VONTOBEL U.S. VALUE FUND
ANNUAL REPORT 1999
Dear Shareholder:
1999 turned out to be my worst year ever as a fund manager in my 11 1/2 years at
Vontobel. For 1999 Vontobel U.S. Value Fund produced a negative total return of
- -14.07%, while the S&P 500 gained 21.04%. Part of the year's abysmal performance
is self-inflicted: we had "blowups" in UnumProvident (merger-related accounting
problems and Q2 earnings disappointment due to rising group disability claims)
and ESG Re (dismissal of CEO following the company's ill-advised attempt to
launch a health care insurance product in Germany); many of our insurance
stocks, which seemed cheap in January, saw fundamentals deteriorate during the
year and the stocks became cheaper still; and financials in general did poorly
in the face of a long bond that started the year near 5% but ended the year well
over 6%. The second cloud to rain on us had to do with the poor performance of
most "value stocks" in general in 1999. If we hadn't lost money on portfolio
holdings in UnumProvident and Mercury General, then we probably would have been
exposed to other value stocks that we sometimes traffic in and that declined in
price anyway, e.g., Coke (-10%), Berkshire Hathaway (-25%) and Freddie Mac
(-25%); selloffs in the latter led us to purchase them in the fourth quarter.
The third and final cloud raining over us in 1999 was the lopsided nature of the
market toward technology and internet stocks. The market's gains have become so
narrow that 70% of all New York Stock Exchange stocks had negative returns in
1999 and, ex-tech, the S&P 500 would have risen only 2% last year. An analyst in
Barron's in December noted "this is the biggest bifurcation of returns since the
1972 market." Even if us codgy value managers try to be more open-minded with
regard to technology going forward, it is highly unlikely that we would have
stayed on the tech bandwagon this long to see Yahoo trade at 500x next year's
estimated profits and Cisco trade for 100x this year's earnings.
Have most value managers become dinosaurs? Technology is now over 25% of the S&P
500 Index (indeed, with recent changes in the S&P 500, some would argue that the
index itself has really become a large cap growth proxy) and historically value
managers, with their emphasis on certainty and knowing what the future will look
like with a reasonable degree of accuracy, have shied away form such
ever-changing high growth areas as the internet and biotech. Many of us took our
cue from value guru Warren Buffett, who opined that while he admired his good
friend Bill Gates, he just couldn't get a grip on Microsoft's business and had
to pass on the stock. Buffett has also opined that internet stocks are
impossible to value. Warren is no dummy, but regarding his lack of exposure to
tech the last two years, Forbes recently quipped "if Buffett headed a mutual
fund, he'd be looking for a second career."
Going forward, one of our challenges is to see if we can become more flexible,
open-minded investors and try to find those same elements of a franchise, free
cash flow, predictability and good management in the technology area of the
market that we so admired in the Gillettes and Cokes of the world. We'll see.
I'm told such companies do exist, and we are applying ourselves to the
technology sector even now to see if we can expand our investment paradigm to
perhaps capture some of these dynamic companies the next time they find
themselves on their backs. (Don't worry, we're not about to throw our entire
discipline out the window and rush into tech at today's valuations.)
A bad year like 1999 has caused us to re-think other aspects of our investment
approach, also. Our Buffett-oriented approach to value investing typically
biased us in favor of financials, such as AIG, and consumer staples, such as
Disney, and away not only from the apparently less-analyzable tech sector, but
also away from the more cyclical, deeper value areas of the market (Ford,
Caterpillar, etc.) frequented by many traditional value investors. A key tenet
to the Buffett approach is that if you find a steady financial history, you can
probably take comfort in forecasting a steady future, upon which to make earning
predictions and from whence you can derive the intrinsic value of a stock. Of
course, there aren't many companies that have non-commodity-like products or
defensible franchises, so one's investment universe is inherently limited and
the result is a concentrated portfolio with very few stocks.
As we have practiced the Buffett approach over the years, in good times and bad,
we have always been aware of the limits of our knowledge. It is very difficult
to know more than 80% of what you need to know about a company and its business
prospects. Even with the best of companies, some material facts are just not
knowable (i.e., how many colas will Coke sell in India or China in 2015?). One
has to resort to a conservative extrapolation into the future based on a study
of the past. One of our learning experiences in 1999 is that if certainty is a
lot harder to come by than a pure Buffett practitioner would care to admit, and
the unknown or unforeseeable is always present (witness the blowup in
UnumProvident, and what a good company it had been and how close we had been to
management and the business), then investing probably becomes somewhat more
probabilistic, in which case a slightly more diverse portfolio with slightly
less concentrated positions might be more appropriate in the future. Such a
tactic would be a reasonable defense against the limitations of our knowledge
and our vulnerability to the unforeseen event. Hence, our inclination going
forward, to reduce risk and perhaps volatility, will probably be to diversify
somewhat more than in the past.
Let's examine one of our stocks with the weakest current fundamentals, Mercury
General. Mercury now trades in the low $20s, down from $70 in 1998. A
competitive California automobile insurance market has driven its earnings down
from a $3.25 rate to an estimated $2.55 rate in 2000. Prices are finally
stabilizing and we may actually see modest price increases in 2000. For the sake
of argument, let's say Mercury never grew its earnings again and the best it
could ever earn was $2.55. How much would the stock be worth? Finance 101 tells
us that the value of a financial asset is 1/K-G, where K= the discount rate and
G= the projected earnings growth rate. Since we're assuming Mercury will have
absolutely no future earnings growth (highly unlikely), then the value of its
stock is simply 1 divided by the discount rate, or long bond rate of 6.3% times
its "perpetual" earnings power of $2.55. 1/ 6.30% =15.8 x $2.55 in earnings
gives us a value of $40 for MCY, up almost 90% from its current trading range.
And just imagine what Mercury's fair value would be if the company began to grow
earnings again?
Our portfolio is chock-a-block with severely undervalued equities such as
Mercury General. Can I tell you when its value is likely to be realized in what
is currently the most momentum-oriented market of the past 75 years? No. Can I
promise you that its fundamentals are going to improve next quarter and that
this will prompt all kinds of analyst upgrades and focus attention on the stock?
No. But I can tell you that in our humble opinion, the stock is extremely
oversold and worth a good deal more than the price it currently sells for in the
marketplace.
Mercury General at less than 10x earnings versus Cisco at 100x earnings. While
yes, in the future, we will scrutinize the technology sector of the market to
see if we can come up with a select number of steady names in the context of our
Buffett-like paradigm, at today's prices, even many technology analysts are
skeptical about current valuations and observe that value now in the market may
reside more in the "old economy" stocks than the "new economy" stocks.
One could say that for the Vontobel U.S. Value Fund 1999 has been a year to be
remembered as a year to forget. In fact, the exact opposite is true. We intend
to learn everything we can about mistakes made and opportunities missed in 1999
to become better investors going forward. Although at least a part of our
terrible relative performance this year can be attributed to a quirky market
that may be seen only once a generation (internet mania), we as portfolio
managers ultimately hold ourselves responsible for performance. In this respect,
money management is very much like professional sports: sometimes you're the
hero, and sometimes you're the bum. We owe our shareholders and ourselves much
better results in the future. For many years we produced competitive returns
with lower risk than the market (the fund's risk-adjusted return ranked within
the 13th percentile of equity funds tracked by Capital Resources Inc. for the
5-year period ending December 31, 1998). This year, our historical virtues were
turned upside down. More than any other single factor, it is personal pride that
will drive us to resurrect our results and re-establish our reputation. We want
to be excellent and we want to win, both for our clients, for our firm and for
ourselves.
