COMMONWEALTH SHAREHOLDER SERVICES, INC.
1500 FOREST AVENUE, SUITE 223 * P.O. BOX 8687 * RICHMOND, VA 23229
(804) 285-8211 * (800) 527-9500 * FAX (804) 285-8251
FILED VIA EDGAR
May 5, 2000
Filing Desk
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Reference: Vontobel Funds, Inc.
File Number 333-82107
Filed Pursuant to Rule 497 (c)
Gentlemen:
Transmitted herewith for electronic filing on behalf of Vontobel Funds, Inc.,
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 dated May 1, 2000.
Should you have questions or comments regarding this filing, please contact
the undersigned.
Sincerely,
/s/ John Pasco, III
- -------------------
John Pasco, III
<PAGE>
Prospectus
Vontobel U.S. Value Fund
Vontobel International Equity Fund
Vontobel Eastern European Equity Fund
Vontobel U.S. Equity Fund
Vontobel Greater European Bond Fund
Series of Vontobel Funds, Inc.
(the "Company")
A "Series" Investment Company
Prospectus Dated
May 1, 2000
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.
<PAGE>
TABLE OF CONTENTS PAGE NUMBER
RISK/RETURN SUMMARY...................................
VONTOBEL U.S. VALUE FUND.........................
VONTOBEL INTERNATIONAL EQUITY FUND...............
VONTOBEL EASTERN EUROPEAN EQUITY FUND............
VONTOBEL U.S. EQUITY FUND........................
VONTOBEL GREATER EUROPEAN BOND FUND..............
FUND FEES AND EXPENSES................................
INVESTMENT OBJECTIVES/STRATEGIES AND RISKS............
OTHER PRINCIPAL RISKS.................................
MANAGEMENT ORGANIZATION AND CAPITAL STRUCTURE.........
SHAREHOLDER INFORMATION...............................
PURCHASING SHARES.....................................
REDEEMING SHARES......................................
OTHER SHAREHOLDER SERVICES............................
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.............
DISTRIBUTIONS AND TAXES...............................
DISTRIBUTION ARRANGEMENTS.............................
FINANCIAL HIGHLIGHTS..................................
<PAGE>
RISK/RETURN SUMMARY
VONTOBEL U.S. VALUE FUND ("Value Fund")
Investment Objective: Long-term capital returns
Principal Investment
Strategies: Under normal circumstances, the
Value Fund will invest at least 65%
of its assets in equity securities
that are traded on U.S. exchanges.
The Fund also invests 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 adviser 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 returns, 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 actual performance over various lengths of time and provides a
comparison to a broad measure of market performance over the same lengths of
time. Please keep in mind that the Value Fund's past performance may not
indicate how it will perform in the future.
<PAGE>
[Bar chart goes here]
Value Fund
Year Total Return
1991 37.29%
1992 16.30%
1993 6.00%
1994 0.02%
1995 40.36%
1996 21.28%
1997 34.31%
1998 14.70%
1999 (14.07%)
Best Calendar Quarter 1st Q 1991 up 21.90%
Worst Calendar Quarter 3rd Q 1999 down 15.30%
The following table compares the performance of the Value Fund and the Standard
and Poor's 500 Index (the "S&P 500 Index"). The S&P 500 Index is an unmanaged
index of 500 stocks of a representative sampling of leading U.S. companies based
on market size, liquidity and industry group representation. Returns include
dividends and distributions and are expressed in U.S. dollars.
Average Annual Total Returns
(for the period ending December 31, 1999)
-----------------------------------------
Since Inception
1 Year 5 Years (March 30, 1990)
------ ------- ----------------
Value Fund (14.07%) 17.64% 13.45%
S&P 500 Index 21.04% 28.55% 19.06%
VONTOBEL INTERNATIONAL EQUITY FUND ("International Equity Fund")
Investment Objective: Capital appreciation
Principal Investment
Strategies: Under normal circumstances the International
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 hold primarily 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
Adviser 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 of
companies in emerging and developing 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 in 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. You should not
invest in the International Equity
Fund if you are not willing to
accept the risks associated with
investing in foreign countries or if
you are seeking current income.
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 actual performance over various lengths of time and
provides a comparison to a broad measure of market performance over the same
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.
[Bar chart goes here]
International Equity Fund
Year Total Return
1990* (12.42%)
1991 18.74%
1992 (2.37%)
1993 40.80%
1994 (5.28%)
1995 10.91%
1996 16.98%
1997 9.19%
1998 16.77%
1999 46.52%
Best Calendar Quarter 4th Q 1999 up 34.02%
Worst Calendar Quarter 3rd Q 1990 down 19.40%
* Represents a period during which the Fund was advised by other investment
advisers. On July 6, 1990, the Fund's current investment adviser 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, Australasia and Far East
Index ("MSCI EAFE Index"). The MSCI EAFE Index is an unmanaged index of more
than 1,100 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 period ending December 31, 1999)
-----------------------------------------
Since Inception
1 Year 5 Years (July 6, 1990)
------ ------- --------------
International Equity Fund 46.52% 19.36% 13.26%
MSCI EAFE Index 27.28% 13.15% 9.20%
VONTOBEL EASTERN EUROPEAN EQUITY FUND ("E. European Equity Fund")
Investment Objective: Capital appreciation
Principal Investment
Strategies: Under normal circumstances, the E. European
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
adviser 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 of companies
that trade in emerging and developing 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 in 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 current equity
holdings and to take advantage of
opportunities in the newly
reorganized markets of Eastern
Europe. You should not invest in
the E. European Equity Fund if you
are not willing to accept the risk
associated with investing in foreign
and developing markets or if you are
seeking current income.
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 actual performance over various lengths of time and
provides a comparison to a broad measure of market performance over the same
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.
[Bar chart goes here]
E. European Equity Fund
Year Total Return
1997 8.74%
1998 (46.62%)
1999 14.50%
Best calendar quarter 4th Q 1999 up 31.64%
Worst calendar quarter 3rd Q 1998 down 40.48%
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 securities exchanges or established over-the-counter markets
in Poland, the Czech Republic, Hungary, Slovakia, Croatia, Romania, Slovenia,
Estonia, Latvia, Lithuania and Russia. Returns do not include dividends or
distributions and are expressed in U.S. dollars. The E. European Equity Fund's
returns include dividends and distributions and are expressed in U.S. dollars.
Average Annual Total Returns
(for the period ending December 31, 1999)
-----------------------------------------
Since Inception
1 Year 3 Years (February 15, 1996)
E. European Equity Fund 14.50% (12.73%) (0.27%)
Nomura Composite-11 Index 16.51% ( 2.85%) 5.61%
VONTOBEL U.S. EQUITY FUND ("U.S. Equity Fund")
Investment Objective: Long-term capital returns
Principal Investment Strategies: Under normal circumstances,
the U.S. Equity Fund will
invest at least 65% of its
total assets in equity
securities and securities
that are convertible into
equity securities. The Fund
typically invests in
securities that are traded
on U.S. exchanges.
Principal Investment Risks: The U.S. Equity Fund's
investments are subject to
market, economic and
business risks. These risks
will cause the U.S. Equity
Fund's net asset value
("NAV") to fluctuate over
time. Therefore, the value
of your investment in the
U.S. Equity Fund could
decline. Also, there is no
assurance that the
investment adviser will
achieve the U.S. Equity
Fund's objective.
An investment in the U.S. Equity Fund is not a
bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or
any other government agency.
Investor Profile: You may want to invest in
the U.S. Equity Fund if you
are seeking long-term
capital returns, and are
willing to accept share
prices that may fluctuate,
sometimes significantly,
over the short term. You
should not invest in the
U.S. Equity Fund if you are
seeking current income.
Performance Information
The bar chart and table below shows the U.S. Equity Fund's performance for one
year. The table below the chart shows what the return would equal if you
averaged actual performance over various lengths of time and provides a
comparison to a broad measure of market performance over the same lengths of
time. Please keep in mind that the U.S. Equity Fund's past performance may not
indicate how it will perform in the future.
[Bar chart goes here]
U.S. Equity Fund
Year Total Return
1998 (22.40%)
1999 32.56%
Best Calendar Quarter 4th Q 1999 up 22.50%
Worst Calendar Quarter 3rd Q 1998 down 24.77%
The following table compares the performance of the U.S. Equity Fund, the S&P
500 Index and Morgan Stanley Capital International's Emerging Markets Free Index
(the "MSCI EMF Index"). The MSCI EMF Index is a market-capitalization-weighted
index of equity securities traded on securities exchanges or established over
the counter markets in 25 emerging markets countries. Index returns include
dividends and distributions and are expressed in U.S. dollars. The S&P 500 Index
is an unmanaged index of 500 stocks of a representative sampling of leading U.S.
companies based on market size, liquidity and industry group representation.
Returns include dividends and distributions and are expressed in U.S. dollars.
As of December 27, 1999, the fund's investment strategy for achieving its
objective of long-term capital appreciation became to invest in a carefully
selected and continuously managed diversified portfolio consisting primarily of
equity securities of issuers in the United States. Formerly, as Vontobel
Emerging Markets Equity Fund, the Fund invested in equity securities of issuers
in developing countries around the world. Effective January 1, 2000, the Fund
began to compare itself against the S&P 500 Index.
Average Annual Total Returns
(for the period ending December 31, 1999)
-----------------------------------------
Since Inception
1 Year (September 1, 1997)
------ -------------------
U.S. Equity Fund 32.56% ( 1.34%)
MSCI EMF Index 63.70% 1.00%
S&P 500 Index 21.04% 23.56%
VONTOBEL GREATER EUROPEAN BOND FUND ("Bond Fund")
Investment Objective: To maximize total return from
capital growth and income.
Principal Investment
Strategies: Under normal circumstances, the Bond Fund will
invest at least 65% of its total assets in
fixed-income instruments that are issued by
borrowers located in Western and Eastern
European countries. The Fund will normally
invest at least 65% of its total assets in debt
instruments denominated in foreign currencies.
It generally will invest in securities rated
Baa3 or higher by Moody's Investors Service,
Inc. ("Moody's") or BBB- or higher by Standard &
Poor's Ratings Group ("S&P") or unrated
securities which the Adviser believes are of
comparable quality.
The Fund will normally have investments in
securities of issuers from a minimum of three
different countries. Under certain
circumstances, the Bond Fund will hold a U.S.
dollar cash position up to 35% of its net
assets, hold foreign cash positions up to 25% of
its assets, and may hold up to 90% of its assets
in securitized money market instruments.
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 or
increase. There is no assurance
that the Bond Fund will achieve its
objective.
The Bond Fund will invest in foreign countries
and its 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 Fund may be
especially suitable for you if you
are willing to take advantage of
opportunities in bond markets
throughout Europe. You should not
invest in the Bond Fund if you are
not willing to accept the risks
associated with investing in foreign
countries and developing markets.
Performance Information
The bar chart and table below shows the Bond Fund's performance for one year.
The table below the chart shows what the return would equal if you averaged
actual performance over various lengths of time and provides a comparison to a
broad measure of market performance over the same lengths of time. Please keep
in mind that the Bond Fund's past performance may not indicate how it will
perform in the future.
[Bar chart goes here]
Bond Fund
Year Total Return
1998 24.54%
1999 (9.01%)
Best calendar quarter 4th Q 1998 up 6.72%
Worst calendar quarter 1st Q 1999 down 9.70%
The following table compares the performance of the Bond Fund and a
market-weighted composite index as follows: For the period 8/29/97 through
8/31/99, the Bank Austria-Creditanstalt Eastern European Bond Index (BA/CA
Index). Effective 8/31/99, a composite index composed of the BA/CA Index (40%)
and the following J.P. Morgan (JPM) indices of government debt instruments
(60%): 5% JPM Sweden; 5% JPM Denmark; 15% JPM UK; 35% JPM European Monetary
Union. Returns for the composite indices for the period since inception include
income and are expressed in US$.
Average Annual Total Returns
(for the period ending December 31, 1999)
-----------------------------------------
Since Inception
1 Year (September 1, 1997)
------ -------------------
Bond Fund (9.01%) 5.26%
BA/CA-JPM Composite Index (5.86%) (16.54%)
FUND FEES AND EXPENSES
The following tables describe the fees and expenses that you will pay in
connection with purchases or redemption of shares of the Value Fund, the
International Equity Fund, the E. European Equity Fund, the U.S. Equity Fund and
the Bond 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.
