taxable income than was actually distributed to you. However, you will be
entitled to either deduct your share of such taxes in computing your taxable
income or (subject to limitations) claim a foreign tax credit for such taxes
against your U.S. federal income tax. A Fund will provide you with the
information necessary to complete your individual income tax return if it makes
this election.
Information on the tax character of distributions
The Funds will inform you of the amount of your ordinary income dividends and
capital gains distributions at the time they are paid, and will advise you of
their tax status for federal income tax purposes shortly after the close of each
calendar year. If you have not held Fund shares for a full year, a Fund may
designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the Fund.
Election to be taxed as a regulated investment company
Each Fund has elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code, has qualified as such for its most
recent fiscal year, and intends to so qualify during the current fiscal year. As
regulated investment companies, the Funds generally pay no federal income tax on
the income and gains they distribute to you. The board reserves the right not to
maintain the qualification of a Fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such case,
a Fund will be subject to federal, and possibly state, corporate taxes on its
taxable income and gains, and distributions to you will be taxed as ordinary
dividend income to the extent of such Fund's earnings and profits.
Excise tax distribution requirements
To avoid federal excise taxes, the Internal Revenue Code requires a Fund to
distribute to you by December 31 of each year, at a minimum, the following
amounts: 98% of its taxable ordinary income earned during the calendar year; 98%
of its capital gain net income earned during the twelve month period ending
October 31; and 100% of any undistributed amounts from the prior year. Each Fund
intends to declare and pay these amounts in December (or in January that are
treated by you as received in December) to avoid these excise taxes, but can
give no assurances that its distributions will be sufficient to eliminate all
taxes.
Redemption of Fund shares
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. If you redeem your Fund shares, or exchange your
Fund shares for shares of a different series of the Company, the IRS will
require that you report a gain or loss on your redemption or exchange. If you
hold your shares as a capital asset, the gain or loss that you realize will be
capital gain or loss and will be long-term or short-term, generally depending on
how long you hold your shares. Any loss incurred on the redemption or exchange
of shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gains distributed to you by the Fund
on those shares.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you buy other shares in such Fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you purchase.
U.S. Government Obligations
Many states grant tax-free status to dividends paid to you from interest earned
on direct obligations of the U.S. government, subject in some states to minimum
investment requirements that must be met by the Fund. Investments in Government
National Mortgage Association or Federal National Mortgage Association
securities, bankers' acceptances, commercial paper and repurchase agreements
collateralized by U.S. government securities do not generally qualify for
tax-free treatment. The rules on exclusion of this income are different for
corporations.
Dividends-received deduction for corporations
If you are a corporate shareholder, you should note that 10% of the dividends
paid by the Value Fund for the most recent fiscal year qualified for the
dividends-received deduction. In some circumstances, you will be allowed to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay on these dividends. The dividends-received
deduction will be available only with respect to dividends designated by the
Value Fund as eligible for such treatment. All dividends (including the deducted
portion) must be included in your alternative minimum taxable income
calculation.
Because the income of the International Equity Fund, E. European Equity Fund,
Bond Fund, Emerging Markets Equity Fund and E. European Debt Fund is derived
primarily from investments in foreign rather than domestic U.S securities, no
portion of its distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by such Funds for the
most recent calendar year qualified for such deduction, and it is anticipated
that none of the current year's dividends will so qualify.
Investment in complex securities
The Funds may invest in complex securities. These investments may be subject to
numerous special and complex tax rules. These rules could affect whether gains
and losses recognized by a Fund are treated as ordinary income or capital gain,
accelerate the recognition of income to a Fund and/or defer a Fund's ability to
recognize losses, and, in limited cases, subject a Fund to U.S. federal income
tax on income from certain of its foreign securities. In turn, these rules may
affect the amount, timing or character of the income distributed to you by a
Fund.
INVESTMENT PERFORMANCE
For purposes of quoting and comparing the performance of the Funds to that of
other mutual funds and to relevant indices in advertisements or in reports to
shareholders, performance will be stated in terms of total return or yield. Both
"total return" and "yield" figures are based on the historical performance of a
Fund, show the performance of a hypothetical investment and are not intended to
indicate future performance.
YIELD INFORMATION
From time to time, the Funds may advertise a yield figure. A portfolio's yield
is a way of showing the rate of income the portfolio earns on its investments as
a percentage of the portfolio's share price. Under the rules of the SEC, yield
must be calculated according to the following formula:
Yield = 2[(a-b +1)-1]6
cd
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
A Fund's yield, as used in advertising, is computed by dividing the Fund's
interest and dividend income for a given 30-day period, net of expenses, by the
average number of shares entitled to receive distributions during the period
dividing this figure by a Fund's NAV at the end of the period and annualizing
the result (assuming compounding of income) in order to arrive at an annual
percentage rate. Income is calculated for purposes of yield quotations in
accordance with standardized methods applicable to all stock and bond mutual
funds. Dividends from equity investments are treated as if they were accrued on
a daily basis solely for the purposes of yield calculations. In general,
interest income is reduced with respect to bonds trading at a premium over their
par value by subtracting a portion of the premium from income on a daily basis,
and is increased with respect to bonds trading at a discount by adding a portion
of the discount to daily income. Capital gains and losses generally are excluded
from the calculation. Income calculated for the purpose of calculating a Fund's
yield differs from income as determined for other accounting purposes. Because
of the different accounting methods used, and because of the compounding assumed
in yield calculations, the yield quoted for a Fund may differ from the rate of
distributions the fund paid over the same period or the rate of income reported
in the Fund's financial statements.