Edwin Walczak, Fund Manager
January 21, 2000
<PAGE>
[graph goes here]
Vontobel U.S. Value Fund S & P 500
----------------------------------------
3/30/1990 $10,000 $10,000
12/31/1990 $ 9,011 $ 9,966
12/31/1991 $12,371 $13,002
12/31/1992 $14,343 $13,993
12/31/1993 $15,205 $15,401
12/31/1994 $15,209 $15,604
12/31/1995 $21,347 $21,475
12/31/1996 $25,887 $26,201
12/31/1997 $34,770 $34,943
12/31/1998 $39,883 $44,929
12/31/1999 $34,271 $54,384
[end graph]
<PAGE>
Vontobel U.S. Value Fund
Schedule of Portfolio Investments
December 31, 1999
Number
of Market
Shares Security Description Value
- ---------- -------------------- ------------
COMMON STOCK: 83.07%
BANKING: 2.46%
99,304 California Center Bank* $ 1,762,646
-----------
COSMETICS AND TOILETRIES: 5.07%
88,000 Gillette Co. 3,624,500
---------
DIVERSIFIED OPERATIONS: 1.41%
18 Berkshire Hathaway Class A 1,009,800
---------
FOOD - RETAIL: 2.54%
56,200 Albertsons, Inc. 1,812,450
---------
HOME FURNISHINGS: 1.27%
28,400 Ethan Allen Interiors, Inc. 910,575
-------
INSURANCE - DISABILITY: 10.16%
226,436 UNUM Provident Corp. 7,260,104
---------
INSURANCE-DIVERSIFIED: 8.44%
51,600 Esg Re Limited* 357,975
153,800 Horace Mann Educators Corp. 3,018,325
195,225 Old Republic International Corp. 2,659,941
---------
6,036,241
---------
INSURANCE-PROPERTY/CASUALTY: 19.29%
85,000 Ace Ltd. 1,418,438
100,600 Chubb Corp. 5,665,037
78,500 IPC Holdings Ltd. 1,167,688
153,500 Mercury General Corp. 3,415,375
52,000 Renaissancere Holdings Ltd. 2,125,500
---------
13,792,038
----------
MEDICAL HOSPITALS: 1.14%
61,000 Health Management Assn., Inc. 815,875
-------
OTHER FINANCIAL: 21.05%
117,724 Fannie Mae 7,350,392
36,000 Countrywide Credit Inds., Inc. 909,000
144,200 Freddie Mac 6,786,412
---------
15,045,804
----------
PAINT & RELATED PRODUCTS: 3.80%
129,200 Sherwin Williams 2,713,200
---------
PUBLISHING AND BROADCAST: 5.09%
61,100 Knight Ridder, Inc. 3,635,450
---------
RETAIL TOYS: 1.35%
67,300 Toys "R" Us 963,231
---------
Total Investments:
(Cost: $66,737,087)** 83.07% 59,381,914
Other assets, net 16.93% 12,098,149
------ ----------
NET ASSETS 100.00% $71,480,063
======= ===========
* Non-income producing
** Cost for Federal income tax purposes is $66,737,087 and net unrealized
depreciation consists of:
Gross unrealized appreciation $ 2,536,046
Gross unrealized depreciation (9,891,219)
-----------
Net unrealized depreciation $(7,355,173)
============
See Notes to Financial Statements
<PAGE>
VONTOBEL U.S. VALUE FUND
Statement of Assets and Liabilities
December 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments at value
(identified cost of $66,737,087)(Notes 1 & 3) $59,381,914
Cash 11,501,997
Receivables:
Capital stock sold $268,468
Dividends receivable 47,695
Investments sold 578,731
-------
894,894
Other assets 6,300
--------
TOTAL ASSETS 71,785,105
----------
LIABILITIES
Payables:
Capital stock redeemed 202,186
Investment management fees 70,286
Accrued expenses 32,570
-------
TOTAL LIABILITIES 305,042
-----------
NET ASSETS $71,480,063
===========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($71,480,063/5,009,490 shares outstanding) $ 14.27
===========
At December 31, 1999 there were 50,000,000 shares of $.01 par value stock
authorized and components of net assets are:
Paid in capital $81,671,547
Net unrealized depreciation on investments (7,355,173)
Accumulated net realized loss on investments (2,836,311)
-----------
Net Assets $71,480,063
===========
See Notes to Financial Statements
<PAGE>
Vontobel U.S. Value Fund
STATEMENT OF OPERATIONS
Year ended December 31, 1999
- --------------------------------------------------------------------------------
Investment Income
Income:
Interest $1,223,444
Dividend 1,753,518
---------
Total income $ 2,976,962
-----------
Expenses:
Investment management fees (Note 2) 1,224,969
Recordkeeping and
administrative services (Note 2) 305,947
Shareholder servicing and
reports (Note 2) 127,907
Transfer agent fees (Note 2) 247,038
Custodian and accounting fees (Note 3) 105,590
Printing 168,626
Filing and registration fees (Note 2) 75,226
Legal and audit fees 53,039
Organizational costs 18,181
Other 143,912
-------
Total expenses 2,470,435
---------
Management fee waiver and expense reimbursement (22,500)
--------
Net expenses 2,447,935
---------
Net investment income 529,027
---------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments (2,836,311)
Net change in unrealized appreciation on investments (18,597,297)
------------
Net loss on investments (21,433,608)
------------
Net decrease in net assets resulting, from operations ($20,904,581)
=============
See Notes to Financial Statements
<PAGE>
VONTOBEL U.S. VALUE FUND
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Year ended Year ended
December 31, 1999 December 31,1998
----------------- -----------------
OPERATIONS
Net investment income $ 529,027 $ 2,056,313
Net realized gain (loss)
on investments (2,836,311) 29,341,209
Change in unrealized
appreciation of investments (18,597,297) (4,007,234)
------------ -----------
Net increase (decrease) in
net assets resulting from
operations (20,904,581) 27,390,288
DISTRIBUTION TO SHAREHOLDERS FROM
Net investment income
($.11, and $.16 per share,
respectively) (725,107) (1,357,295)
Net realized gain from
investment transactions
($0 and, $1.90 per
share, respectively) ---- (16,117,877)
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets
resulting from capital share
transactions** (107,353,117) (12,571,875)
------------- ------------
Net decrease in net assets (128,982,805) (2,656,759)
Net assets at
beginning of year 200,462,868 203,119,627
----------- ------------
NET ASSETS at the end of year $ 71,480,063 $200,462,868
============ ============
*A summary of capital share transactions follows:
Year ended December 31, 1999 Year ended December 31, 1998
---------------------------- ----------------------------
Shares Value Shares Value
------ ------ ------- ------
Shares sold 1,958,018 $31,261,054 15,954,466 $270,442,839
Shares reinvested
from distributions 44,006 664,930 1,043,131 16,283,273
Shares redeemed (8,975,932) (139,279,101) (17,313,425) (299,297,987)
----------- ------------- ------------ -------------
Net decrease (6,973,908) $(107,353,117) (315,828) $(12,571,875)
=========== ============== =========== =============
See Notes to Financial Statements
<PAGE>
VONTOBEL U.S. VALUE FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- --------------------------------------------------------------------------------
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.
See Notes to Financial Statements
<PAGE>
Vontobel U.S. Value Fund
Notes to the Financial Statements
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel U.S. Value Fund (the
"Fund") is a series of Vontobel Funds, Inc. ("VFI") which is registered under
The Investment Company Act of 1940, as amended, as a non-diversified open-end
management company. The Fund was established in March 30, 1990 as a series of
VFI which has allocated to the Fund 50,000,000 of its 500,000,000 shares of $.01
par value common stock. The following is a summary of significant accounting
policies consistently followed by the Fund. The policies are in conformity with
generally accepted accounting principles.
The investment objective of the Fund is to achieve long-term capital returns of
the broad market by investing in a continuously managed non-diversified
portfolio of U.S. equity securities.
A. Security Valuation. Investments in securities traded on a national securities
exchange or included in the NASDAQ National Market System are valued at the last
reported sales price; other securities traded in the over-the-counter market and
listed securities for which no sale is reported on that date are valued at the
last reported bid price. Short-term investments (securities with a remaining
maturity of sixty days or less) are valued at cost which, when combined with
accrued interest, approximates market value.
B. Federal Income Taxes. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required. The Fund has capital loss carryforwards
available to offset future capital gains, if any, of $730,305 which expires in
2007. Additionally, the Fund incurred capital losses of $2,106,006 after October
31, 1999 which are deemed, under income tax regulations, to occur on the first
day of the Fund's next fiscal year (January 1, 2000).
C. Security Transactions and Dividends. Security transactions are accounted
for on the trade date. The cost of securities sold is determined generally on
a first-in, first-out basis. Dividends are recorded on the ex-dividend date.
D. Deferred Organizational Expenses. Reorganization costs assumed in the
acquisition of Centurion Growth fund on December 24, 1994 amounted to $90,899
and were amortized over a period of five (5) years.
E. Accounting Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS AND OTHER--Pursuant to
an Investment Advisory Agreement, the Advisor, Vontobel USA, Inc.("VUSA")
provides investment services for an annual fee of 1.00% on the first $100
million of average daily net assets and .75% on average daily net assets over
$100 million. VUSA will reimburse the Fund, to the extent of its advisory fee,
to limit the Fund's aggregate annual operation expenses (excluding taxes,
brokerage commissions and amortization of organization expenses), to the lowest
applicable percentage limitation prescribed by any state in which the Fund's
shares are qualified for sale.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $402,108 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky and certain shareholder
servicing on an hourly rate basis. For other administrative services, CSS
receives 0.20% of average daily net assets.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $224,046 for its services for the year ending December
31, 1999.
Certain officers and/or directors of the Fund are also officers and/or directors
of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY--Purchases and sells of securities other than
short-term notes aggregated $69,659,461 and $151,597,066, respectively.
NOTE 4 - DISTRIBVUTIONS TO SHAREHOLDERS--Distributions from net investment
income and realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These distribution differences are primarily due to differing
treatments for equalization and post-October capital losses.
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
- --------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities of Vontobel
U.S. Value Fund, a series of Vontobel Funds, Inc., including the schedule of
portfolio investments as of December 31, 1999, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Vontobel U.S. Value Fund as of December 31, 1999, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended, in conformity with generally accepted accounting
principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 20, 2000
<PAGE>
VONTOBEL INTERNATIONAL EQUITY FUND
ANNUAL REPORT 1999
Dear Shareholder:
As in the US, telecom and technology stocks pushed foreign markets to new highs
in 1999. Vontobel International Equity Fund produced a total return of 46.52%,
outperforming Morgan Stanley Capital International's EAFE Index, which gained
26.96%.
After six years of declining returns on capital and returns on equity in Europe
and Japan, international equities experienced a dramatic turnaround as
corporations worldwide embraced the concept of shareholder value. More stringent
accounting standards, increased accountability in corporate governance, and a
greater focus on financial results (as gauged by returns on equity and operating
margins) have given corporate executives in Europe and Japan new benchmarks.