The purpose of these tables is to assist investors in understanding the various
costs and expenses that they will bear directly or indirectly.
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 and other Distributions None
Redemption Fee (1) 2%(2)
Exchange Fee (4) None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees 0.93%
Distribution (12b-1 Fees) None
Other Expenses 0.94%
Total Annual Fund Operating Expenses 1.87%
----
Fee Waiver and/or Expense Reimbursements 0.12%
----
Net Expenses 1.75%(5)
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 and other Distributions None
Redemption Fee (1) 2.00%(2)
Exchange Fee (4) None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees 0.90%
Distribution (12b-1 Fees) None
Other Expenses 0.38%
Total Annual Fund Operating Expenses 1.28%
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 and other Distributions None
Redemption Fee (1) 2.00%(3)
Exchange Fee (4) None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees 1.25%
Distribution (12b-1 Fees) None
Other Expenses 2.12%
Total Annual Fund Operating Expenses 3.37%
U.S. 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 and other Distributions None
Redemption Fee (1) 2.00%(2)
Exchange Fee (4) None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees 1.00%
Distribution (12b-1 Fees) None
Other Expenses 1.80%
-----
Total Annual Fund Operating Expenses 2.80%
Fee Waiver and/or Expense Reimbursements 1.05%
-----
Net Expenses 1.75%(5)
BOND 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 and other Distributions None
Redemption Fee (1) 2.00%(3)
Exchange Fee (4) None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees 1.25%
Distribution (12b-1 Fees) None
Other Expenses 1.45%
----
Total Annual Fund Operating Expenses 2.70%
Fee Waiver and/or Expense Reimbursements 0.21%
----
Net Expenses 2.49%(6)
(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 three (3) months.
(3) A 2% redemption fee is charged on shares held less than six (6) months.
(4) A shareholder may be charged a $10 fee for each telephone exchange.
(5)The expense information in the table has been restated to reflect current
expenses. These costs are net of fee waivers and reimbursements to maintain
total operating expenses to 1.75% pursuant to a contractual expense
limitation agreement (See Management Organization and Capital Structure
below).
(6)The expense information in the table has been restated to reflect current
expenses. These costs are net of fee waivers and reimbursements to maintain
total operating expenses to 2.49% pursuant to a contractual expense
limitation agreement (See Management Organization and Capital Structure
below).
EXAMPLES
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:
1 Year 3 Years 5 Years 10 Years
------ -------- ------- -------
Value Fund (1) $178 $ 551 $ 949 $2,062
International Equity Fund $130 $ 406 $ 702 $1,545
E. European Equity Fund $339 $1,036 $1,755 $3,658
U.S. Equity Fund (1) $178 $ 551 $ 949 $2,062
Bond Fund (2) $252 $ 776 $1,326 $2,826
(1)The expense information in the table has been restated to reflect current
expenses. These costs are net of fee waivers and reimbursements to maintain
total operating expenses to 1.75% pursuant to a contractual expense
limitation agreement (see Management Organization and Capital Structure
below).
(2)The expense information in the table has been restated to reflect current
expenses. These costs are net of fee waivers and reimbursements to maintain
total operating expenses to 2.49% pursuant to a contractual expense
limitation agreement (see Management Organization and Capital Structure
below).
<PAGE>
Absent these commitments, your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Value Fund $190 $588 $1,011 $2,190
U.S. Equity Fund $308 $942 $1,601 $3,365
Bond Fund $273 $838 $1,430 $3,032
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.
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 Adviser 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 "Adviser"), the investment adviser for each of the Funds,
employs a bottom-up approach to stockpicking. (A bottom-up approach means that
securities are selected company by company rather than by identifying a suitable
industry or market sector for investments and then investing in companies in
that industry or market sector.) This bottom-up approach emphasizes 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 Adviser 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 Adviser'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 Adviser 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 Adviser 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 and free cash flow, low debt and effective management.
As noted above, the Adviser seeks to achieve its investment objective by
investing principally in equity securities. Nonetheless, the Adviser 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 Adviser views its
"cash position" as a residual investment that is a measure of the ability of its
investment personnel to identify enough stocks and convertible securities that
meet their rigorous investment criteria.
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, the Value Fund
must meet certain diversification requirements. These include the requirement
that at the end of each tax year quarter, at least 50% of the market value of
its total assets must be invested in cash, cash equivalents, U.S. government
securities, and securities of issuers (including foreign governments), in which
it has invested not more than 5% of its assets. A regulated investment company
is also limited in its purchases of voting securities of any issuer and may
invest no more than 25% of the value of its total assets in securities (other
than U.S. Government securities) of any one issuer or of two or more issuers
that the Value Fund controls and are engaged in the same, similar or related
trades or business.
The Value Fund's investment success depends on the skill of the Adviser in
evaluating, selecting and monitoring the portfolio assets. If the Adviser's
conclusions about growth rates or securities values are incorrect, the Value
Fund may not perform as anticipated.
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 equity 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 Adviser will decide when and how much to invest in each of those
markets. Investments may also be made in equity securities 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 Adviser
seeks to invest in companies that have a long record of successful operations in
their core business and earnings growth through increasing market share and unit
sales volumes. These companies are typically among the leaders in their
industry, having demonstrated consistent growth in cash flow, sales, operating
profits, returns on equity and returns on invested capital, and little or no
debt. The 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.
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, Depositary Receipts may be purchased if trading conditions make them
more attractive than the underlying security (see Depositary Receipts below).
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 Fund's investment success depends on the skill of the Adviser in evaluating,
selecting and monitoring the portfolio assets. If the Adviser's conclusions
about growth rates or securities values are incorrect, the International Equity
Fund may not perform as anticipated.
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 Adviser's
investment universe consists of companies that are located in, or listed on the
exchanges of Central and Eastern European 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 Adviser concentrates on the markets of
Hungary, Poland, Slovenia, the Czech Republic, Slovakia, Russia, Croatia and the
Baltic states (Estonia, Latvia and Lithuania). The Adviser can invest in local
shares in Poland, Hungary, the Czech Republic, Slovakia, the Baltic States,
Croatia, Romania and Slovenia. Elsewhere, due to the lack of local
sub-custodians or liquidity, the Adviser currently invests only through ADR ,
GDR or RDC 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 Adviser
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
Adviser considers only about 250 stocks as suitable for investment, based upon
their market capitalization and liquidity. The Adviser expects this number to
increase dramatically in the years to come. Together, these 250 stocks represent
a market capitalization of approximately US$ 75 billion.
The Fund faces those same risks that are associated with investing in foreign
and developing markets (see "Other Principal Risks" below). The E. European
Equity Fund's investment success depends on the skill of the Adviser in
evaluating, selecting and monitoring the portfolio assets. If the Adviser's
conclusions about growth rates or securities values are incorrect, the 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 E. European 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 in addition to its own expenses. Also,
federal 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.
U.S. Equity Fund
The U.S. Equity Fund's investment objective is to achieve long-term capital
returns in excess of the broad market by investing in equity securities and
securities that are convertible into equity securities, such as warrants,
convertible bonds, debentures or convertible preferred stock. Under normal
circumstances, the U.S. Equity Fund will invest at least 65% of its total assets
in equity securities or securities that are convertible into equity securities.
The U.S. Equity Fund typically invests in securities that are traded on U.S.
exchanges. As of January 1, 2000, the Adviser uses the S&P 500 Index as the
benchmark for the broad market against which the performance of the U.S. Equity
Fund is measured. Prior to January 1, 2000, the Adviser used the EMF Index.
The portfolio of the U.S. Equity Fund will be diversified. The U.S. Equity Fund
typically invests in the securities of medium to large capitalization companies,
but is not limited to investing in securities of companies of any size. Using a
bottom-up investment approach, the Adviser seeks to invest in companies that
have a long record of successful operations in their core business and earnings
growth through increasing market share and unit sales volumes. These companies
are typically among the leaders in their industry, having demonstrated
consistent growth in cash flow, sales, operating profits, returns on equity and
returns on invested capital, and little or no debt. The U.S. Equity Fund also
intends to diversify investments broadly among sectors.
The U.S. Equity Fund may invest more than 5% of its assets in U.S. Government
debt securities. However, because it intends to qualify as a "regulated
investment company" for purposes of Subchapter M of the Code, the U.S. Equity
Fund must meet certain diversification requirements. These include the
requirement that at the end of each tax year quarter, at least 50% of the market
value of its total assets must be invested in cash, cash equivalents, U.S.
Government securities, and securities of issuers (including foreign
governments), in which it has invested not more than 5% of its assets. A
regulated investment company is also limited in its purchases of voting
securities of any one issuer and may invest no more than 25% of that value of
its total assets in securities (other than U.S. Government securities) of any
one issuer.
The U.S. Equity Fund's investment success depends on the skill of the Adviser in
evaluating, selecting and monitoring the portfolio assets. If the Adviser's
conclusions about growth rates or securities values are incorrect, the U.S.
Equity Fund may not perform as anticipated.
Bond Fund
The Bond Fund's objective is to maximize total return from capital growth and
income. The Fund will seek to achieve its investment objective by investing in
fixed-income securities that are issued by borrowers in both Western and Eastern
European countries. Foreign government, governmental agency and supranational
agency obligations issued in local currencies represent the most common types of
investments used in the Fund's portfolio.
Under normal circumstances the Bond Fund will invest at least 65% of its total
assets in fixed-income instruments that are issued by borrowers located in
Western and Eastern European countries.
It generally will invest in securities rated Baa3 or higher by Moody's or BBB-
by S&P or unrated securities which the Adviser believes are of comparable
quality. The Fund reserves the right, however, to invest more than 5% of its
assets in lower rated securities (including unrated securities which the Adviser
believes to be of such lower quality). The Fund will invest no more than 10% in
securities rated Ba2 by Moody's or BB by S&P and no more than 5% in securities
rated B2 by Moody's or rated B by S&P, or securities which are unrated but are
of comparable quality as determined by the Adviser.
The Fund will normally have investments in securities of issuers from a minimum
of three different countries. The Fund's investment universe includes, but is
not limited to, Germany, the United Kingdom, France, Denmark, Norway, Sweden,
Belgium, Spain, Switzerland, Ireland, Portugal, Italy, Austria, Finland,
Luxembourg, Greece, Turkey, the Czech Republic, Slovakia, Hungary, Poland,
Slovenia, the Baltic states, Croatia, Romania and Russia.
Generally, the Fund will have up to a maximum of 50% of total assets invested in
debt instruments denominated in the currencies of developing European nations
(including Greece, Turkey and Portugal in addition to Eastern Europe), and 50%
of its total assets in debt instruments of Western Europe. When investments in
Eastern European debt instruments appear more volatile, the Adviser may reduce
its holdings in those instruments to 40%. Conversely, when market conditions in
Eastern European countries appear more favorable, total assets invested in debt
instruments may be increased to 60%. In extreme circumstances, the Fund may
invest up to 80% of its total assets in Western European debt instruments.
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. In circumstances where the outlook for U.S. dollar cash returns
is more attractive than that for cash and bond returns in all other currencies,
the Fund will hold a U.S. dollar cash position of up to 35% of the Fund's total
assets. Conversely, if the outlook for Eastern European currency cash returns is
more attractive, the Fund will hold foreign cash positions of up to 25% of the
Fund's total assets. From time to time, the Adviser 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 European countries,
commercial paper and corporate short-term paper with maturities of up to one
year.
The selection of bonds for the Bond Fund is dependent upon the Adviser's
evaluation of those factors influencing interest rates. The Adviser 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 Adviser 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 Adviser 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 Adviser's top-down market allocation decision. The Adviser is conscious
of the need for liquidity and therefore invests only in issues within a sector
that the Adviser 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 Bond
Fund. Maturity selection is based on the Adviser'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
Adviser 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.
OTHER PRINCIPAL RISKS
Stock Market Stock market risk is the risk is the
Risk 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
Funds may increase or decrease.