TOTAL RETURN PERFORMANCE
Under the rules of the SEC, fund advertising performance must include total
return quotes, "T" below, calculated according to the following formula:
P(1+T)n= ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1,5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods (or fractional portion
thereof).
The average annual total return will be calculated under the foregoing formula
and the time periods used in advertising will be based on rolling calendar
quarters, updated to the last day of the most recent quarter prior to submission
of the advertising for publication, and will cover prescribed periods. When the
period since inception is less than one year, the total return quoted will be
the aggregate return for the period. In calculating the ending redeemable value,
all dividends and distributions by a Fund are assumed to have been reinvested at
NAV as described in the prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the prescribed periods (or fractional
portions thereof) that would equate the initial amount invested to the ending
redeemable value.
Fund Name One-Year Five-Year Ten-Year From
Period Ended Period Ended Period Ended Inception
12/31/98 12/31/98 12/31/98 12/31/98
Value Fund 14.70% 21.27% N/A 17.12%
International Equity Fund 16.77% 9.38% N/A 9.89%
Emerging Markets Fund (22.20%) N/A N/A (20.97%)
E. European Equity Fund (46.62%) N/A N/A ( 4.95%)
Bond Fund 14.85% N/A N/A 7.07%
E. European Debt Fund 24.54% N/A N/A 17.43%
The Funds may also from time to time include in such advertising an aggregate
total return figure or an average annual total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately each Fund's performance with other measures of investment return. The
Funds may quote an aggregate total return figure in comparing each Fund's total
return with data published by Lipper Analytical Services, Inc. or with the
performance of various indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, Russell Indices, the
Value Line Composite Index, the Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency Index,
Merrill Lynch Intermediate Agency Index, Morgan Stanley Capital International
Europe, Australia, Far East Index or the Morgan Stanley Capital International
World Index. For such purposes, each Fund calculates its aggregate total return
for the specific periods of time by assuming the investment of $1,000 in shares
of the applicable Fund and assuming the reinvestment of each dividend or other
distribution at NAV on the reinvestment date. Percentage increases are
determined by subtracting the initial value of the investment from the ending
value and by dividing the remainder by the beginning value. To calculate its
average annual total return, the aggregate return is then annualized according
to the SEC's formula for total return quotes outlined above.
The Funds may also advertise the performance rankings assigned by the various
publications and statistical services, including but not limited to, SEI, Lipper
Mutual Performance Analysis, Intersec Research Survey of non-U.S. Equity Fund
Returns, Frank Russell International Universe, and any other data which may be
reported from time to time by Dow Jones & Company, Morningstar, Inc., Chase
Investment Performance, Wilson Associates, Stanger, CDA Investment Technologies,
Inc., the Consumer Price Index ("CPI"), The Bank Rate Monitor National Index, or
IBC/Donaghue's Average U.S. Government and Agency, or as appears in various
publications, including but not limited to, The Wall Street Journal, Forbes,
Barron's, Fortune, Money Magazine, The New York Times, Financial World,
Financial Services Week, USA Today and other national or regional publications.
FINANCIAL INFORMATION
Financial Highlights, Statements and Reports of Independent Accountants. You can
receive free copies of reports, request other information and discuss your
questions about the Funds by contacting the Funds directly at:
VONTOBEL FUNDS, INC.
1500 Forest Avenue, Suite 223
Richmond, VA 23229
The books of each Fund will be audited at least once each year by Tait, Weller
and Baker, of Philadelphia, PA, independent public accountants.
The Fund's audited financial statements and notes thereto for the year ended
December 31, 1998 and the unqualified report of Tait, Weller & Baker, on such
financial statements (the "Report") are incorporated by reference in this SAI
and are included in the Fund's 1998 annual report to shareholders (the "Annual
Report"). A copy of the Annual Report accompanies this SAI and an investor may
obtain a copy of the Annual Report by writing to the Fund or calling
(800)-527-9500.
<PAGE>
VONTOBEL FUNDS, INC.
1500 Forest Avenue, Suite 223, P.O. Box 8687, Richmond, VA 23229
(800) 527-9500 * (804) 285-8211 * Fax (804) 285-8251
VIA EDGAR
May 6, 1999
Filing Desk
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Vontobel Funds, Inc.
File Numbers 2-78931 & 811-3551
Gentlemen:
Transmitted herewith for electronic filing on behalf of Vontobel Funds, Inc.
(the "Fund"), please find enclosed, pursuant to Rule 497(c) under the Securities
Act of 1933, as amended, a copy of the Prospectus and Statement of Additional
Information of the Funds dated May 1, 1999 for the Vontobel International Equity
Fund series, the Vontobel U.S. Value Fund series, the Vontobel International
Bond Fund series, the Vontobel Eastern European Equity Fund series and the
Vontobel Emerging Markets Equity Fund series.
Should you have any questions, please feel free to contact the undersigned.
Sincerely,
/s/ John Pasco, III
John Pasco, III