Despite stagnant sales, many firms reported substantial increases in operating
profits, thanks to cost cutting, outsourcing, and cuts in capital spending. Also
illustrative is the change in attitude toward share buybacks. Last year 39 of
the 40 companies in France's CAC Index announced share buybacks or share
cancellations. In large part, the rerating of European and Japanese equities is
due to the fact that managements are learning to make better use of their
balance sheets, which are for the most part richly capitalized.
Corporate governance has vastly improved in Europe, with the UK far in the lead.
Ten years ago, it was impossible to get a breakdown of a company's results by
industrial division. Today improved reporting standards provide a more accurate
picture of financial performance, and unexplained "exceptional items" are a
thing of the past. One consequence of this greater transparency has been a
frenzy of M&A activity. The British company Vodafone's bid for Germany's
Mannesmann has set a precedent for a major cross-border acquisition; the
combined $140 billion company will control 31 million cellular customers in more
than 26 countries. We've been generously rewarded for owning both firms for many
years. Last quarter alone both stocks shot up more than 35%, resulting in
full-year gains of 67% for Vodafone and 129% for Mannesmann.
Shareholder value creation is becoming a reality in Japan as well. Japanese
managements have begun to adopt such policies as increased offshore procurement,
cuts in R&D, wage reduction measures, and re-engineering of production. Yet old
habits die hard. Japanese industry remains very much a vertically integrated
system, and the reorganization of the industry groups known as keiretsu will
take time. Despite the fact that they are refocusing attention away from sales
growth to cost control and productivity, not many companies are using return on
equity to measure their performance. Companies we own were among the exceptions
(e.g., Micro, Hikari Tsushin, Murata, Rohm, Takeda, 7-11).
We added a number of Japanese companies to the portfolio last year, not because
of the improved picture of the Japanese domestic economy but because several
Japanese firms have begun to compete successfully on different terms. Hikari
Tsushin, a cellular service provider founded in 1988, three years after the
telecom industry was deregulated, is one of Japan's new success stories. It's
headed by 34-year-old Yasumitsu Shigeta, whose 60% ownership stake is worth US$
25 billion. Customer demand is being spurred by WAP (wireless application
protocol for viewing e-mail and web page text on cell phones) and the company
should show positive free cash flow growth in the current fiscal year. With an
ROE of 26% and ROA of 22%, it has grown earnings at 55% over the last three
years. We also bought Secom, a security services firm with a 60% market share.
It's had operating margins of 20% for the last 10 years, ROE's of 11% and a
constant growth rate in revenues of 6% with profits rising by about 15%. The
founder still owns 10%. Both these firms are great businesses with the kind of
superior, consistent track records that allow us to attach a buy-in price that
is reasonable from an investment standpoint.
While the fund benefited from its holdings in telecom and technology companies,
last year's strongest performers, it continues to be well diversified among
industry sectors. Our largest deviations against the EAFE benchmark are the
financial sector, where we have an underweight, and services, where we are
overweight due to the sharp appreciation in share prices. We have trimmed a lot
of stocks whose portfolio weightings had increased due to performance, and are
adding selectively into the financial sector.
We believe that the majority of companies within our investable universe will be
able to sustain their strong sales growth over the next 12 months. 1999 seems to
have left a good foundation for rebuilding the needed strengths in Europe's and
Japan's corporate world. The tide has definitely turned for international equity
investors.
Fabrizio Pierallini, Fund Manager
February 1, 2000
<PAGE>
[graph goes here]
Vontobel International
Equity Fund MSCI EAFE
---------------------- ---------
7/6/1990 $10,000 $10,000
12/31/1990 $ 8,709 $ 8,726
12/31/1991 $10,343 $ 9,784
12/31/1992 $ 9,984 $ 8,593
12/31/1993 $14,218 $11,391
12/31/1994 $13,463 $12,277
12/31/1995 $14,929 $13,653
12/31/1996 $17,464 $14,478
12/31/1997 $19,068 $14,736
12/31/1998 $22,265 $17,682
12/31/1999 $32,619 $22,450
[end graph]
<PAGE>
VONTOBEL INTERNATIONAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1999
Number of Market
Shares Security Description Value
- --------- ---------------------------------------- ---------------
Common Stock: 98.50%
Finland: 3.50%
24,900 Nokia ADR (Telecommunications) $ 4,731,000
29,200 Sonera Group (Telecom Services) 1,999,678
---------------
6,730,678
---------------
France: 8.59%
5,340 Altran Technologies (Engineering - Consulting) 3,224,345
16,200 Axa S.A. (Multi-line Insurance) 2,256,317
2,838 CAP Gemini (Computer Services) 719,717
32,895 CGIP (Holding) 2,151,753
21,000 Dassault Systems SA (Computer Software) 1,367,328
1,800 L'OREAL (Cosmetics) 1,442,804
2,550 LVMH Louis Vuitton/Moet Hennessy (Diversified) 1,141,186
31,510 Scor (Reinsurance) 1,388,902
14,515 Total SA (Oil/Gas) 1,935,450
11,750 Valeo (Auto Parts) 905,765
---------------
16,533,567
---------------
Germany: 5.56%
4,839 Alliance AG (Multi-line Insurance) 1,624,054
47,294 Bayerische Motoren Werke (Automobile) 1,442,108
15,100 Mannesmann AG (Telecom Services) 3,639,414
88 Munchener Ruckversicherung Wts 6/03/02 (Reinsurance 4,676
5,676 Munchener Ruckversicherung (Reinsurance) 1,438,292
4,250 SAP AG (Computer Software) 2,557,639
---------------
10,706,183
---------------
Great Britain: 18.65%
142,960 Amvescap (Financial Services) 1,663,059
23,398 British Petroleum PLC Sponsored ADR * (Petroleum) 1,387,794
88,000 British Telecom (Telecom Services) 2,151,208
110,000 Capita Group PLC (Human Resources) 2,008,315
42,135 CGU PLC (Multi-line Insurance) 679,073
250,000 Compass Group PLC (Food) 3,433,363
29,821 CRH Ord (Construction) 639,221
82,000 Diageo Plc (Beverages) 659,787
86,000 Dixons Group (Retail) 2,068,969
116,000 Hays PLC (Diversified) 1,847,973
175,000 HSBC Holdings (Banking) 2,440,111
109,348 Lloyds TSB Group PLC (Banking) 1,368,337
175,040 Misys PLC (Computer Services) 2,729,137
80,000 New Securicor PLC (Commercial Services) 207,779
90,000 Next Ord (Retail) 863,753
65,959 Provident Financial Group PLC (Financial) 745,990
480,000 Rentokil Initial PLC (Commercial Services) 1,750,773
51,654 Schroders PLC (Banking) 1,039,879
268,560 Siebe PLC (Diversified) 1,462,285
70,000 Smithkline Beecham PLC (Pharmaceuticals) 893,481
391,000 Vodafone Group PLC (Telecommunications) 1,937,858
248,000 WPP Group (Advertising) 3,930,804
---------------
35,908,949
---------------
Italy: 2.35%
212,500 Eni SPA (Oil - Integrated) 1,167,618
290,000 Pirelli (Diversified) 795,268
122,000 Telecom Italia Mobile (Telecom Services) 1,361,571
85,000 Telecom Italia (Telecom Services) 1,197,557
---------------
4,522,014
---------------
Ireland: 1.40%
100,306 Allied Irish Banks PLC (Banking) 1,140,655
52,400 Elan Corporation ADR * (Medical Products) 1,545,800
---------------
2,686,455
---------------
Netherlands: 9.00%
33,231 Aegon NV (Multi-line Insurance) 3,207,089
19,324 Aegon NV ADR (Multi-line Insurance) 1,845,442
29,400 ASM Lithography Holdings NV * (Electronics) 3,263,412
30,000 Getronics NV (Computer Services) 2,391,088
31,000 Heineken NV (Beverages) 1,510,552
26,000 Kempen & Co (Financial Services) 1,033,522
10,940 Koninklijke Philips (Electronics) 1,486,278
51,195 Vendex NV (Diversified) 1,360,130
36,600 Wolters Kluwer NV (Publishing) 1,237,569
---------------
17,335,082
---------------
Norway: 0.45%
51,500 Tomra Systems AG (Recycling) 874,680
---------------
Spain: 0.60%
46,000 Telefonic a De Espana (Telecom Services) 1,148,044
---------------
Sweden: 7.30%
47,200 A Com AB (Advertising) 1,076,890
215,320 Assa Abloy Series 'B' (Metal Processors/Fabrication 3,026,078
13,500 Connecta AB (Consulting) 460,426
33,600 Ericsson (LM) Tele Series B Free (Telecommunication 2,161,496
5,800 Framtidsfabriken AB (Consulting) 1,050,453
90,000 Hennes & Mauritz AB (Retail) 3,016,582
24,100 Modern Times Group AG (Media) 1,196,072
66,000 Securitas AB Ser B (Commercial Services) 1,195,343
68,800 Svenska Handelsbanks Ser A (Banking) 865,765
---------------
14,049,105
---------------
Switzerland: 7.70%
20,000 Credit Suisse Group (Banking) 3,975,382
950 Nestle AG (Food) 1,740,344
1,000 Pharma Vision * (Pharmaceutical) 709,665
75 Roche Holdings AG (Pharmaceutical) 1,224,644
410 Roche Holdings Genusscheine (Pharmaceutical) 4,866,545
800 Swiss Reinsurance (Reinsurance) 1,643,409
860,000 Zurcher KTBK 9/15/00 WT CHF 669,723
---------------
14,829,712
---------------
Australia: 0.49%
172,500 Telstra Corporation (Telecom Services) 938,393
---------------
Hong Kong: 1.85%
161,400 Dah Sing Financial Services (Financial Services) 643,648
340,000 Smartone Telecom Hldgs Ltd (Telecom Services) 1,640,188
125,000 Sun Hung Kai Properties (Real Estate) 1,286,422
---------------
3,570,258
---------------
Japan: 28.55%
20,500 Asatsu DK Inc (Advertising) 1,384,593
50 Credit Saison Co. (Financial) 871
16,000 Fuji Photo Film Co. (Consumer Goods) 584,182
2,000 Hikari Tsushin Inc (Retail) 4,013,312
21,000 Honda Motor Co (Automobiles) 781,128
17,000 Hoya Co. (Glass Products and Electronics) 1,339,565