Interest Rate Interest rate risk is the risk that when Risk interest rates
rise, debt security prices
fall. The opposite is also true: debt
security prices rise when interest rates
fall. In general, securities with longer
maturities are more sensitive to these
price changes.
Geographic Investments in a single region, even though
Risks representing a number of different
countries within the region, may be affected by common
economic forces and other factors. A Fund is subject to
greater risks of adverse events which occur in the region and
may experience greater volatility than a Fund that is more
broadly diversified geographically. Political or economic
disruptions in European countries, even in countries in which
a Fund is not invested, may adversely affect security values
and thus, a Fund's holdings.
European Several European countries are
Currency 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 invest in securities of countries that have converted to
the Euro or convert in the future, that 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 A Fund's investments in foreign securities
Investing 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.
Emerging and A Fund's investments in emerging and
Developing developing countries involve those same
Markets 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, theses markets may be
subject to more substantial volatility and price fluctuations
than securities that are traded on more developed markets.
Depositary Depositary Receipts are receipts typically
Receipts issued in the U.S. by a bank or trust
company evidencing ownership of an underlying foreign
security. The International Equity Fund and the E. European
Equity Fund may invest in Depositary Receipts 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 Depositary Receipts 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 Depositary Receipts.
Temporary When the Adviser believes that investments
Defensive should be deployed in a temporary defensive
Positions 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 purposes, each of the International Equity
Fund, E. European Equity Fund and the 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 objective.
The Adviser decides when it is appropriate to be in a
defensive position. It is impossible to predict for how long
such alternative strategies will be utilized.
MANAGEMENT ORGANIZATION AND CAPITAL STRUCTURE
Investment Adviser - Vontobel USA Inc., 450 Park Avenue, New York, N.Y. 10022,
manages the investments of each Fund pursuant to separate Investment Advisory
Agreements (each, an "Advisory Agreement"). The Adviser is a wholly owned and
controlled subsidiary of Vontobel Holding AG, a Swiss bank holding company,
having its registered offices in Zurich, Switzerland. As of December 31, 1999,
the Adviser manages in excess of $2.1 billion. The Adviser also acts as the
adviser to three series of a Luxembourg fund organized by an affiliate of the
Adviser. That fund does not accept investments from the U.S. The Adviser has
provided investment advisory services to mutual fund clients since 1990.
Pursuant to the Advisory Agreements, the Adviser provides the Funds with
investment management services and office space. The Adviser pays the office and
clerical expenses that are associated with investment research, statistical
analysis, and the supervision of the Fund's portfolios. The Adviser 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 Adviser. Each Fund is responsible for all other expenses that
are not specifically assumed by the Adviser. Such expenses include (but are not
limited to) brokerage fees and commissions, legal fees, auditing fees,
bookkeeping and record keeping fees, custodian and transfer agency fees and
registration fees.
As compensation for its service as investment adviser for each of the Funds, the
Adviser 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, 1999, the Adviser earned $1,224,969 for
the Value Fund, $1,474,217 for the International Equity Fund, $387,669 for the
E. European Equity Fund, $16,711 for the U.S. Equity Fund and $104,623 for the
Bond Fund. The Adviser waived fees of $22,500 for the Value Fund, $16,711 for
the U.S. Equity Fund and $104,623 for the Bond Fund.
In the interest of limiting expenses of the Value Fund, the U.S. Equity Fund and
the Bond Fund, the Adviser has entered into a contractual expense limitation
agreement with the Company. Pursuant to the agreement, the Adviser has agreed to
waive or limit its fees and to assume other expenses so that the total annual
operating expenses are limited to 1.75% for the Value Fund and the U.S. Equity
Fund; and 2.49% for the Bond Fund. These limits do not apply to interest, taxes,
brokerage commissions, other expenditures capitalized in accordance with
generally accepted accounting principles and other extraordinary expenses not
incurred in thee ordinary course of business.
Int'l. E.Eur. U.S.
Value Equity Equity Equity Bond
Amount of Assets Managed Fund Fund Fund Fund Fund
- --------------------------------------------------------------------------------
$0-$100 million 1.00% 1.00% 1.25% 1.00% 1.25%
More than $100 million to $500 million 0.75% 0.75% 1.25% 1.00% 1.25%
More than $500 million to $1 billion 0.75% 0.75% 1.00% 0.875% 1.00%
More than $1 billion 0.75% 0.75% 1.00% 0.75% 1.00%
- --------------------------------------------------------------------------------
Mr. Edwin Walczak is a Senior Vice President of the Adviser. Mr.
Walczak joined the Adviser in 1988 and has been the President and
portfolio manager of the Value Fund since its inception in March,
1990.
Mr. Fabrizio Pierallini, who is the Chief Investment Officer and a Senior Vice
President of the Adviser, has been the President and portfolio manager of the
International Equity Fund since May, 1994 and the U.S. Equity 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. Mark Robertson joined the Adviser in September, 1991. He is a
Vice President of the Adviser and the associate portfolio manager of
the U.S. Equity Fund. Prior to joining the Adviser, Mr. Robertson
was a securities analyst with the Value Line Investment Survey.
Mr. Rajiv Jain joined the Adviser in November, 1994. He is a First
Vice President of the Adviser and the associate portfolio manager of
the International Equity Fund. 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 Adviser, 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 was the portfolio manager
of Lombard Odier's closed-end Polish Investment Fund and its Luxembourg-based
Eastern Europe Fund. He is an EFFAS certified financial analyst (European
Federation of Financial Analysts and Statisticians).
Dr. Monica Mastroberardino, Vice President of the Adviser, has been the
portfolio manager of the Bond Fund since August, 1999. 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.
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.
Depositary Receipts (i.e., ADRs, EDRs and GDRs) will be valued at the closing
price of the instrument last determined prior to the Valuation Time unless the
Company is aware of a material change in value. Securities for which such a
value cannot be readily determined on any day will be valued at the closing
price of the underlying security adjusted for the exchange rate.
PURCHASING SHARES
You may purchase shares of the 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, E. European Equity Fund, U.S.
Equity Fund and Bond 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 at (800) 628-4077 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 Fund's records. You will not have access to your shares until the
Fund's 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 the U.S. Value, U.S. Equity and
International Equity Fund shares redeemed less than three months after purchase
(including shares to be exchanged). The Company deducts a 2% redemption fee from
proceeds of the E. European Equity and Bond Fund shares redeemed less than six
months after purchase (including shares to be exchanged). The applicable Fund
retains this amount to offset the Fund's costs of purchasing or selling
securities. The Adviser reserves the right to waive the redemption fee for its
clients.
After receipt of your request in proper order, the Transfer Agent will mail
redemption proceeds to your registered address within seven days. The Transfer
Agent 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 NAV 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 Transfer Agent 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 shares 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 a year-end 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.
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 has notified you that you are subject to
backup withholding and instructs a Fund to do so.
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.
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.
DISTRIBUTION ARRANGEMENTS
The Funds are offered through financial supermarkets, investment advisers and
consultants, financials planners, brokers, dealers and other investment
professionals and directly through First Dominion Capital Corp. ("FDCC"), the
Distributor for the Funds. 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.
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 page of this Prospectus. The following information should be read in
conjunction with the financial statements and notes thereto.
<PAGE>
Vontobel U.S. Value Fund
Financial Highlights
For a Share Outstanding Throughout Each Period
Years ended December 31,
-----------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Per Share Operating Performance
Net asset value,
beginning of period $16.73 $16.51 $13.78 $13.25 $10.26
------ ------ ------ ------ ------
Income from investment operations
Net investment income 0.07 0.22 0.10 0.17 0.05
Net realized and
unrealized gain (loss)
on investments (2.42) 2.06 4.61 2.65 4.09
------ ----- ----- ----- -----
Total from investment operations (2.35) 2.28 4.71 2.82 4.14
------ ----- ----- ----- -----
Less distributions
Distributions from
net investment income (0.11) (0.16) (0.10) (0.19) (0.04)
Distributions from
Realized gain on
Investments --- (1.90) (1.88) (2.10)(1.11)
----- ------ ------ ----- ------
Total distributions (0.11) (2.06) (1.98) (2.29)(1.15)
------ ------ ------ ------ ------
Net asset value, end of
period $14.27 $16.73 $16.51 $13.78 $13.25
====== ====== ====== ======= =====
Total Return (14.07%)14.70% 34.31% 21.28% 40.36%
Ratios/Supplemental Data
Net assets, end of
Period (000's) $71,480 $200,463 $203,120 $69,552 $55,103
Ratio to average
net assets - (A)
Expenses - (B) 1.87% 1.46% 1.61% 1.48% 1.65%
Expenses - net (C) 1.87% 1.45% 1.58% 1.43% 1.50%
Net investment income 0.40% 0.93% 0.72% 0.63% 0.38%
Portfolio turnover rate 66.62%122.71% 89.76%108.36% 95.93%
(A) Management fee waivers reduced the expense ratios and increased net
investment income ratios by .02% in 1999, 0.01% 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.
(C) Expense ratio-net reflects the effect of the custodian fee credits, the
Fund received.
<PAGE>
Vontobel International Equity FundFinancial HighlightsFor a Share
-----------
Outstanding Throughout Each Period
Years ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Per Share Operating Performance
Net asset value, beginning $20.18$18.15 $18.22 $17.13 $16.23
Income from investment
operations-
Net investment income 0.06 0.01 (0.03) 0.03 0.16
Net realized and unrealized
gain (loss) on investments 9.07 2.98 1.74 2.85 1.61
Total from investment
operations 9.13 2.99 1.71 2.88 1.77
Less distributions-
Distributions from net
investment income (0.05) 0.00 0.00 (0.03) (0.17)
Distributions from
Realized gains (1.25) (0.96) (1.78) (1.76) (0.70)
Total distributions (1.30) (0.96) (1.78) (1.79) (0.87)
Net asset value,
end of period $28.01 $20.18 $18.15 $18.22 $17.13
Total Return 46.52% 16.77% 9.19% 16.98% 10.91%
Ratios/Supplemental Data
Net assets,
end of period (000s) $192,537 $161,933 $160,821 $151,710 $130,505
Ratio to average net assets-
Expenses (A) 1.28% 1.40% 1.56% 1.60% 1.63%
Expenses-net (B) 1.27% 1.36% 1.50% 1.39% 1.53%
Net investment income (loss) 0.03% 0.06% (0.17%) 0.15% 0.41%
Portfolio turnover rate 37.91% 41.51% 38.45% 54.58% 68.43%
(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.
<PAGE>
Vontobel Eastern European Equity Fund
Financial Highlights
For a Share Outstanding Throughout Each Period
February 15,*
Years ended December 31, to December 31,
------------------------
1999 1998 1997 1996
---- ---- ---- ----
Per Share Operating Performance
Net asset value,
beginning of period $ 8.14 $15.25 $14.89 $10.00
Income from investment
operations-
Net investment loss (0.20) (0.31) (0.19) (0.06)
Net realized and unrealized
gain (loss) on investments 1.38 (6.80) 1.47 4.95
Total from investment
operations 1.18 (7.11) 1.28 4.89
Less distributions-
Distributions from realized
gains on investments 0.00 0.00 (0.92) 0.00
Total distributions 0.00 0.00 (0.92) 0.00
Net asset value, end
of period $9.32 $8.14 $15.25 $14.89
Total Return 14.50% (46.62)% 8.74% 48.90%
Ratios/Supplemental Data
Net assets, end of
Period (000s) $33,644 $36,154 $139,408 $61,853
Ratio to average net assets-
Expense 3.37% 2.57% 1.94% 2.02%**
Expense 3.26% 2.41% 1.66% 1.71%**
Net investment loss (2.35%) (1.67%) (1.30%) (1.07)**
Portfolio turnover 103.80% 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.
<PAGE>
Vontobel U.S. Equity Fund
Financial Highlights
For a Share Outstanding Throughout Each Period
Years ended December 31, September 1,* to
------------------------
1999 1998 December 31, 1997
---- ---- -----------------
Per Share Operating
Performance
Net asset value,
beginning of period $7.31 $9.42 $10.00
Income from investment
operations-
Net investment income
(loss) (0.02) 0.00 (0.04)
Net realized and
unrealized gain
(loss) on investments 2.40 (2.11) (0.54)
Total from investment
operations 2.38 (2.11) (0.58)
Net asset value,
end of period $9.69 $7.31 $9.42
Total Return 32.56% (22.40%) (5.80%)
Ratios/Supplemental Data
Net assets, end of period $10,946 $1,611 $3,601
Ratio to average net assets- (A)
Expenses (B) 3.05% 2.38% 2.41%**
Expenses-net (C) 3.02% 2.07% 2.20%**
Net investment loss (1.68%) (0.02%) (1.42)**
Portfolio turnover rate 128.26% 130.59% 16.36%
(A) Management fee waivers and expense reimbursements reduced the expense ratio
and increased net investment income ratio by 5.64%, 3.75% and 1.25%, in 1999,
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
<PAGE>
Vontobel Greater European Bond Fund
Financial Highlights
For a Share Outstanding Throughout Each Period
Years ended December 31, September 1* to
------------------------
1999 1998 December 31, 1997
---- ---- -----------------
Per Share Operating Performance
Net asset value,
beginning of period $10.21 $9.70 $10.00
Income from investment
operations
Net investment income 0.71 1.27 0.26
Net realized and
unrealized gain (loss)
on investments (1.63) 1.09 (0.32)
Total from investment
operations (0.92) 2.36 (0.06)
Less distributions
Distributions from
net investment income - (1.64) (0.24)
Distributions from
capital gains - (0.21) -
Total Distributions 0.00 (1.85) (0.24)
Net asset value, end of period $9.29 $10.21 $9.70
Total Return (9.01%) 24.54% (0.55%)
Ratios/Supplemental Data
Net assets,
end of period (000's) $9,336 $7,882 $14,438
Ratio to average net assets -(A)
Expenses - (B) 2.70%** 1.98% 2.38%**
Expenses - net (C) 2.49%** 1.98% 2.19%**
Net investment income 8.73%** 12.03% 8.28%**
Portfolio turnover rate 61.37% 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 1.28% and .41% in 1999 and 1998, 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.
<PAGE>
Information about the Company, including the SAI, can be reviewed and copied at
the SEC's Public Reference Room, 450 Fifth Street NW, Washington, D.C.
Information about the operation of the Public Reference Room may be obtained by
calling the SEC at 1-202-942-8090. Annual and semi-annual reports and other
information regarding the Funds are available on the EDGAR Database on the SEC's
Internet site at http://www.sec.gov, and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the following
e-mail address: [email protected], or by writing the Commission's Public
Reference Section, Washington D.C. 20549-0102. For more information about the
Funds, you may wish to refer to the Company's SAI dated May 1, 2000, which is on
file with the SEC and incorporated by reference into this Prospectus. You can
obtain a free copy of the SAI by writing to Vontobel Funds, Inc., 1500 Forest
Avenue, Suite 223, Richmond, Virginia 23229, by calling toll free (800) 527-9500
or by e-mail at: [email protected]. General inquiries regarding the
Funds may also be directed to the above address or telephone number. This
prospectus is also available on-line at our website (www.vontobelfunds.com).
(Investment Company Act File No. 811-3551)
<PAGE>
VONTOBEL FUNDS, INC.
(THE "COMPANY")
1500 FOREST AVENUE, SUITE 223, RICHMOND, VA 23229
1-800-527-9500
STATEMENT OF ADDITIONAL INFORMATION
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
VONTOBEL EASTERN EUROPEAN EQUITY FUND
VONTOBEL U.S. EQUITY FUND
VONTOBEL GREATER EUROPEAN BOND FUND
This Statement of Additional Information ("SAI") is not a prospectus. It should
be read in conjunction with the current Prospectus of the Vontobel U.S. Value
Fund, Vontobel International Equity Fund, Vontobel Eastern European Equity Fund,
Vontobel U.S. Equity Fund (formerly named Vontobel Emerging Markets Equity Fund)
and Vontobel Greater European Bond Fund (collectively, the "Funds"), dated May
1, 2000. You may obtain the Prospectus of the Funds, free of charge, by writing
to Vontobel Funds, Inc. at 1500 Forest Avenue, Suite 223, Richmond, VA 23229 or
by calling 1-800-527-9500.
The Funds' audited financial statements and notes thereto for the year ended
December 31, 1999 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 Funds' 1999 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 Company or calling
(800)-527-9500.
The date of this SAI is May 1, 2000.
<PAGE>
TABLE OF CONTENTS PAGE
General Information
Investment Objectives
Strategies and Risks
Investment Programs
Convertible Securities
Warrants
Illiquid Securities
Debt Securities
International Bonds
Strategic Transactions
Options
Futures
Currency Transactions
Combined Transactions
Eurocurrency Instruments
Use of Segregated and Other Special Accounts
Depositary Receipts
Temporary Defensive Positions
U.S. Government Securities
Repurchase Agreements
Reverse Repurchase Agreements
When-Issued Securities
Other Investments
Investment Restrictions
Management of the Company
Principal Securities Holders
Investment Adviser and Advisory Agreement Management-Related Services Portfolio
Transactions Portfolio Turnover Capital Stock and Dividends Dividends and
Distributions Additional Information about Purchases and Sales Eligible Benefit
Plans Tax Status Investment Performance Financial Information
<PAGE>
GENERAL INFORMATION
Vontobel Funds, Inc. (the "Company") was organized as a Maryland
corporation on October 28, 1983. The Company is an open-end,
management investment company (commonly known as a "mutual fund"),
registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). This SAI relates to the Vontobel U.S. Value
Fund ("Value Fund"), Vontobel International Equity Fund
("International Equity Fund"), Vontobel Eastern European Equity
Fund ("E. European Equity Fund"), Vontobel U.S. Equity Fund ("U.S.
Equity Fund") and Vontobel
Greater European Bond Fund ("Bond Fund") (individually, a "Fund,"
collectively, the "Funds"). Each Fund is a separate investment
portfolio or series of the Company (see "Capital Stock" below).
Each of the International Equity, E. European Equity and U. S.
Equity Funds is a "diversified" series," as that term is defined in
the 1940 Act. The Value and Bond Funds are "non-diversified" series.
INVESTMENT OBJECTIVES
The Value Fund's investment objective is to achieve long-term capital returns.
The investment objective of each of the International Equity and E. European
Equity Funds is to achieve capital appreciation and the investment objective of
the U.S. Equity Fund is to achieve long-term capital appreciation. The
investment objective of the Bond Fund is to maximize total return from capital
growth and income.
All investments entail some market and other risks. For instance, there is no
assurance that a Fund will achieve its investment objective. You should not rely
on an investment in a Fund as a complete investment program.
STRATEGIES AND RISKS
The following discussion of investment techniques and instruments supplements,
and should be read in conjunction with, the investment information in the Funds'
Prospectus. In seeking to meet its investment objective, each Fund may invest in
any type of security whose characteristics are consistent with its investment
program described below.
INVESTMENT PROGRAMS
Convertible Securities: Each of the Value, International Equity, E. European
Equity and U.S. 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, E. European Equity and U.S.
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 which the Fund has valued the
securities. Illiquid securities include generally, among other things, certain
written over-the-counter options, securities or other liquid assets as cover for
such options, repurchase agreements with maturities in excess of seven days,
certain loan participation interests and other securities whose disposition is
restricted under the federal securities laws.
Debt Securities: The Bond Fund intends to invest primarily in debt securities.
It generally will invest in securities rated Baa3 or higher by Moody's Investor
Service, Inc. ("Moody's") or BBB- by Standard & Poor's Rating Group ("S&P") or
unrated securities which the Adviser believes are of comparable quality. The
Fund reserves the right, however, to invest more than 5% of its assets in lower
rated securities (including unrated securities which the Adviser believes to be
of such lower quality). The Fund will invest no more than 10% in securities
rated Ba2 and no more than 5% in securities rated B2 by Moody's or,
respectively, securities rated BB and B by S&P, or securities which are unrated
but are of comparable quality as determined by the Adviser. The Fund may invest
substantial amounts in issuers from one or more countries and will normally have
investments in securities of issuers from a minimum of three different
countries. Under normal circumstances, the Value Fund and the U.S. Equity Fund
will have at least 65% of its assets invested in common stocks or securities
convertible into common stocks. The Value Fund and U.S. Equity 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 and the U.S. Equity 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.
International Bonds: International bonds are bonds issued in countries other
than the United States. The investments of the Bond Fund may include debt
securities issued or guaranteed by Western and Eastern European national
governments, their agencies, instrumentalities or political subdivisions,
corporate debt securities issued by borrowers in Western and Eastern European
countries and Western and Eastern European 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: (1) other complex foreign political, legal and economic
factors, (2) lesser availability than in the United States of data on which to
make trading decisions, (3) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (5) 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 ("NAV") 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 NAV per share is computed (close of the NYSE),
or, in the absence of such sale, the latest bid price. The asset will be
extinguished upon expiration of the option, the selling (writing) of an
identical option in a closing transaction, or the delivery of the underlying
security upon the exercise of the option.
The purchase of a put option will constitute a short sale for federal tax
purposes. The purchase of a put at a time when the substantially identical
security held long has not exceeded the long term capital gain holding period
could have adverse tax consequences. The holding period of the long position
will be cut off so that even if the security held long is delivered to close the
put, short term gain will be recognized. If substantially identical securities
are purchased to close the put, the holding period of the securities purchased
will not begin until the closing date. The holding period of the substantially
identical securities not delivered to close the short sale will commence on the
closing of the short sale.
The Fund will purchase a call option only to close out a covered call option it
has written. It will write a put option only to close out a put option it has
purchased. Such closing transactions will be effected in order to realize a
profit on an outstanding call or put option, to prevent an underlying security
from being called or put, or, to permit the sale of the underlying security.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option, or purchase another put option, on the underlying security
with either a different exercise price or expiration date or both. If the Fund
desires to sell a particular security from its portfolio on which it has written
a call option, or purchased a put option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security. There is,
of course, no assurance that the Fund will be able to effect such closing
transactions at a favorable price. If it cannot enter into such a transaction,
it may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security. This could
result in higher transaction costs, including brokerage commissions. The Fund
will pay brokerage commissions in connection with the writing or purchase of
options to close out previously written options. Such brokerage commissions are
normally higher than those applicable to purchases and sales of portfolio
securities.
Options written by the Fund will normally have expiration dates between three
and nine months from the date written. The exercise price of the options may be
below, equal to, or above 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: (1) insufficient trading interest in certain options;
(2) restrictions on transactions imposed by an exchange; (3) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities including reaching daily price
limits; (4) interruption of the normal operations of the OCC or an exchange; (5)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (6) a decision by one or more exchanges to discontinue the trading of
options (or a particular class or series of options), in which event the
relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through a direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days.
Although it is not required to do so, the Fund generally expects to enter into
OTC options that have cash settlement provisions.
Unless the parties provide otherwise, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank of
New York as "primary dealers," or broker dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that OTC options purchased by a Fund and portfolio securities
"covering" the amount of a Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to a fund's limitation on investing no more than 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, E. European Equity and the Bond Fund
(collectively, the International Funds) may purchase and sell call options on
currencies. All calls sold by the Fund must be "covered" (i.e., the Fund must
own the securities or futures contract subject to the call) or must meet the
asset segregation requirements described below as long as the call is
outstanding. Even though the Fund will receive the option premium to help
protect it against loss, a call sold by the Fund exposes the Fund during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or instrument and may require the
Fund to hold a security or instrument which it might otherwise have sold.
The Funds may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, convertible securities, and Eurocurrency
instruments (whether or not it holds the above securities in its portfolio), and
futures contracts (except the Bond Fund) may not purchase or sell futures
contracts on individual corporate debt securities.) The International Funds may
purchase and sell put options on currencies. The Fund will not sell put options
if, as a result, more than 50% of the Fund's assets would be required to be
segregated to cover its potential obligations under such put options other than
those with respect to futures and options thereon. In selling put options, there
is a risk that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price. For tax purposes, the purchase of
a put is treated as a short sale, which may cut off the holding period for the
security. Consequently, the purchase of a put is treated as generating gain on
securities held less than three months or short term capital gain (instead of
long term) as the case may be.