33,000 Mikuni Coca Cola (Beverages) 578,211
27,500 Murata Manufacturing Co. Ltd. (Electronics) 6,460,454
30,000 Nichiei Co Ltd (Financial Services) 651,919
14,000 Nintendo Co. Ltd. (Consumer Goods) 2,326,938
16 Nippon Tel and Tel (Telecom Services) 274,080
38,000 Nomura Securities Co Ltd (Brokerage) 686,276
150 NTT Data Communications Systems (Telecommunications 3,450,470
154 NTT Mobile Commn Network Inc (Telecom Services) 5,924,236
16,400 Rohm Co. Ltd. (Electronics) 6,742,365
9,000 Ryohin Keikaku Co Ltd Jpy (Retail) 1,806,872
11,000 Secom Co (Communication Services) 1,211,335
13,000 Seven-Eleven Japan (Retail) 2,061,472
3,550 Shohkoh Fund & Co (Financial Services) 1,405,614
15,000 Sony Corp. (Audio/Video Products) 4,448,904
58,000 Takeda Chemical Industries (Medical/Drugs) 2,867,071
60,000 Tokyo Broadcasting System, Inc. (Broadcasting) 2,032,106
23,000 Tokyo Electron Ltd. (Electronics) 3,151,919
140,000 Yasuda Fire & Marine Insurance (Insurance) 792,091
---------------
54,975,984
---------------
Malaysia: 0.55%
300,000 Malayan Banking Berhad (Banking) 1,065,789
---------------
Singapore: 1.96%
110,064 Datacraft Asia Ltd (Computer Services) 913,531
132,000 Singapore Press Holdings Ltd. (Publishing) 2,861,123
---------------
3,774,654
---------------
Total Common Stocks
(Cost: $104,498,060) 189,649,547
---------------
Principal
Amount Corporate Bonds: 0.41%
- -------
800,000 Salomon Smith Euro Mid Term Note,
maturity date 5/9/00
(Cost: $800,000) 798,000
---------------
Total Investments:
(Cost: $105,298,060)** 98.91% 190,447,547
Other assets, net 1.09% 2,089,744
------ -----------
Net Assets 100.00% $192,537,291
======= ============
* Non-income producing
** Cost for Federal income tax purposes is $105,298,060 and net unrealized
appreciation consists of:
Gross unrealized appreciation $87,605,641
Gross unrealized depreciation (2,456,154)
---------------
Net unrealized appreciation $85,149,487
===============
ADR--Security represented is held by the custodian bank in the form of American
Depository Receipts.
See Notes to Financial Statements
<PAGE>
Vontobel International Equity Fund
Statement of Assets and Liabilities
December 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments at value (identified
cost of $105,298,060)(Notes 1 & 3) $190,447,547
Cash (including foreign currencies) 1,405,598
Receivables:
Capital stock sold $300,666
Dividends and interest 156,687
Investments sold 473,485
-------
930,838
Other assets 25,010
----------------
TOTAL ASSETS 192,808,993
----------------
LIABILITIES
Investment management fees payable 136,346
Accrued expenses 135,356
----------------
TOTAL LIABILITIES 271,702
----------------
NET ASSETS $192,537,291
================
NET ASSET VALUE, OFFERING
AND REDEMPTION PRICE PER SHARE
($192,537,291 / 6,873,275 shares outstanding) $ 28.01
================
At December 31, 1999 there were 50,000,000 shares of $.01 par value stock
authorized and the components of net assets are:
Paid in capital $107,394,353
Net unrealized gain on investments
and currency transactions 85,142,938
----------------
Net Assets $192,537,291
================
See Notes to Financial Statements
<PAGE>
Vontobel International Equity Fund
Statement of Operations
For the year ended December 31, 1999
- --------------------------------------------------------------------------------
Investment Income
Income:
Interest $ 123,742
Dividend (Net of foreign tax
withheld of $209,680) 1,996,130
-----------
Total income $2,119,872
Expenses:
Investment management fees (Note 2) 1,474,217
Recordkeeping and
administrative services (Note 2) 260,011
Custodian and accounting fees (Note 3) 92,640
Shareholder servicing and reports (Note 2) 12,813
Transfer agent fees (Note 2) 23,274
Legal and audit fees 42,876
Filing and registration fees (Note 2) 15,506
Other 168,007
------------
Total expenses 2,089,344
Custody credits (Note 3) (10,551)
------------
Expenses, net 2,078,793
------------
Net investment income 41,079
------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on investments 23,189,302
Net realized gain on foreign currency
conversions and forward currency contracts 1,358,375
Change in unrealized appreciation
on investments and foreign currencies 41,562,567
------------
Net gain on investments 66,110,244
------------
Net increase in net assets
resulting from operations $66,151,323
============
See Notes to Financial Statements
<PAGE>
Vontobel International Equity Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Years ended December 31,
--------------------------------------------
1999 1998
--------------- -----------
OPERATIONS
Net investment income $ 41,079 $ 106,817
Net realized gain on investments
and foreign currency transactions 24,547,677 16,174,584
Net unrealized appreciation
of investments and currencies 41,562,567 10,265,830
--------------- -----------
Net increase in net
assets resulting
from operations 66,151,323 26,547,231
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
($0.05 and $0 per
share, respectively) (345,700) ----
Net realized gain from
investment transactions
($1.25 and $0.96 per share,
respectively) (8,366,747) (7,497,265)
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets
resulting from capital
share transactions* (26,834,678) (17,937,871)
------------ -----------
Net increase in net assets 30,604,198 1,112,095
Net assets at
beginning of year 161,933,093 160,820,998
----------- -----------
NET ASSETS at end of year $192,537,291 $161,933,093
============ ============
*A summary of capital share transactions follows:
1999 1998
---------------------- ----------------------
Shares Value Shares Value
------- ------ ------- -----
Shares sold 11,858,769 $247,523,446 10,169,780 $46,636,966
Shares reinvested
from distributions 351,845 8,229,657 366,109 13,035,788
Shares redeemed (13,362,079) (282,587,781) (11,371,833) (49,613,933)
------------- ----------- ---------- ------------
Net decrease (1,151,465) ($26,834,678) (835,944) ($10,058,821)
============= ============ =========== =============
See Notes to Financial Statements
<PAGE>
Vontobel International Equity Fund
Financial Highlights
For a Share Outstanding Throughout Each Year
- --------------------------------------------------------------------------------
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 38.41% 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.
See Notes to Financial Statements
<PAGE>
Vontobel International Equity Fund
Notes to the Financial Statements
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel International Equity Fund
(the "Fund") is a series of Vontobel Funds, Inc. ("VFI") which is registered
under The Investment Company Act of 1940, as amended, as a diversified open-end
management company. The Fund was established in December, 1984 as a series of
VFI which has allocated to the Fund 50,000,000 of its 500,000,000 shares of $.01
par value common stock.
The objective of the Fund is to achieve capital appreciation by investing in a
carefully selected and continuously managed diversified portfolio consisting
primarily of equity securities of issuers located the Europe and the Pacific
Basin.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Investments traded on stock exchanges are valued at the
last quoted sales price on the exchange on which the securities are traded as of
the close of business on the last day of the period or, lacking any sales, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are valued on the exchange designated by or under
the authority of the Fund's Board of Directors. Securities traded in the
over-the-counter market are valued at the last available sale price in the
over-the-counter market prior to time of valuation. Securities for which market
quotations are not readily available are valued on a consistent basis at fair
value as determined in good faith by or under the direction of the Fund's
officers in a manner specifically authorized by the Board of Directors of the
Fund. Temporary investments in U.S. dollar denominated short-term investments
are valued at amortized cost, which approximates market. Portfolio securities
which are primarily traded on foreign exchanges are generally valued at the
closing price on the exchange on which they are traded, and those values are
then translated into U.S. dollars at the current exchange rate.
B. Federal Income Taxes. The Fund intends to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required.
C. Security Transactions and Dividends. Security transactions are accounted
for on the trade date. The cost of securities sold is determined generally on
a first-in, first-out basis. Dividends are recorded on the ex-dividend date.
D. Currency Translation. The market values of foreign securities, currency
holdings, other assets and liabilities initially expressed in foreign currencies
are recorded in the financial statements after translation to U.S. dollars based
on the exchange rates at the end of the period. The cost of such holdings is
determined using historical exchange rates. Income and expenses are translated
at approximate rates prevailing when accrued or incurred. The Fund does not
isolate that portion of gains and losses on investments which is due to changes
in foreign exchange rates from that which is due to changes in market prices of
the investments. Such fluctuations are included with the net realized and
unrealized gains and losses from investments. Foreign securities and currency
transactions may involve certain considerations and risks not typically
associated with those of domestic origin.