Options on Securities Indices and Other Financial Indices
The Funds may also purchase and sell call and put options on securities indices
and other financial indices. By doing so, the Funds can achieve many of the same
objectives that they would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement. For example, an option on an index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the index upon which the option is based exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option. This amount of cash is equal to the excess of the closing price
of the index over the exercise price of the option, which also may be multiplied
by a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or any other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
Futures
The International Funds may enter into financial futures contracts or purchase
or sell put and call options on such futures as a hedge against anticipated
interest rate or currency market changes and for risk management purposes. The
Bond Fund may enter into financial futures contracts or purchase 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 (1) the risk that the
value of its portfolio of investments in a foreign market may decline before it
can liquidate its interest, or (2) the risk that a foreign market in which it
proposes to invest may have significant increases in value before it actually
invests in that market. In the first instance, the International Fund will sell
a future based upon a broad market index which it is believed will move in a
manner comparable to the overall value of securities in that market. In the
second instance, the International Fund will purchase the appropriate index as
an "anticipatory" hedge until it can otherwise acquire suitable direct
investments in that market. As with the hedging of foreign currencies, the
precise matching of financial futures on foreign indices and the value of the
cash or portfolio securities being hedged may not have a perfect correlation.
The projection of future market movement and the movement of appropriate indices
is difficult, and the successful execution of this short-term hedging strategy
is uncertain.
Regulatory policies governing the use of such hedging techniques require the
International Funds to provide for the deposit of initial margin and the
segregation of suitable assets to meet their obligations under futures
contracts. Futures are generally bought and sold on the commodities exchanges
where they are listed with payment of initial and variation margin as described
below. The sale of a futures contract creates a firm obligation by an
International Fund, as seller, to deliver to the buyer the specific type of
financial instrument called for in the contract at a specific future time for a
specified price (or, with respect to index futures and Eurocurrency instruments,
the net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such position.
The International Funds' use of financial futures and options thereon will in
all cases be consistent with applicable regulatory requirements, particularly
the rules and regulations of the Commodity Futures Trading Commission. The
International Funds will use such techniques only for bona fide hedging, risk
management (including duration management) or other portfolio management
purposes. Typically, maintaining a futures contract or selling an option thereon
requires the International Fund to deposit an amount of cash or other specified
assets (initial margin), which initially is typically 1% to 10% of the face
amount of the contract (but may be higher in some circumstances) with a
financial intermediary as security for its obligations. Additional cash or
assets (variation margin) may be required to be deposited thereafter on a daily
basis as the mark to market value of the contract fluctuates. The purchase of an
option on financial futures involves payment of a premium for the option without
any further obligation on the part of the International Fund. If the
International Fund exercises an option on a futures contract, it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position. Futures contracts and options thereon are
generally settled by entering into an offsetting transaction, but there can be
no assurance that the position can be offset prior to settlement at an advantage
price or that delivery will occur.
An International Fund will not enter into a futures contract or related option
(except for closing transactions) if immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the International Fund's total assets (taken at
current value); however, in the case of an option that is in-the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating the
5% limitation. The segregation requirements with respect to futures contracts
and options thereon are described below.
Currency Transactions
Each of the International Funds may engage in currency transactions with
counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange-listed currency
futures, exchange-listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract between the
parties, at a specified price. These contracts are traded in the interbank
market and conducted directly between currency traders (usually large,
commercial banks) and their customers. A forward foreign currency contract
generally has no deposit requirement or commissions charges. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies. Currency swaps operate similarly to an interest rate swap
(described below). The International Funds may enter into currency transactions
with Counterparties which have received (or the guarantors of the obligations of
which have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO, or (except for OTC
currency options) are determined to be of equivalent credit quality by the
Adviser.
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.
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").
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 U.S. dollar and foreign currencies during the period between the
date the security is purchased or sold and the date on which payment is made or
received by entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of the foreign currency involved in the
underlying security transactions.
Position Hedging
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The International Funds may use position hedging when the Adviser believes that
the currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar. The International Funds may enter into a forward
foreign currency contract to sell, for a fixed amount of dollars, the amount of
foreign currency approximating the value of some or all of its portfolio
securities denominated in such foreign currency. The precise matching of the
forward foreign currency contract amount and the value of the portfolio
securities involved may not have a perfect correlation since the future value of
the securities hedged will change as a consequence of market movements between
the date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is difficult, and the
successful execution of this short-term hedging strategy is uncertain.
The International Funds will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging as described below.
Cross Hedging
The International Funds may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the International Funds
have or expect to have portfolio exposure.
Proxy Hedging
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the International Funds may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a fund's portfolio is exposed is difficult to hedge or to hedge against the U.S.
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the fund's portfolio securities
are or are expected to be denominated, and buying U.S. dollars. The amount of
the contract would not exceed the value of the International Fund's securities
denominated in linked currencies. For example, if the Adviser considers that the
Swedish krona is linked to the euro, the International Funds hold securities
denominated in Swedish krona and the Adviser believes that the value of Swedish
krona will decline against the U.S. dollar, the Adviser may enter into a
contract to sell euros and buy U.S. dollars.
Combined Transactions
The Funds may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward foreign currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction or when the Adviser believes that it is in the Fund's best interests
to do so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
are normally entered into based on the Adviser's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase such risks or hinder achievement of the portfolio management objective.
Eurocurrency Instruments
The International Funds may make investments in Eurocurrency instruments.
Eurocurrency instruments are futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR") or to the interbank rates
offered in other financial centers. Eurocurrency futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and sellers to obtain
a fixed rate for borrowings. The International Funds might use Eurocurrency
futures contracts and options thereon to hedge against changes in LIBOR and
other interbank rates, to which many interest rate swaps and fixed income
instruments are linked.
Segregated and Other Special Accounts
In addition to other requirements, many transactions require a Fund to segregate
liquid high grade assets with its custodian to the extent Fund obligations are
not otherwise "covered" through the ownership of the underlying security,
financial instruments or currency. In general, either the full amount of any
obligation by a Fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by a Fund
will require the Fund to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate liquid high grade securities sufficient to purchase and deliver the
securities if the call is exercised. A call option sold by a Fund on an index
will require the Fund to own portfolio securities which correlate with the index
or segregate liquid high grade assets equal to the excess of the index value
over the exercise price industry or other on a current basis. A put option
written by a Fund requires the Fund to segregate liquid, high grade assets equal
to the exercise price. A currency contract which obligates an International Fund
to buy or sell currency will generally require the Fund to hold an amount of
that currency or liquid securities denominated in that currency equal to the
Fund's obligations or to segregate liquid high grade assets equal to the amount
of the Fund's obligation.
OTC options entered into by a Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange-listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange-listed options sold by the Fund other than those
generally settle with physical delivery, and the Fund will segregate an amount
of liquid assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
sufficient liquid assets. Such assets may consist of cash, cash equivalents,
liquid debt securities or other liquid assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. An International Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the International Fund could purchase a put
option if the strike price of that option is the same or higher than the strike
price of a put option sold by the Fund. Moreover, instead of segregating assets,
if the International Fund held a futures or forward contract, it could purchase
a put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offered in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction, no segregation is required, but if it
terminates prior to such time, liquid assets equal to any remaining obligation
would need to be segregated.
An International Fund's activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Code for qualification as a
regulated investment company.
Depositary Receipts
American Depositary Receipts ("ADRs") are receipts typically issued in the U.S.
by a bank or trust company evidencing ownership of an underlying foreign
security. The International Equity and the E. European Equity Funds may invest
in ADRs which are structured by a U.S. bank without the sponsorship of the
underlying foreign issuer. In addition to the risks of foreign investment
applicable to the underlying securities, such unsponsored ADRs may also be
subject to the risks that the foreign issuer may not be obligated to cooperate
with the U.S. bank, may not provide additional financial and other information
to the bank or the investor, or that such information in the U.S. market may not
be current.
Like ADRs, European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), and Registered Depositary Certificates ("RDCs") represent receipts for
a foreign security. However, they are issued outside of the U.S. The
International Equity and E. European Equity Funds may also invest in EDRs, GDRs
and RDCs.
EDRs, GDRs and RDCs involve risks comparable to ADRs, as well as the fact that
they are issued outside of the U.S. Furthermore, RDCs involve risks associated
with securities transactions in Russia.
Temporary Defensive Positions
When the Adviser believes that investments should be deployed in a temporary
defensive posture because of economic or market conditions, each of the Funds
may invest up to 100% of its assets in U.S. Government securities (such as
bills, notes, or bonds of the U.S. Government and its agencies) or other forms
of indebtedness such as bonds, certificates of deposits or repurchase
agreements. For temporary defensive purposes, each of the International Equity,
E. European Equity and the Bond Funds may hold cash or debt obligations
denominated in U.S. dollars or foreign currencies. These debt obligations
include U.S. and foreign government securities and investment grade corporate
debt securities, or bank deposits of major international institutions. When a
Fund is in a temporary defensive position, it is not pursuing its stated
investment policies. The Adviser decides when it is appropriate to be in a
defensive position. It is impossible to predict for how long such alternative
strategies will be utilized.
U.S. Government Securities
The Funds may invest in U.S. Government Securities. The term "U.S. Government
Securities" refers to a variety of securities which are issued or guaranteed by
the U.S. Treasury, by various agencies of the U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government. U.S. Treasury securities are backed by the full faith and credit of
the United States. Securities issued or guaranteed by U.S. Government agencies
or U.S. Government sponsored instrumentalities may or may not be backed by the
full faith and credit of the United States. In the case of securities not backed
by the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim
directly against the United States in the event the agency or instrumentality
does not meet its commitment. An instrumentality of the U.S. Government is a
government agency organized under Federal charter with government supervision.
Repurchase Agreements
As a means of earning income for periods as short as overnight, the Funds may
enter into repurchase agreements that are collateralized by U.S. Government
Securities. The Funds may enter into repurchase commitments for investment
purposes for periods of 30 days or more. Such commitments involve investment
risks similar to those of the debt securities in which the Funds invest. Under a
repurchase agreement, a Fund acquires a security, subject to the seller's
agreement to repurchase that security at a specified time and price. A purchase
of securities under a repurchase agreement is considered to be a loan by a Fund.
The Adviser monitors the value of the collateral to ensure that its value always
equals or exceeds the repurchase price and also monitors the financial condition
of the seller of the repurchase agreement. If the seller becomes insolvent, a
Fund's right to dispose of the securities held as collateral may be impaired and
the Fund may incur extra costs. Repurchase agreements for periods in excess of
seven days may be deemed to be illiquid.
Reverse Repurchase Agreements
As a means of enhancing income, the Bond Fund may enter into reverse repurchase
agreements with selected banks and broker/dealers. Under a reverse repurchase
agreement, a Fund sells securities subject to an obligation to repurchase those
securities at a specified time and price. In order to comply with U.S.
regulatory conditions applicable to investment companies, the Fund will
recognize gains or losses on such obligations each day, and will segregate cash,
U.S. government securities, or other high-grade debt instruments in an amount
sufficient to satisfy its repurchase obligation. The Fund will also mark the
value of the assets to market daily, and post additional collateral if
necessary. The Fund may invest the payment received for such securities prior to
fulfilling its obligation to repurchase the securities. Reverse repurchase
agreements are considered to be borrowings under the 1940 Act. Therefore, the
Fund's investment in reverse repurchase agreements is subject to the borrowing
limitations of the 1940 Act (See "Investment Restrictions").
If the buyer under a repurchase agreement becomes insolvent, the Fund's right to
reacquire its securities may be impaired. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the buyer of the securities
before repurchase of the securities under a reverse repurchase agreement, it may
encounter delay and incur costs before being able to apply the cash held to
purchase replacement securities. Also, the value of such securities may increase
before it is able to purchase them.
When-issued Securities
The Bond Fund 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 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 and Bond Funds, as to 75% of its assets, purchase the
securities of any issuer (other than obligations issued or guaranteed as to
principal and interest by the Government of the United States or any agency
or instrumentality thereof) if, as a result of such purchase, more than 5%
of its total assets would be invested in the securities of such issuer.
2) Except for the Value and Bond Funds, purchase stock or securities of an
issuer (other than the obligations of the United States or any agency or
instrumentality thereof) if such purchase would cause the Fund to own more
than 10% of any class of the outstanding voting securities of such issuer
or, except for the 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, U. S. Equity and Bond Funds, borrow money,
except as a temporary measure for extraordinary or emergency purposes, or
except in connection with reverse repurchase agreements, provided that the
Fund maintains asset coverage of 300% in connection with the issuance of
senior securities. Notwithstanding the foregoing, to avoid the untimely
disposition of assets to meet redemptions, the Value, U.S. Equity and Bond
Funds may borrow up to 33 1/3% of the value of the Fund's assets to meet
redemptions, provided that the Fund may not make other investments while
such borrowings are outstanding.
6) Make loans, except that a Fund may (1) lend portfolio securities; and (2)
enter into repurchase agreements secured by U.S. Government securities and,
with respect to the Bond Fund, except to the extent that the entry into
repurchase agreements and the purchase of debt securities in accordance
with its investment objective and policies may be deemed to be loans.
7) Invest more than 25% of a Fund's total assets in securities of one or more
issuers having their principal business activities in the same industry,
provided that, for the Bond 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 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 Bond 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 Adviser and principal underwriter,
and officers of the Company, are noted with an asterisk (*).
Principal
Occupation(s)
Name, Address and Position(s) Held With During the Past 5
Age Company Years
*John Pasco, III Chairman, Director Mr. Pasco has served
1500 Forest Ave, Suite and Treasurer as Treasurer and
223 Richmond, VA 23229 Director of
(55) Commonwealth
Shareholder Services,
Inc. ("CSS"), the
Company's
Administrator, since
1985; Director,
President and
Treasurer of
Commonwealth Capital
Management, Inc. (a
registered investment
adviser) since 1983;
Director and
shareholder of Fund
Services, Inc., the
Company's Transfer and
Disbursing Agent,
since 1987;
shareholder of
Commonwealth Fund
Accounting, Inc.,
which provides
bookkeeping services
to Star Bank; and
Chairman, Director and
Treasurer of the World
Funds, Inc., a
registered investment
company, since May
1997. Mr. Pasco is
also a certified
public accountant.
*Henry Schlegel Director Mr. Schlegel has
450 Park Avenue served as a Director,
New York, NY 10022 the President and the
(47) Chief Executive
Officer of Vontobel USA
Inc., a registered
investment adviser,
since 1988.
Samuel Boyd, Jr. Director Mr. Boyd has served as
10808 Hob Nail Court the Manager of the
Potomac, MD 20854 Customer Services
(59) Operations and
Accounting Division of
the Potomac Electric
Power Company
since 1978 and as
Director of
World Funds, Inc.,
a registered
investment company,
since May 1997. Mr.
Boyd is also a
certified public
accountant.
William E. Poist Director Mr. Poist has served
5272 River Road as a financial and tax
Bethesda, MD 20816 consultant through his
(60) firm Management
Consulting for
Professionals since
1968 and as Director
of World Funds, Inc.,
a registered
investment company,
since May 1997. Mr.
Poist is also a
certified public
accountant.
Paul M. Dickinson Director Mr. Dickinson has
8704 Berwickshire Drive served as President of
Richmond, VA 23229 Alfred J. Dickinson,
(52) Inc., Realtors since
April 1971 and as a
Director of
World Funds, Inc., a
registered
investment company,
since May 1997.
*Edwin D. Walczak Vice President of the Mr. Walczak has served
450 Park Avenue Company and as Senior Vice President
New York, NY 10022 President of the Portfolio Manager of
(46) Vontobel U.S. Value Fund Vontobel USA Inc., a
registered investment
adviser,since July 1988.
*Fabrizio Pierallini Vice President of the Mr. Pierallini has
450 Park Avenue Company and served as Senior
New York, N.Y. 10022 President of the Vice President and
(40) Vontobel Portfolio Manager
International Equity of Vontobel
Fund and the USA Inc., a registered
Vontobel U.S. Equity investment adviser,
Fund since April 1994.
*Monica Mastroberardino Vice President of the Dr. Mastroberardino
450 Park Avenue Company and President has served as Vice
New York, NY 10022 of the Vontobel President and
(41) Greater European Bond Portfolio Manager of
Fund Vontobel USA Inc., a
registered investment
adviser, since
February 1999. Dr.
Mastroberardino is a
macroeconomic
analyst with
Vontobel Asset
Management,
Switzerland, and serves
as the associate
portfolio manager of the
Vontobel group's
Luxembourg-registered
Eastern European Debt
Fund. From February
1995 to January 1998 she
was a macroeconomic
analyst with Credit
Suisse, Switzerland.
*Luca Parmeggiani Vice President of the Mr. Parmeggiani has
450 Park Avenue Company and President served as Vice President
New York, NY 10022 of the Vontobel and Portfolio Manager
(38) Eastern European of Vontobel USA Inc.,
Equity Fund a registered investment
adviser, since October
1997. Mr. Parmeggiani
is a First Vice
President and the head
of European equity
management of
Vontobel Asset
Management,
Switzerland. From 1992
to 1997 he was a
portfolio manager with
Lombard Odier & Cie,
Geneva. Mr. Parmeggiani
is an EFFAS certified
financial analyst
(European Federation
of Financial Analysts
and Statisticians).
F. Byron Parker, Jr. Secretary Mr. Parker has served
810 Lindsay Court as Secretary of
Richmond, VA 23229 Commonwealth
(57) Shareholder Services,
Inc. since 1986. He is
also a Partner in the
law firm Mustian &
Parker.
Compensation of Directors: The Company does not compensate the Directors who are
officers or employees of the Adviser. The "independent" Directors receive an
annual retainer of $1,000 and a fee of $200 for each meeting of the Directors
which they attend in person or by telephone. Directors are reimbursed for travel
and other out-of-pocket expenses. The Company does not offer any retirement
benefits for Directors. For the fiscal year ended December 31, 1999, the
Directors received the following compensation from the Company:
Aggregate
Compensation Pension or
From the Retirement
Funds Fiscal Benefits Total
Year Ended Accrued as Compensation
Name and December 31, Part of Fund from the Fund
Position Held 1999(1) Expenses Company
- --------------------------------------------------------------------------------
John Pasco, III, Director N/A N/A N/A
Henry Schlegel, Director N/A N/A N/A
Samuel Boyd, Jr., Director $10,800 N/A $10,800
William E. Poist, Director $12,000 N/A $12,000
Paul M. Dickinson, Director $12,000 N/A $12,000
(1) This amount represents the aggregate amount of compensation paid to the
Directors for: (a) service on the Board of Directors for the Funds for the
fiscal year ended December 31, 1999.
POLICIES CONCERNING PERSONAL INVESTMENT ACTIVITIES
The Fund, its Investment Adviser and Principal Underwriter have each adopted a
Codes of Ethics, as required by federal securities laws. Under the Funds' Code
of Ethics, persons who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for the Funds or that are currently held by the Funds, subject
to general restrictions and procedures. The personal securities transactions of
access persons of the Funds, its Adviser and Principal Underwriter will be
governed by the Funds' Code of Ethics.
The Code of Ethics is on file with, and can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. In addition, the Code of Ethics are
also available on the EDGAR Database on the SEC's Internet website at
http://www.sec.gov.
CONTROL PERSONS AND PRINCIPAL SECURITIES PERSONS
As of April 1, 2000 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 1,210,828.761 outstanding shares (or 31.079%); and Bank Vontobel
AG and its affiliates for the benefit of its customers, Bahnhofstrasse #3
CH-8022 Zurich, Switzerland, owned of record 550,459.081 outstanding shares (or
14.129%).
International Equity Fund
Bank Vontobel AG and its affiliates for the benefit of its customers,
Bahnhofstrasse #3 CH-8022 Zurich, Switzerland, owned of record 2,362,703.922
outstanding shares (or 34.203%); EAMCO, c/o Riggs Bank P.O. Box 96211,
Washington, D.C. 20090-6211, owned of record 453,250.064 outstanding shares (or
6.561%); and Charles Schwab Reinvestment, 101 Montgomery Street, San Francisco,
CA 94104, owned of record 1,604,500.673 outstanding shares (or 23.227%).
E. European Equity Fund
Charles Schwab Reinvestment, 101 Montgomery Street, San Francisco, CA 94104,
owned of record 839,542.223 outstanding shares (or 24.775%); Bank Vontobel AG
and its affiliates for the benefit of its customers, Bahnhofstrasse #3 CH-8022
Zurich, Switzerland, owned of record 416,385.638 outstanding shares (or
12.288%); and National Investors Services Corp. for the exclusive benefit of its
customers, 55 Water Street, New York, NY 10041, owned of record 290,146.581
outstanding shares (or 8.562%).
U.S. Equity Fund
Charles Schwab Reinvestment 101 Montgomery Street, San Francisco, CA 94104,
owned of record 201,095.419 outstanding shares (or 14.993%); Bank Vontobel AG
and its affiliates for the benefit of its customers Banhhofstrasse #3 CH-8022
Zurich, Switzerland, owned of record 273,295.746 outstanding shares (or
20.376%); and Vontobel USA Inc. 450 Park Avenue, New York, NY 10022, for Acct. #
V042-007 owned of record 217,951.674 outstanding shares (or 16.25%).
Bond Fund
Bank Vontobel AG and its affiliates for the benefit of its customers,
Bahnhofstrasse #3 CH-8022 Zurich, Switzerland, owned of record 592,935.706
outstanding shares (or 79.087%); and Palenzona Ingeborg of Bahnhofstrasse 33
Ch-8022 Zurich, Switzerland, owned of record 43,347.922 outstanding shares (or
5.782%).
MANAGEMENT OWNERSHIP
As of April 1, 2000, the Officers and Directors, individually and as a group,
owned beneficially less than 1% of the outstanding shares of the Funds.
INVESTMENT ADVISER AND ADVISORY AGREEMENT
Vontobel USA Inc. (the "Adviser"), 450 Park Avenue, New York, N.Y. 10022, is
each Fund's investment adviser. The Adviser is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended, (the "Advisers
Act"). The Adviser is a wholly owned subsidiary of Vontobel Holding AG, a Swiss
bank holding company which is traded on the Swiss Stock Exchange.
The Adviser serves as investment adviser to the Funds pursuant to separate
Investment Advisory Agreements with the Company for each Fund (each an "Advisory
Agreement"). The Advisory Agreements for the Value Fund, International Equity
Fund, E. European Equity Fund , U.S. Equity and Bond Funds are dated July 14,
1992, July 14, 1992, February 14, 1996, August 18, 1997 and August 18, 1997,
respectively. The Advisory Agreement for each such Fund may be renewed annually
provided such renewal is approved annually by: 1) the Company's Board of
Directors; or 2) by a majority vote of the outstanding voting securities of the
Company and a majority of the Directors who are not "interested persons" of the
Company. The Advisory Agreements will automatically terminate in the event of
their "assignment," as that term is defined in the 1940 Act, and may be
terminated without penalty at any time upon 60 days' written notice to the other
party by: (i) the majority vote of all the Directors or by vote of a majority of
the outstanding voting securities of the Fund; or (ii) the Adviser.
Under the Advisory Agreements, the Adviser, subject to the supervision of the
Directors, provides investment management advice with respect to securities and
other instruments. The Adviser makes all decisions and performs all duties in
accordance with the Funds' investment objectives, policies, and investment
restrictions.
The Adviser is responsible for effecting all security transactions on behalf of
the Funds, including the allocation of principal business and portfolio
brokerage and negotiation of commissions. In placing orders with brokers or
dealers, the Adviser will attempt to obtain the best price and execution for the
Fund's orders. The Adviser may allocate brokerage to an affiliated dealer in
accordance with written policies adopted by the Company's Board of Directors.
The Adviser is also permitted to purchase and sell securities to and from
brokers and dealers who provide the Adviser with research advice and other
statistical services. In such instances, the Adviser may be authorized to pay a
commission, which is higher than the commission that would be charged by another
broker. From time to time, and subject to the Adviser obtaining the best price
and execution for each Fund, the Board of Directors may authorize the Adviser to
allocate brokerage transactions to a broker in consideration of: (1) the sale of
Fund shares; or (2) payment of an obligation otherwise payable by the Funds.