E. Forward Currency contracts. Forward sales of currencies are undertaken to
hedge certain assets denominated in currencies that Vontobel USA, Inc. ("VUSA"),
the Fund's investment advisor, expects to decline in value in relation to other
currencies. A forward currency contract is an agreement between two parties to
buy or sell a currency at a set price on a future date. Forward contracts are
marked to market daily and the change in market value is recorded by the fund as
an unrealized gain or loss. When a contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed. The Fund
could be at risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably.
F. Distribution to Shareholders. Distributions from net investment income and
realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations that may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions, net operating losses and post-October capital and
currency losses.
G. Accounting Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS AND OTHER--Pursuant to
an Investment Advisory Agreement, the Advisor, Vontobel USA, Inc.("VUSA")
provides investment services for an annual fee of 1.00% on the first $100
million of average daily net assets and .75% on average daily net assets over
$100 million.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $381,099 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky and certain shareholder
servicing on an hourly rate basis. For other administrative services, CSS
receives 0.20% of average daily net assets.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $99,577 for its services for the year ending December 31,
1999.
To discourage short term investing and recover certain administrative, transfer
agency, shareholder servicing and other costs associated with such short term
investing, the Fund charges a 2% fee on such redemption of shares held less than
six months. Such fees amounted to $357,926 for the year ended December 31, 1999,
representing 0..22% of average net assets.
Certain officers and/or directors of the Fund are also officers and/or directors
of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY--Purchases and sells of securities other than
short-term notes aggregated $60,860,856 and $90,110,831, respectively. The
custodian has provided credits in the amount of $10,551 against custodian and
accounting charges based on credits on cash balances of the Fund.
NOTE 4-SECURITIES LENDING--At December 31, 1999 securities valued at $3,961,056
were on loan to brokers. For collateral, the Fund received shares of a
short-term global investment trust valued at $4,161,934. Income from securities
lending amounted to $54,603 for the year ended December 31, 1999. The risks to
the Fund of securities lending are that the borrower may not provide additional
collateral when required or return the securities when due.
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of Vontobel
International Equity Fund, a series of Vontobel Funds, Inc., including the
schedule of portfolio investments as of December 31, 1999, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Vontobel International Equity Fund as of December 31, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 20, 2000
<PAGE>
VONTOBEL EASTERN EUROPEAN EQUITY FUND - ANNUAL REPORT 1999
Dear Shareholder:
The explosive bull run in international equities during the final two months of
1999 sent Eastern European equities soaring as well. The region had lagged all
year due to the impact of the 1998 Russian crisis, the Kosovo war, and the slow
pace of growth in Europe, particularly Germany, which finally pulled out of its
4-year recession in the third quarter.
Vontobel Eastern European Equity Fund surged during the last two months in the
year, earning 31.6% in the fourth quarter. For 1999 the fund earned a total
return of 14.50%, vs. 16.51% for the Nomura Research Institute's Composite-11
Index. At December 31, 1999, the fund's closing Net Asset Value stood at $9.32,
and net assets totaled $32,081,460.
Hungary and Poland, the fund's two largest weightings, produced US dollar
returns of 13% and 25% respectively. The Czech Republic ended up 4% for the
year, while Croatia remained in negative territory at -19%. Russia, of course,
was the region's big winner. After plummeting 37% in the third quarter, the
Russian market roared back to life to earn a US dollar return of 110% for the
year (see chart).
Russia
During the fourth quarter, in anticipation of a rally in Russia, we made a
tactical decision to increase our Russian exposure, at the expense of cash and
our weighting in the Czech Republic. We invested mainly in blue chips and oil
stocks, increasing positions in Lukoil, Surgutneftegaz, Rostelcom, and adding
Mosenergo, Moscow's power company, and Tatneft, the country's fourth-largest oil
producer. After the dramatic share price appreciation in the last quarter, our
Russian weighting at year end was 24.5% (see chart).
This decision was made irrespective of fundamental considerations, since Russia
remains a market that defies any serious valuation methodology. Instead, we made
our investment case with a 4-month time horizon, based on such factors as: an
anticipated acceleration of growth Western Europe; worldwide bullish sentiment,
in particular the revived interest in emerging markets equities; the huge gap in
equity valuations between Eastern Europe and rest of the world; the increasing
popularity of Vladimir Putin, which reinforced investor hopes for a pro-reform
government; anticipation of a strong January effect, in part due to the
dissipation of Y2K fears; the strict conditions imposed on Russia by the World
Bank and the IMF; and Russia's underweighting in international portfolios, a
result of the massive capital flight following Russia's default on international
debt in 1998.
Adding to the euphoria in the Russian market was Boris Yeltsin's premature
resignation in the waning hours of the century. Following on the heels of the
victory of pro-government factions in the December 19th parliamentary elections,
Yeltsin's action all but assured the victory of Putin, his hand-picked
successor, in the presidential elections to be held in March. Opportunities for
continued high returns in the Russian market are offset by political risks,
which, in the interim, could cause considerable price fluctuations. We are
protecting ourselves against these risks by investing only in the most liquid
issues and by adjusting our portfolio management approach to changing economic
and political conditions.
Hungary and Poland
Third quarter current account figures, published on Nov 3rd, were
enthusiastically received by the market. The market was expecting a deficit
ranging from $150-300 million, and it came in at only $93 million. Industrial
production figures also surpassed expectations (10.7% year-over-year). These
better than expected numbers, together with a drop in the rate of growth of
inflation, prompted a surprise rate cut of 50 basis points in early January. We
maintain a strong overweight in this market, which boasts the region's highest
number of quality companies. Telecom operator Matav is our favorite stock in the
region.
In contrast to Hungary, Poland's high current deficit for September ($1.1
billion) hurt both the equity market and the zloty. Interest rates in Poland
will remain high due to inflation fears. The absence of an export recovery also
hurt the market, but this should change when the ripple effect of the pick-up in
European growth makes itself felt on the Polish economy. In November we
initiated a nearly 3% position in Polski Koncern Naftowy, one of the largest
companies in the region with a market capitalization of $2.5 billion, and the
first oil & gas company listed in Poland. In view of the disproportionate size
of the Polish market in the benchmark (42%), we maintain a prudent but sizable
underweight (29%).
Comeback in 2000?
We believe that the global macroeconomic environment is favorable for emerging
markets and Eastern Europe in particular. Our expectations for a continued
re-rating in these markets in 2000 are predicated on a slight deceleration in
the US economy; an acceleration of European growth in a low inflation
environment; a continued Japanese recovery which will sustain world growth;
strengthening of the euro vs. the dollar; and a further rise in commodity prices
driven by increased demand.
The major investment themes in Eastern Europe in 2000 are:
- - an acceleration in regional growth, mainly led by exports
- - the increasing importance of EU convergence, which will bring greater
focus on the region and sustain foreign direct investment inflows
- - the lagging performance of the last two years, which has left
international funds underweighted in the region
For now, we are maintaining our tactical overweight in Russia, which we think
will benefit the most from fund inflows into the region (followed by Hungary and
Poland). Unless our short-term investment case for maintaining this overweight
remains compelling, we will gradually shift assets to more fundamental stories
(Hungary, Poland and some stocks in smaller markets).