Each Fund is obligated to pay the Adviser an advisory fee. That fee is payable
monthly at an annual rate that is equal to a percentage of the Fund's average
daily net assets. Both the Value and International Equity Funds pay the Adviser
at a rate of 1.00% on the first $100 million and 0.75% on assets in excess of
$100 million. The U.S. Equity Fund pays the Adviser at a rate of 1.00% on the
first $500 million, 0.875% on the next $500 million and 0.75% on assets in
excess of $1 billion. Both the E. European Equity and Bond Funds pay the Adviser
at a rate of 1.25% on the first $500 million and 1.00% on assets in excess of
$500 million. The table below shows the total amount of advisory fees that each
Fund paid the Adviser for the last three fiscal years. The table also shows the
amount of investment advisory fees that the Adviser waived during the last three
fiscal years.
Years Ended December 31,
Fund 1997 Fee 1998 Fee 1999 Fee
Payable/Waived Payable/Waived Payable/Waived
Value Fund $ 986,164/22,500 $1,903,694/22,500 $1,224,969/22,500
International
Equity Fund 1,443,062/ -0- 1,505,510/ -0- 1,474,217/ -0-
E. European
Equity Fund 2,113,314/ -0- 1,003,342/ -0- 387,669/ -0-
U.S. Equity Fund* 14,720/14,720 35,051/35,051 16,711/16,711
Bond Fund* 57,164/ -0- 154,111/50,475 104,623/104,623
* Fees paid and/or waived in 1997 reflect payments for the period from
September 1, 1997, the commencement of operations, to December 31, 1997.
In the interest of limiting expenses of the Value Fund, the U.S. Equity Fund and
the Bond Fund, the Adviser has entered into a contractual expense limitation
agreement with the Company. Pursuant to the agreement, the Adviser has agreed to
waive or limit its fees and to assume other expenses so that the total annual
operating expenses are limited to 1.75% for the Value Fund and the U.S. Equity
Fund; and 2.49% for the Bond Fund. These limits do not apply to interest, taxes,
brokerage commissions, other expenditures capitalized in accordance with
generally accepted accounting principles and other extraordinary expenses not
incurred in the ordinary course of business.
Pursuant to the terms of the Advisory Agreements, the Adviser pays all expenses
it incurs in connection with rendering its management services. Each Fund is
responsible for all other expenses that are not specifically assumed by the
Adviser. Such expenses include (but are not limited to) brokerage fees and
commissions, legal fees, auditing fees, fees for bookkeeping and record keeping
services, custodian and transfer agency fees and registration fees. The services
furnished by the Adviser under the Advisory Agreements are not exclusive, and
the Adviser is free to perform similar services for others.
ADMINISTRATION
Pursuant to the Administrative Services Agreement with the Company, dated
January 7, 1999 (the "Service Agreements"), Commonwealth Shareholder Services,
Inc. ("CSS"), 1500 Forest Avenue, Suite 223, Richmond, Virginia 23229, serves as
the administrator of the Funds. CSS supervises all aspects of the operation of
the Funds, except those performed by the Adviser. John Pasco III, Chairman of
the Board of the Company, is the sole owner of CSS. CSS provides certain
administrative services and facilities for the Funds, including preparing and
maintaining certain books, records, and monitoring compliance with state and
federal regulatory requirements.
As administrator, CSS receives asset-based fees, computed daily and paid monthly
at annual rates of 0.20% of the average daily net assets of the Funds on the
first $500 million and 0.15% on assets in excess of $500 million (which includes
regulatory matters, backup of the pricing of shares of each Fund, administrative
duties in connection with execution of portfolio trades, and certain services in
connection with Fund accounting). CSS receives an hourly fee, plus certain
out-of-pocket expenses, for shareholder servicing and state securities law
matters.
The table below shows the total amount of administrative fees that each Fund
paid CSS for the last three fiscal years.
Years Ended December 31,
Fund 1997 1998 1999
Value Fund $318,571 $504,371 $402,108
International Equity Fund 419,496 328,563 381,099
E. European Equity Fund 432,860 205,758 122,727
U.S. Equity Fund* 11,074 18,245 1,889
Bond Fund* 14,359 36,769 23,728
* Fees paid in 1997 reflect payments for the period from September 1, 1997,
the commencement of operations, to December 31, 1997.
CUSTODIAN AND ACCOUNTING SERVICES
Pursuant to the Custodian Agreement and Accounting Agency Agreement with the
Company dated November 1,1998, Brown Brothers Harriman & Co. ("BBH"), 40 Water
Street, Boston Massachusetts, 02109, acts as the custodian of the Funds'
securities and cash and as the Funds' accounting services agent. With the
consent of the Company, BBH has designated The Depository Trust Company of New
York, as its agent to secure a portion of the assets of the International Funds.
BBH is authorized to appoint other entities to act as sub-custodians to provide
for the custody of foreign securities which may be acquired and held by the
International Funds outside the U.S. Such appointments are subject to
appropriate review by the Company's Board of Directors. As the accounting
services agent of the International Funds, BBH maintains and keeps current the
books, accounts, records, journals or other records of original entry relating
to such Funds' business.
TRANSFER AGENT
Pursuant to a Transfer Agent Agreement with the Company dated January 1, 1999,
Fund Services, Inc. ("FSI") acts as the Company's transfer and disbursing agent.
FSI is located at 1500 Forest Avenue, Suite 111, Richmond, VA 23229. John Pasco,
III, Chairman of the Board of the Company and an officer and shareholder of CSS
(the Administrator of the Funds), owns one-third of the stock of FSI; therefore,
FSI may be deemed to be an affiliate of the Company and CSS.
FSI provides certain shareholder and other services to the Company, including
furnishing account and transaction information and maintaining shareholder
account records. FSI is responsible for processing orders and payments for share
purchases. FSI mails proxy materials (and receives and tabulates proxies),
shareholder reports, confirmation forms for purchases and redemptions and
prospectuses to shareholders. FSI disburses income dividends and capital
distributions and prepares and files appropriate tax-related information
concerning dividends and distributions to shareholders.
DISTRIBUTOR
Vontobel Fund Distributors, a division of First Dominion Capital Corp. (the
"Distributor"), 1500 Forest Avenue, Suite 223, Richmond, VA 23229, serves as the
principal underwriter of the Funds' shares pursuant to a Distribution Agreement
dated August 18, 1997. John Pasco, III, Chairman of the Board of the Company,
owns 100% of the Distributor, and is its President, Treasurer and a Director.
INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Tait, Weller & Baker, audit the Company's
annual financial statements, assists in the preparation of certain reports to
the U.S. Securities and Exchange Commission (the "SEC"), and prepares the
Company's tax returns. Tait, Weller & Baker is located at 8 Penn Center Plaza,
Suite 800, Philadelphia, PA 19103.
PORTFOLIO TRANSACTIONS
It is the policy of the Adviser, in placing orders for the purchase and sale of
each Fund's securities, to seek to obtain the best price and execution for
securities transactions, taking into account such factors as price, commission,
where applicable, (which is negotiable in the case of U.S. national securities
exchange transactions but which is generally fixed in the case of foreign
exchange transactions), size of order, difficulty of execution and the skill
required of the executing broker/dealer. After a purchase or sale decision is
made by the Adviser, the Adviser arranges for execution of the transaction in a
manner deemed to provide the best price and execution for the Fund.
Exchange-listed securities are generally traded on their principal exchange,
unless another market offers a better result. Securities traded only in the
over-the-counter market may be executed on a principal basis with primary market
makers in such securities, except for fixed price offerings and except where the
Fund may obtain better prices or executions on a commission basis or by dealing
with other than a primary market maker.
The Adviser, when placing transactions, may allocate a portion of a Fund's
brokerage to persons or firms providing the Adviser with investment
recommendations, statistical, research or similar services useful to the
Adviser's investment decision-making process. The term "investment
recommendations or statistical, research or similar services" means (1) advice
as to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, and (2) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, and portfolio strategy.
Such services are one of the many ways the Adviser can keep abreast of the
information generally circulated among institutional investors by
broker-dealers. While this information is useful in varying degrees, its value
is indeterminable. Such services received, on the basis of transactions for a
Fund, may be used by the Adviser for the benefit of other clients, and the Fund
may benefit from such transactions effected for the benefit of other clients.
While there is no formula, agreement or undertaking to do so, and when it can be
done consistent with the policy of obtaining best price and execution, a Fund
may consider sales of its shares as a factor in the selection of brokers to
execute portfolio transactions. The Adviser may be authorized, when placing
portfolio transactions for a Fund, to pay a brokerage commission in excess of
that which another broker might have charged for executing the same transaction
solely on account of the receipt of research, market or statistical information.
Except for implementing the policy stated above, there is no intention to place
portfolio transactions with particular brokers or dealers or groups thereof.
The Board of Directors of the Company has adopted policies and procedures
governing the allocation of brokerage to affiliated brokers. The Adviser has
been instructed not to place transactions with an affiliated broker-dealer,
unless that broker-dealer can demonstrate to the Company that the Fund will
receive (1) a price and execution no less favorable than that available from
unaffiliated persons, and (2) a price and execution equivalent to that which
that broker-dealer would offer to unaffiliated persons in a similar transaction.
The Board reviews all transactions which have been placed pursuant to those
policies and procedures at its Board meetings.
When two or more Funds that are managed by the Adviser are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated in a manner deemed equitable to each Fund. In some cases this
procedure could have a detrimental effect on the price or volume of the security
as far as a Fund is concerned. In other cases, however, the ability of such Fund
to participate in volume transactions will be beneficial for the Fund. The Board
of Directors of the Company believes that these advantages, when combined with
the other benefits available because of the Adviser's organization, outweigh the
disadvantages that may exist from this treatment of transactions.
The Funds paid brokerage commissions as follows:
Years Ended December 31,
Fund 1997 1998 1999
Value Fund $290,165 $496,553 $357,993
International Equity Fund 292,194 146,822 367,230
E. European Equity Fund 932,733 374,114 123,675
U.S. Equity Fund 4,604 17,928 11,962
Bond Fund -0- -0- -0-
The Funds paid brokerage commissions to Vontobel Securities, Ltd.
(an affiliated broker-dealer) as follows:
Years ended December 31,
Fund 1997 1998 1999
Value Fund -0- -0- -0-
International Equity Fund -0- -0- -0-
E. European Equity Fund -0- -0- -0-
U.S. Equity Fund -0- -0- -0-
Bond Fund -0- -0- -0-
PORTFOLIO TURNOVER
Average annual portfolio turnover rate is the ratio of the lesser of sales or
purchases to the monthly average value of the portfolio securities owned during
the year, excluding from both the numerator and the denominator all securities
with maturities at the time of acquisition of one year or less. A higher
portfolio turnover rate involves greater transaction expenses to a Fund and may
result in the realization of net capital gains, which would be taxable to
shareholders when distributed. The Adviser makes purchases and sales for a
Fund's portfolio whenever necessary, in the Adviser's opinion, to meet the
Fund's objective. The Adviser anticipates that the average annual portfolio
turnover rate of each of the Funds will be less than 100%. As a result of
negative investment performance, there were increased transactions (due to Fund
redemptions) in the U.S. Value Fund for fiscal year end December 31, 1998 which
caused the portfolio turnover to exceed 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 NAV 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 SAI, 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 Funds' securities are generally valued at current market prices. Investments
in securities traded on the national securities exchanges or included in the
NASDAQ National Market System are valued at the last reported sale price. Other
securities traded in the over-the-counter market and listed securities for which
no sales are reported on that date are valued at the last reported bid price.
Short-term debt securities (less than 60 days to maturity) are valued at their
fair market value using amortized cost pricing procedures. Other assets for
which market prices are not readily available are valued at their fair value as
determined in good faith under procedures set by the Board of Directors.
Depositary Receipts (i.e., ADRs, EDRs and GDRs) will be valued at the closing
price of the instrument last determined prior to the Valuation Time unless the
Company is aware of a material change in value. Securities for which such a
value cannot be readily determined on any day will be valued at the closing
price of the underlying security adjusted for the exchange rate.
PURCHASING SHARES
You may purchase shares of the Funds directly from the Distributor or through
brokers or dealers who are members of the National Association of Securities
Dealers, Inc. When you acquire or redeem shares through a securities broker or
dealer, you may be charged a transaction fee. The offering price per share is
equal to the NAV next determined after the Fund receives your purchase order.
The minimum initial investment for the Value Fund, E. European Equity Fund, U.S.
Equity Fund and Bond Fund is $1,000. The minimum initial investment in the
International Equity Fund is $200,000. Subsequent investments for all Funds must
be $50 or more. The Company may waive the minimum initial investment requirement
for purchases made by directors, officers and employees of the Company. The
Company may also waive the minimum investment requirement for purchases by its
affiliated entities and certain related advisory accounts and retirement
accounts (such as IRAs). You may purchase shares of a Fund by mail or wire.
ELIGIBLE BENEFIT PLANS
An eligible benefit plan is an arrangement available to the (1) employees of an
employer (or two or more affiliated employers) having not less than ten
employees at the plan's inception (2) or such an employer on behalf of employees
of a trust or plan for such employees, their spouses and their children under
the age of 21 or a trust or plan for such employees, which provides for
purchases through periodic payroll deductions or otherwise. There must be at
least five initial participants with accounts investing or invested in shares of
one or more of the Funds and/or certain other funds.
The initial purchase by the eligible benefit plan along with prior purchases by
or for the benefit of the initial participants of the plan must aggregate not
less than $5,000. Subsequent purchases must be at least $50 per account and must
aggregate at least $250. The eligible benefit plan must make purchases using a
single order and a single check or federal funds wire. The eligible benefit plan
may not make purchases more often than monthly. The Company will establish a
separate account for each employee, spouse or child for which purchases are
made. The Company may modify the requirements for initiating or continuing
purchases or stop offering shares to such a plan at any time without prior
notice.
SELLING SHARES
You may redeem shares of the Funds at any time and in any amount by mail or
telephone. The Transfer Agent will use reasonable procedures to confirm that
instructions communicated by telephone are genuine and, if the procedures are
followed, will not be liable for any losses due to unauthorized or fraudulent
telephone transactions.
The Company's procedure is to redeem shares at the NAV determined after FSI
receives the redemption request in proper order. The Company deducts a 2%
redemption fee from proceeds of the Value Fund, U.S. Equity Fund and
International Equity Fund shares redeemed less than three months after purchase
(including shares to be exchanged). The Company deducts a 2% redemption fee from
proceeds of the E. European Equity Fund and Bond Fund shares redeemed less than
six months after purchase (including shares to be exchanged). The applicable
Fund retains this amount to offset the Fund's costs of purchasing or selling
securities. The Adviser reserves the right to waive the redemption fee for its
clients.
The Company may suspend the right to redeem shares for any period during which
the NYSE is closed or the SEC determines that there is an emergency. In such
circumstances you may withdraw your redemption request or permit your request to
be held for processing at the NAV next computed after the suspension is
terminated.
SMALL ACCOUNTS
Due to the relatively higher cost of maintaining small accounts, the Company may
deduct $10 per year from your account or may redeem the shares in your account,
if it has a value of less than $1,000. The Company will advise you in writing
sixty (60) days prior to deducting the annual fee or closing your account,
during which time you may purchase additional shares in any amount necessary to
bring the account back to $1,000. The Company will not close your account if it
falls below $1,000 solely because of a market decline.
SPECIAL SHAREHOLDER SERVICES
As described briefly in the Prospectus, each Fund offers the following
shareholder services:
Regular Account: A regular account allows a shareholder to make voluntary
investments and/or withdrawals at any time. Regular accounts are available to
individuals, custodians, corporations, trusts, estates, corporate retirement
plans and others. You may use the Account Application provided with the
Prospectus to open a regular account.
Telephone Transactions: You may redeem shares or transfer into another Fund if
you request this service on your initial Account Application. If you do not
elect this service at that time, you may do so at a later date by sending a
written request and signature guarantee to FSI.
Each Fund employs reasonable procedures designed to confirm the authenticity of
your telephone instructions and, if it does not, it may be liable for any losses
caused by unauthorized or fraudulent transactions. As a result of this policy, a
shareholder that authorizes telephone redemption bears the risk of losses, which
may result from unauthorized or fraudulent transactions which the Fund believes
to be genuine. When you request a telephone redemption or transfer, you will be
asked to respond to certain questions. The Company has designed these questions
to confirm your identity as a shareholder of record. Your cooperation with these
procedures will protect your account and the Fund from unauthorized
transactions.
Invest-A-Matic Account: Invest-A-Matic Accounts allow shareholders to make
automatic monthly investments into their account. Upon request, FSI will
withdraw a fixed amount each month from a shareholder's checking account and
apply that amount to additional shares. This feature does not require you to
make a commitment for a fixed period of time. You may change the monthly
investment, skip a month or discontinue your Invest-A-Matic Plan as desired by
notifying FSI at (800) 628-4077.
Individual Retirement Account ("IRA"): All wage earners under 70-1/2, even those
who participate in a company sponsored or government retirement plan, may
establish their own IRA. You can contribute 100% of your earnings up to $2,000
(or $2,250 with a spouse who is not a wage earner, for years prior to 1997). A
spouse who does not earn compensation can contribute up to $2,000 per year to
his or her own IRA. The deductibility of such contributions will be determined
under the same rules that govern contributions made by individuals with earned
income. A special IRA program is available for corporate employers under which
the employers may establish IRA accounts for their employees in lieu of
establishing corporate retirement plans. Known as SEP-IRA's (Simplified Employee
Pension-IRA), they free the corporate employer of many of the recordkeeping
requirements of establishing and maintaining a corporate retirement plan trust.
If you have received a lump sum distribution from another qualified retirement
plan, you may rollover all or part of that distribution into your Fund IRA. A
rollover contribution is not subject to the limits on annual IRA contributions.
By acting within applicable time limits of the distribution you can continue to
defer Federal Income Taxes on your rollover contribution and on any income that
is earned on that contribution.
Roth IRA: A Roth IRA permits certain taxpayers to make a non-deductible
investment of up to $2,000 per year. Provided an investor does not withdraw
money from his or her Roth IRA for a 5 year period, beginning with the first tax
year for which contribution was made, deductions from the investor's Roth IRA
would be tax free after the investor reaches the age of 59-1/2. Tax free
withdrawals may also be made before reaching the age of 59-1/2 under certain
circumstances. Please consult your financial and/or tax professional as to your
eligibility to invest in a Roth IRA. An investor may not make a contribution to
both a Roth IRA and a regular IRA in any given year.
An annual limit of $2,000 applies to contributions to regular and Roth IRAs. For
example, if a taxpayer contributes $2,000 to a regular IRA for a year, he or she
may not make any contribution to a Roth IRA for that year.
How to Establish Retirement Accounts: Please call the Company to obtain
information regarding the establishment of individual retirement plan accounts.
Each plan's custodian charges nominal fees in connection with plan establishment
and maintenance. These fees are detailed in the plan documents. You may wish to
consult with your attorney or other tax adviser for specific advice concerning
your tax status and plans.
Exchange Privilege: Shareholders may exchange their shares for shares of any
other series of the Company, provided the shares of the Fund the shareholder is
exchanging into are noticed for sale in the shareholder's state of residence.
Each account must meet the minimum investment requirements (currently $1,000 for
all funds except the International Equity Fund which is $200,000). 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, if received by the Company
prior to 4:00 p.m. EST). FSI will charge your account a $10.00 service fee each
time you make such an exchange. The Company reserves the right to limit the
number of exchanges or to otherwise prohibit or restrict shareholders from
making exchanges at any time, without notice, should the Company determine that
it would be in the best interest of its shareholders to do so. For tax purposes,
an exchange constitutes the sale of the shares of the Fund from which you are
exchanging and the purchase of shares of the Fund into which you are exchanging.
Consequently, the sale may involve either a capital gain or loss to the
shareholder for federal income tax purposes. The exchange privilege is available
only in states where it is legally permissible to do so.
TAX STATUS
DISTRIBUTIONS AND TAXES
Distributions of net investment income
The Funds receive income generally in the form of dividends and interest on
their investments. This income, less expenses incurred in the operation of a
Fund, constitutes a Fund's net investment income from which dividends may be
paid to you. Any distributions by a Fund from such income will be taxable to you
as ordinary income, whether you take them in cash or in additional shares.
Distributions of capital gains
The Funds may derive capital gains and losses in connection with sales or other
dispositions of their portfolio securities. Distributions from net short-term
capital gains will be taxable to you as ordinary income. Distributions from net
long-term capital gains will be taxable to you as long-term capital gain,
regardless of how long you have held your shares in a Fund. Any net capital
gains realized by a Fund generally will be distributed once each year, and may
be distributed more frequently, if necessary, in order to reduce or eliminate
excise or income taxes on the Fund.
Effect of foreign investments on distributions
Most foreign exchange gains realized on the sale of securities are treated as
ordinary income by a Fund. Similarly, foreign exchange losses realized by a Fund
on the sale of securities are generally treated as ordinary losses by the Fund.
These gains when distributed will be taxable to you as ordinary dividends, and
any losses will reduce a Fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce a Fund's ordinary
income distributions to you, and may cause some or all of a Fund's previously
distributed income to be classified as a return of capital.
A Fund may be subject to foreign withholding taxes on income from certain of its
foreign securities. If more than 50% of a Fund's total assets at the end of the
fiscal year are invested in securities of foreign corporations, a Fund may elect
to pass-through to you your pro rata share of foreign taxes paid by the Fund. If
this election is made, the year-end statement you receive from a Fund will show
more taxable income than was actually distributed to you. However, you will be
entitled to either deduct your share of such taxes in computing your taxable
income or (subject to limitations) claim a foreign tax credit for such taxes
against your U.S. federal income tax. A Fund will provide you with the
information necessary to complete your individual income tax return if it makes
this election.
Information on the tax character of distributions
The Funds will inform you of the amount of your ordinary income dividends and
capital gains distributions at the time they are paid, and will advise you of
their tax status for federal income tax purposes shortly after the close of each
calendar year. If you have not held Fund shares for a full year, a Fund may
designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the Fund.
Election to be taxed as a regulated investment company
Each Fund has elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code, has qualified as such for its most
recent fiscal year, and intends to so qualify during the current fiscal year. As
regulated investment companies, the Funds generally pay no federal income tax on
the income and gains they distribute to you. The board reserves the right not to
maintain the qualification of a Fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such case,
a Fund will be subject to federal, and possibly state, corporate taxes on its
taxable income and gains, and distributions to you will be taxed as ordinary
dividend income to the extent of such Fund's earnings and profits.
Excise tax distribution requirements
To avoid federal excise taxes, the Internal Revenue Code requires a Fund to
distribute to you by December 31st 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 5.9% 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. The U.S. Equity Fund was not eligible for the intercorporate
dividends-received deduction for fiscal year ended December 31, 1999.
Because the income of the International Equity Fund, E. European Equity Fund and
Bond 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:
6
Yield = 2[(a-b +1) -1]
---
cd
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
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:
n
P(1+T) = 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.
One-Year Five-Years Ten-Years Since
Period Ended Period Ended Period Ended Inception to
Fund 12/31/99 12/31/99 12/31/99 12/31/99
Value Fund (14.07%) 17.64% N/A 13.45% (1)
International
Equity Fund 46.52% 19.36% N/A 13.26% (2)
E. European
Equity Fund 14.50% N/A N/A (0.27%)(3)
U.S. Equity Fund 32.56% N/A N/A (1.34%)(4)
Bond Fund (9.01%) N/A N/A 5.26% (4)
(1) Commencement of operations was March 30, 1990.
(2) Commencement of operations was July 6, 1990.
(3) Commencement of operations was February 15, 1996.
(4) Commencement of operations was September 1, 1997.
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, Australasia, 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, Capital
Resource Advisors, 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 Company directly at:
VONTOBEL FUNDS, INC.
1500 Forest Avenue, Suite 223
Richmond, VA 23229
(800) 527-9500
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, 1999 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 1999 annual report to shareholders (the "Annual
Report"). A copy of the Annual Report accompanies this SAI and an investor may
obtain a copy of the Annual Report by writing to the Fund or calling
(800)-527-9500.
A prospectus and additional information may also be obtained from our website at
www.vontobelfunds.com.