Luca Parmeggiani
Fund Manager
January 21, 2000
<PAGE>
[graph goes here]
Vontobel Eastern
European Equity Fund NRI EEEI
-------------------- --------
2/15/1996 $10,000 $10,000
12/31/1996 $14,890 $13,475
12/31/1997 $16,191 $13,572
12/31/1998 $ 8,642 $10,607
12/31/1999 $ 9,895 $12,358
[end graph]
<PAGE>
EASTERN EUROPEAN EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1999
Number
of Market
Shares Security Description Value
- -------- ---------------------------------------------- -----------
Common Stocks: 95.65%
Croatia: 7.45%
137,000 Pliva D D GDR (Medical-Drugs) $ 1,763,875
64,500 Zagrebacka Banka GDR (Banking) 741,750
-----------
2,505,625
-----------
Czech Republic: 3.29%
19,700 Ceske Radiokmunikace Reg S GDR (Telecommunications) 719,050
44,000 Komercni Banka AS Spon ADR (Banking) 234,300
33,700 Ceska Sporitelna (Banking) 154,264
-----------
1,107,614
-----------
Estonia: 0.46%
1,206,800 Britannic Group PLC (Natural Resources) 155,986
-----------
Hungary: 33.06%
8,800 Borsodchem GDR Reg S (Chemicals) 346,500
38,700 Danubius Hotel & Spahuf * (Hotel) 703,289
19,100 Delmagyarorszagi Aramsz Sponsored GDR * (Utilities-Electric) 276,950
27,700 Egis Gyogysergyar (Medical-Drugs) 1,095,511
11,000 Gedeon Richter Ltd GDR Reg S (Medical Drugs) 671,000
10,981 Inter Europa Bank (Banking) 345,260
50,727 Magyar Olay Es Gazipari RT (Oil and Gas) 1,053,260
73,200 Matav RT ADR (Telecommunications) 2,635,200
900 MOL Magyar Olay GDR 144A (Oil and Gas) 18,450
13,100 OTP Bank GDR (Banking) 756,525
52,269 Pannonplast Muanyagipari (Construction Materials) 1,289,929
31,300 Pick Szeged (Food-Meat) 1,466,897
10,000 Tiszai Vegyi Kombinat GDR Reg S (Chemicals) 185,000
14,500 Tiszai Vegyi Kombinat HUF (Chemicals) 276,409
-----------
11,120,180
-----------
Poland: 27.65%
22,500 Agora GDR Reg S (Media) 331,875
43,740 Bank Polska Kasa Opieki (Banking) 571,212
7,300 Bank Slaski (Banking) 501,378
25,000 Budimex SA (Construction) 173,519
27,000 Computerland Poland SA * (Technology) 444,667
40,000 Elektrim SA (Engineering) 406,288
61,249 Exbud SA * (Construction) 516,950
36,500 Exbud SA GDR * 144A (Construction) 273,750
44,200 KGHM Polska Miedz GDR (Metals) 601,120
75,000 Mostostal Zabrze-Holding SA (Construction) 227,630
21,300 Netia Holdings SA ADR (Telecommunications) 391,920
70,000 Polski Koncern Nafto GDR (Oil and Gas) 875,000
7,000 Powszechny Bank Kredy GDR (Banking) 159,950
4,700 Softbank SA GDR (Technology) 162,150
294,700 Telekomunikacja Polska SA GDR (Telecommunications) 1,878,713
53,600 Orbis SA * (Hotels) 483,502
2,500 Prokom Software SA GDR Reg S (Software) 38,438
22,000 Prokom Software Sponsored GDR 144A (Software) 338,250
68,500 Zakalady Metali Lekkich * (Manufacturing) 927,690
-----------
9,304,002
-----------
Slovakia: 0.36%
8,600 Slovnaft AS (Oil and Gas) 122,399
-----------
Russia: 23.38%
95,900 AO Mosenergo Spon ADR (Utilities - Electric) 407,575
23,000 Cores Russian Ctfs Yar Telecom * (Telecommunications) 17,250
40,700 Lukoil Oil Co Sponsored ADR (Oil and Gas) 2,116,400
22,600 Oil Co Lukoil Sp ADR F/Pfd Shs (Oil and Gas) 271,200
66,800 RAO Gazprom Spon ADR Reg S (Oil and Gas) 634,600
33,400 Rostelecom Long Dst&Intl Tl ADR (Telecommunications) 563,625
119,500 Surgutneftegaz Sponsored ADR (Oil and Gas) 2,031,500
97,500 Tatneft Spon ADR Reg S (Oil and Gas) 655,688
4,500 Vimpel Communications Spon ADR (Telecommunications) 200,812
75,900 Unified Energy Systems GDS (Utility-Electric) 967,725
-----------
7,866,375
-----------
Total Investments:
(Cost: $33,118,980) ** 95.65% 32,182,181
Other assets, net 4.35% 1,461,843
-------- -----------
Net Assets 100.00% $33,644,024
======== ===========
* Non-income producing
** Cost for Federal income tax purposes is $33,118,980 and net unrealized
depreciation consists of:
Gross unrealized appreciation $ 4,699,667
Gross unrealized depreciation (5,636,466)
-----------
Net unrealized depreciation $ (936,799)
============
ADR--Security represented is held by the custodian bank in the form of American
Depository Receipts. GDR--Security represented is held by the custodian bank in
the form of Global Depository Receipts.
GDS--Security represented is held by the custodian bank in the form of Global
Depository Shares. RDC--Security represented is held by the custodian bank in
the form of Russian Depository Certificates.
144A-Restricted security. May only be resold to qualified institutional
buyers. The aggregate market value of these securities at December 31. 1999
was $630,450 which represented 1.87% of the Fund's net assets.
See Notes to Financial Statements
<PAGE>
Vontobel Eastern European Equity Fund
Statement of Assets and Liabilities
December 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments at value (identified
cost of $33,118,980)(Notes 1 & 3) $32,182,181
Foreign currencies at value 64
Receivables:
Capital stock sold $ 1,662,022
Dividends 2,350
Investments sold 116,918
----------- 1,781,290
Deferred organizational costs 15,862
----------------
TOTAL ASSETS 33,979,397
----------------
LIABILITIES
Payables:
Bank overdraft 138,273
Investment management fees 30,587
Capital stock redeemed 71,128
----------- 239,988
Accrued expenses 95,385
----------------
TOTAL LIABILITIES 335,373
----------------
NET ASSETS $33,644,024
================
NET ASSET VALUE, OFFERING
AND REDEMPTION PRICE PER SHARE
($33,644,024/3,610,860 shares outstanding) $ 9.32
================
At December 31, 1999 there were 50,000,000 shares of $.01 par value stock
authorized and the components of net assets are:
Paid in capital $81,039,090
Net unrealized loss on investments and
foreign currency transactions (936,799)
Accumulated deficit in undistributed net income (20,766)
Accumulated net realized loss on investments (46,437,501)
----------------
Net Assets $33,644,024
================
See Notes to Financial Statements
<PAGE>
Vontobel Eastern European Equity Fund
Statement of Operations
For year ending December 31, 1999
- --------------------------------------------------------------------------------
Investment Income
Income:
Dividend (Net of foreign tax withheld of $52,919) $ 280,571
------------
Expenses:
Investment management fees (Note 2) $ 387,669
Recordkeeping and
administrative services (Note 2) 63,447
Custodian and accounting fees (Note 3) 164,982
Transfer agent fees (Note 2) 109,198
Printing 140,381
Shareholder servicing and reports (Note 2) 36,773
Legal and audit fees 34,250
Filing and registration fees (Note 2) 18,007
Organizational costs 14,093
Other 75,372
------------
Total expenses 1,044,172
Custody credits (Note 3) (34,322)
------------
Expenses, net 1,009,850
------------
Net investment loss (729,279)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized loss on investments (20,394,989)
Net realized loss on foreign currency conversions (185,383)
Net change in unrealized depreciation
of investments and foreign currencies 24,939,581
------------
Net gain on investments 4,359,209
------------
Net increase in net assets
resulting from operations $3,629,930
============
See Notes to Financial Statements
<PAGE>
Vontobel Eastern European Equity Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Years ended December 31,
----------------------------------
1999 1998
----------- -------------
OPERATIONS
Net investment loss $ (729,279) (1,339,272)
Net realized loss on investments
and foreign currencies (20,580,372) (24,016,438)
Change in unrealized depreciation
of investments 24,939,581 (18,220,110)
------------ ------------
Net increase (decrease) in
net assets resulting
from operations 3,629,930 (43,575,820)
CAPITAL SHARE TRANSACTIONS
Net decrease in net assets
resulting from capital share
transactions* (6,139,848) (59,678,643)
------------ ------------
Net decrease in net assets (2,509,918) (103,254,463)
Net assets at beginning of year 36,153,942 139,408,405
------------ ------------
NET ASSETS at end of year
(Includes accumulated deficit
in undistributed net investment
income of $20,766 and $0,
respectively.) $33,644,024 $36,153,942
*A summary of capital share transactions follows:
Years ended December 31,
------------------------------------------------------------
1999 1998
---------------------- -----------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold 1,024,124 $8,406,082 8,327,774 $ 68,491,154
Shares redeemed (1,854,214) (14,545,930) (13,029,324) (128,169,797)
------------ ------------ ----------- -------------
Net decrease (830,090) $(6,139,848) (4,701,550) $(59,678,643)
============ ============ =========== =============
See Notes to Financial Statements
<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-
Expenses (A) 3.37% 2.57% 1.94% 2.02%**
Expenses-net (B) 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.
See Notes to Financial Statements
<PAGE>
Vontobel Eastern European Equity Fund
Notes to the Financial Statements
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel Eastern European Equity
Fund (the "Fund") is a series of Vontobel Funds, Inc. ("VFI") which is
registered under The Investment Company Act of 1940, as amended, as a
diversified open-end management company. The Fund was established in February,
1996 as a series of VFI which has allocated to the Fund 50,000,000 of its
500,000,000 shares of $.01 par value common stock.
The objective of the Fund is to achieve capital appreciation by investing in a
carefully selected and continuously managed diversified portfolio consisting
primarily of equity securities of issuers located the Eastern Europe.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
Security Valuation. Investments traded on stock exchanges are valued at the last
quoted sales price on the exchange on which the securities are traded as of the
close of business on the last day of the period or, lacking any sales, at the
last available bid price. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or under the
authority of the Fund's Board of Directors. Securities traded in the
over-the-counter market are valued at the last available sale price in the
over-the-counter market prior to time of valuation. Securities for which market
quotations are not readily available are valued on a consistent basis at fair
value as determined in good faith by or under the direction of the Fund's
officers in a manner specifically authorized by the Board of Directors of the
Fund. Temporary investments in U.S. dollar denominated short-term investments
are valued at amortized cost, which approximates market. Portfolio securities
which are primarily traded on foreign exchanges are generally valued at the
closing price on the exchange on which they are traded, and those values are
then translated into U.S. dollars at the current exchange rate.
B. Federal Income Taxes. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required. The fund has capital loss carryforwards,
available to offset future capital gains, if any, of $39,223,357 of which
$20,327,913 expires in 2006 and $18,895,462 expires in 2007.
Additionally the fund incurred capital losses of $7,214,126 and currency losses
of $20,766 after October 31, 1999 which are deemed, under income tax
regulations, to occur in the first day of the fund's next fiscal year (January
1, 2000).
C. Security Transactions and Dividends. Security transactions are accounted
for on the trade date. The cost of securities sold is determined generally on
a first-in, first-out basis. Dividends are recorded on the ex-dividend date.
D. Currency Translation. The market values of foreign securities, currency
holdings, other assets and liabilities initially expressed in foreign currencies
are recorded in the financial statements after translation to U.S. dollars based
on the exchange rates at the end of the period. The cost of such holdings is
determined using historical exchange rates. Income and expenses are translated
at approximate rates prevailing when accrued or incurred. The Fund does not
isolate that portion of gains and losses on investments which is due to changes
in foreign exchange rates from that which is due to changes in market prices of
the investments. Such fluctuations are included with the net realized and
unrealized gains and losses from investments. Foreign securities and currency
transactions may involve certain considerations and risks not typically
associated with those of domestic origin.
E. Distribution to Shareholders. Distributions from net investment income and
realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations that may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions, net operating losses and post-October capital and
currency losses.
F. Deferred Organizational Expenses. All of the expenses of the Fund incurred
in connection with its organization and the public offering of its shares
have been assumed by the Fund. The organization expenses allocable to the
Fund are being amortized over a period of sixty (60) months.
G. Use of Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS AND OTHER--Pursuant to
an Investment Advisory Agreement, the Advisor, Vontobel USA, Inc.("VUSA")
provides investment services for an annual fee of 1.25% on the first $500
million of average daily net assets and 1.00% on average daily net assets over
$500 million.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $122,727 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky and certain shareholder
servicing on an hourly rate basis. For other administrative services, CSS
receives 0.20% of average daily net assets.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $165,514 for its services for the year ending December
31, 1999.
To discourage short term investing and recover certain administrative, transfer
agency, shareholder servicing and other costs associated with such short term
investing, the Fund charges a 2% fee on such redemption of shares held less than
six months. Such fees amounted to $28,553 for the year ended December 31, 1999,
representing 0.09% of average net assets.
Certain officers and/or directors of the Fund are also officers and/or directors
of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY--Purchases and sells of securities other than
short-term notes aggregated $31,743,488 and $40,591,367, respectively. The
custodian has provided credits in the amount of $34,322 against custodian and
accounting charges based on credits on cash balances of the Fund.
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of Vontobel
Eastern European Equity Fund, a series of Vontobel Funds, Inc., including the
schedule of portfolio investments as of December 31, 1999, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended and the financial
highlights for each of the three years in the period then ended and for the
period February 15, 1996 (commencement of operations) to December 31, 1996.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Vontobel Eastern European Equity Fund as of December 31, 1999, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the three years in the period then ended and the period February 15, 1996 to
December 31, 1996, in conformity with generally accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 20, 2000
<PAGE>
VONTOBEL U.S. EQUITY FUND
ANNUAL REPORT 1999
Dear Shareholder:
On December 27, 1999 Vontobel Emerging Markets Equity Fund was renamed Vontobel
U.S. Equity Fund and, in accordance with its revised investment strategy, the
fund's assets were reinvested in the U.S. equity market. The Fund's new symbol
is VNUSX.
At December 31, 1999 the fund's closing net asset value stood at $9.69, and
assets totaled $10,948,236.
For 1999 the fund produced a total return of 32.56%. The fund will retain its
historical performance record since its inception on September 1, 1997 but, in
keeping with its revised investment strategy, has adopted the Standard & Poor's
500 Index as its new benchmark.
In order to achieve its investment objective of long-term capital appreciation,
Vontobel U.S. Equity Fund will invest in a broadly diversified portfolio of
U.S.-based companies generally enjoying strong operating momentum, generating
free cash flow and carrying relatively little debt on their balance sheets. In
selecting stocks for inclusion we will rely in part on a proprietary model that
grades a large population of stocks based primarily on such measures of
operating performance as consistent growth in cash flow, sales, operating
profits, returns on equity and returns on invested capital. This model has been
applied by Vontobel USA's international team with good results, and we look
forward to employing it in the creation and maintenance of a portfolio focusing
on the U.S. market.
Having witnessed an unprecedented level of returns from equity investments in
the final years of the twentieth century, a century that will for all time be
remembered as the American Century, many observers are urging investors to take
a cautious approach toward U.S. markets as the calendar turns. Stocks have
climbed at a frenzied pace and are due for a correction, the pundits say.
Interest rates have risen and are likely to rise further still as the Federal
Reserve acts to keep inflation at bay. The trade deficit is worrisome, they
point out; Americans have been on a consumption binge and must soon cut back.
Speculation is at a fever pitch. When the end comes, they say, it will be ugly.
The pessimists have some valid points, particularly in regards to valuation. As
measured by the broad market averages (the Dow Jones Industrial Average, the
Standard & Poor's 500 Index, the Nasdaq Composite) stocks are indeed selling at
a high multiple to expected earnings. Recent returns to stockholders have been
outsized; we would be truly amazed if the returns on stocks over the next five
years were to match those of the past five years. Furthermore, the Federal
Reserve might well ratchet up interest rates in order to slow the economy's
pace. And, certainly, a casino mentality seems to be at work in at least some
portions of the market.
One should not forget, though, that stocks have, in general, generated high
returns over the past several years for good reason. The ongoing U.S. economic
expansion has set a record as the longest expansion on record. Boosted by new
technology, productivity growth has exceeded all expectations. Inflation has not
flamed out of control, so nominal interest rates have stayed relatively low.
Consumers have jobs and confidence, and corporate profitability is higher than
it's been in decades. No wonder, then, that stock market indices reflect
optimism. There's a lot to be optimistic about. The factors that have driven
stock prices higher in the U.S. are still in place, and it now looks as if
stronger economic growth in other parts of the world (in some cases, a return to
growth after hard times) is likely to gain steam in the year to come.
With regard to those high stock market indices, it's worth noting that not all
stocks are selling at historic highs. Indeed, equity investments in some of the
world's best companies produced negative total returns in 1999. Pfizer,
McDonald's, and Freddie Mac, for example, all lost value last year. And we
believe that some of the highly valued technology companies are highly valued
for good reason. Microsoft, for example, is unlikely to soon be dethroned as the
world's premier software provider, and has tremendous growth prospects as
technology continues to spread across the globe and as new applications are
developed. Yes, some of the heavily hyped dot-com companies may well be absurdly
overvalued, but opportunities for intelligent investing exist in most sectors of
the market, we believe. With Vontobel U.S. Equity Fund we intend to invest in
profitable, growing companies about whose prospects we are optimistic. We do not
intend to speculate in untested start-ups with unproven business models. We
intend to keep the fund at least 95% invested at all times, will limit position
size to no greater than 5% of fund assets, and will avoid excessive industry
concentration.
We look forward to the year ahead and encourage you to contact us with any
questions you may have.
Fabrizio Pierallini, Fund Manager
Mark Robertson, Fund Manager
January 21, 2000
<PAGE>
[graph goes here]
Vontobel U.S.
Equity Fund MSCI EMF S&P
----------- -------- -------
9/1/1997 $10,000 $10,000 $10,000
12/31/1997 $ 9,420 $ 8,430 $10,522
12/31/1998 $ 7,310 $ 6,110 $13,528
12/31/1999 $ 9,690 $10,002 $16,375
[end graph]
<PAGE>
VONTOBEL US EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1999
Number of Market
Shares Security Description Value
- ------ -------------------------------------------- ---------------
Common Stock: 86.13%
ADVERTISING AGENCIES: 2.97%
3,200 Interpublic Group Cos. Inc. $ 184,600
1,400 Onmicom Group, Inc. 140,000
----------
324,600
----------
BEVERAGES: 1.33%
2,500 Coca Cola Co. 145,625
----------
COMMERCIAL BANKS: 4.38%
2,400 Marshall & Ilsley Corp. 150,750
7,600 Synovus Financial Corp 151,050
2,200 US Trust Corp. 176,412
---------
478,212
---------
COMPUTERS - MICRO: 6.58%
1,500 Apple Computer Inc. 154,219
4,200 Dell Computer Corp. 214,200
1,800 Hewlett Packard Co. 205,088
1,900 Sun Microsystems, Inc. 147,131
---------
720,638
---------
COMPUTER SOFTWARE: 3.11%
2,200 Computer Associates Intl., Inc. 153,863
1,600 Microsoft Corp. 186,800
---------
340,663
---------
COSMETICS AND TOILETRIES: 2.18%
5,800 Gillette Co. 238,888
---------
DENTAL SUPPLIES AND EQUIPMENT: 1.33%
3,400 Patterson Dental Co. 144,925
---------
DIVERSIFIED: 0.07%
500 Lever Brothers Pakistan Ltd PKR 8,038
--------
DIVERSIFIED FINANCIAL SERVICES: 3.26%
3,600 Citigroup, Inc. 200,025
1,100 Morgan Stanley Dean Witter 157,025
--------
357,050
--------
ELECTRIC PRODUCTS: 1.73%
3,300 Emerson Electric Corp. 189,338
--------
ELECTRONIC COMPONENTS - SEMI CONDUCTORS: 4.18%
1,100 Applied Materials, Inc. 139,356
2,000 Dallas Semiconductor Corp. 128,875
2,300 Intel Corp. 189,319
--------
457,550
--------
FILTRATION - SEPARATION PRODUCTS: 1.10%
5,000 Donaldson, Inc. 120,313
--------
FINANCE - INVESTMENT BANKER/BROKER: 1.56%
4,400 Paine Webber Group, Inc. 170,775
--------
FINANCE - MORTGAGE LOAN BANKERS: 5.27%
3,500 Countrywide Credit Inds., Inc. 88,375
3,900 Fannie Mae 243,506
5,200 Freddie Mac 244,725
--------
576,606
--------
FOOD: 2.71%
6,100 Albertsons, Inc. 196,725
1,200 Wrigley, William Jr. Co. 99,525
--------
296,250
--------
FOOTWARE AND RELATED APPAREL: 1.40%
2,900 Timberland Co. 153,337
--------
HOME FURNISHINGS: 1.90%
6,500 Ethan Allen Interiors, Inc. 208,406
--------
MEDICAL - DRUGS: 5.63%
5,100 American Home Products 201,131
3,100 Merck & Co. 207,894
6,400 Pfizer, Inc. 207,600
--------
616,625
--------
MEDICAL HOSPITALS: 0.89%
7,300 Health Management Assoc., Inc. 97,638
--------
MEDICAL PRODUCTS: 1.70%
2,000 Johnson and Johnson 186,250
--------
MULTI-LINE INSURANCE: 1.78%
1,800 American International Group 194,625
--------
MULTIMEDIA: 1.79%
2,400 Gannett Co. 195,750
--------
NETWORKING PRODUCTS: 1.37%
1,400 Cisco Systems, Inc. 149,975
--------
OIL AND GAS DRILLING: 0.15%
485 Transocean Sedco Forex, Inc. 16,338
--------
OIL COMPANIES - INTEGRATED: 2.66%
1,800 Exxon Mobil Corp. 145,013
2,700 Texaco Inc. 146,644
--------
291,657
--------
OIL FIELD SERVICES: 1.28%
2,500 Schlumberger, Ltd. 140,625
--------
PAINT AND RELATED PRODUCTS: 2.78%
9,700 Sherwin Williams 203,700
2,400 Valspar Corp. 100,500
--------
304,200
--------
POWER CONVERSION SUPPLY EQUIPMENT: 1.47%
6,100 American Power Conversion Corp. 160,888
--------
PUBLISHING - NEWSPAPERS: 2.01%
3,700 Knight-Ridder, Inc. 220,150
--------
RETAIL: 7.53%
6,100 Bed Bath & Beyond 211,975
7,400 Dollar General 168,350
3,300 Home Depot 226,256
5,400 McDonalds Corp. 217,687
--------
824,268
--------
STEEL PRODUCERS: 0.90%
1,800 Nucor Corp. 98,662
--------
SUPER REGIONAL BANKS: 3.36%
3,200 Comerica 149,400
5,400 Wells Fargo & Company 218,362
--------
367,762
--------
TELEPHONE: 3.89%
4,400 Bellsouth Corp. 205,975
4,500 SBC Communications, Inc. 219,375
--------
425,350
--------
WIRELESS EQUIPMENT: 1.88%
1,400 Motorola, Inc. 206,150
--------
Total Investments:
(Cost: $9,379,502)** 86.13% 9,428,127
Other assets, net 13.87% 1,518,109
----------- -------------
Net Assets 100.00% $10,946,236
=========== ==============
* Non-income producing
** Cost for Federal income tax purposes is $9,379,502 and net unrealized
appreciation consists of:
Gross unrealized appreciation $ 145,827
Gross unrealized depreciation (97,202)
----------
Net unrealized appreciation $ 48,625
==========
See Notes to Financial Statements
<PAGE>
Vontobel U.S. Equity Fund
Statement of Assets and Liabilities
December 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments at value (identified
cost of $9,379,502)(Notes 1 & 3) $ 9,428,127
Cash 2,276,324
Receivables:
Investments sold $ 58,723
Capital stock sold 211,000
Dividends 601
----------- 270,324
Deferred organizational costs 37,017
Other assets 12,201
----------
TOTAL ASSETS 12,023,993
----------
LIABILITIES
Payables:
Investments purchased 1,040,541
Due to Investment Manager 15,816
Accrued expenses 21,400
----------
TOTAL LIABILITIES 1,077,757
----------
NET ASSETS $10,946,236
==========
NET ASSET VALUE, OFFERING
AND REDEMPTION PRICE PER SHARE
($10,946,236 / 1,129,696 shares outstanding) $ 9.69
==========
At December 31,1999 there were 50,000,000 shares of $.01 par value stock
authorized and the components of net assets are:
Paid in capital $11,450,679
Net unrealized gain on investments
and currency transactions 48,646
Accumulated net realized loss on investments (553,089)
-----------
Net Assets $10,946,236
===========
See Notes to Financial Statements
<PAGE>
Vontobel U.S. Equity Fund
Statement of Operations
For the year ended December 31,1999
- --------------------------------------------------------------------------------
Investment Income
Income:
Dividend (Net of foreign tax withheld of $2,945) $22,351
--------
Expenses:
Investment management fees (Note 2) 16,711
Custodian and accounting fees (Note 3) 83,096
Transfer agent fees (Note 2) 7,639
Organizational costs 14,060
Legal and audit fees 5,061
Other 18,777
------------
Total expenses 145,344
Management fee waiver and reimbursed expenses (Note 2) (94,312)
Custody credits (Note 3) (583)
--------
Expenses, net 50,449
--------
Net investment loss (28,098)
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on investments 167,295
Net realized loss on foreign currencies conversions (1,270)
Net change in unrealized depreciation
on investments and foreign currencies 295,265
-------
Net gain on investments 461,290
-------
Net increase in net assets
resulting from operations $433,192
========
See Notes to Financial Statements
<PAGE>
Vontobel U.S. Equity Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Year ended Year ended
December 31, December 31,
1999 1998
---------- ----------
OPERATIONS
Net investment loss $ (28,098) $ (574)
Net realized gain (loss) on investments
and foreign currency transactions 166,025 (625,068)
Net change in unrealized depreciation
of investments and foreign
currencies 295,265 (139,157)
---------- ----------
Net decrease in net assets
resulting from operations 433,192 (764,799)
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net assets
resulting from capital
share transactions** 8,902,313 (1,225,012)
---------- ----------
Net increase (decrease)
in net assets 9,335,505 (1,989,811)
Net assets at beginning of year 1,610,731 3,600,542
---------- ----------
NET ASSETS at end of year
(including undistributed
net investment income of
$0 and $3,383,respectively) $10,946,236 $ 1,610,731
=========== ===========
**A summary of capital share transactions follows:
Year ended Year ended
December 31, December 31,
1999 1998
---------------------- --------------------------
Shares Value Shares Value
------ ----- -------- ------
Shares sold 1,033,591 $9,938,821 85,805 $769,477
Shares redeemed (124,308) (1,036,270) (247,612) (1,994,489)
---------- ----------- --------- ------------
Net increase
(decrease) 909,283 $8,902,313 (161,807) $(1,225,012)
========== ========== ========= ============
See Notes to Financial Statements
<PAGE>
Vontobel U.S. Equity Fund
Financial Highlights
For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
September 1, * to
Years ended December 31, December 31,
1999 1998 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
See Notes to Financial Statements
<PAGE>
Vontobel U.S. Equity Fund (formerly Vontobel Emerging Markets Fund)
Notes to the Financial Statements
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel U.S. Equity Fund (formerly
Vontobel Emerging Markets Fund) (the "Fund") is a series of Vontobel Funds, Inc.
("VFI") which is registered under The Investment Company Act of 1940, as
amended, as a diversified open-end management company. The Fund commenced
operations in September, 1997 as a series of VFI which has allocated to the Fund
50,000,000 of its 500,000,000 shares of $.01 par value common stock. The
effective date of the name change was December 27, 1999.
The objective of the Fund is to achieve long-term capital appreciation by
investing in a carefully selected and continuously managed diversified portfolio
consisting primarily of equity securities of issuers in the United States.
Formerly as Vontobel Emerging Markets Fund, the equity securities were issuers
in developing countries around the world.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Investments in securities traded on a national securities
exchange or included in the NASDAQ National Market System are valued at the last
reported sales price; other securities traded in the over-the-counter market and
listed securities for which no sale is reported on that date are valued at the
last reported bid price. Short-term investments (securities with a remaining
maturity of sixty days or less) are valued at cost which, when combined with
accrued interest, approximates market value.
B. Federal Income Taxes. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required. The fund has capital loss carryforwards,
available to offset future capital gains, if any, of $553,089 which expires in
2006.
C. Security Transactions and Dividends. Security transactions are accounted
for on the trade date. The cost of securities sold is determined generally on
a first-in, first-out basis. Dividends are recorded on the ex-dividend date.
D. Currency Translation. The market values of foreign securities, currency
holdings, other assets and liabilities initially expressed in foreign currencies
are recorded in the financial statements after translation to U.S. dollars based
on the exchange rates at the end of the period. The cost of such holdings is
determined using historical exchange rates. Income and expenses are translated
at approximate rates prevailing when accrued or incurred. The Fund does not
isolate that portion of gains and losses on investments which is due to changes
in foreign exchange rates from that which is due to changes in market prices of
the investments. Such fluctuations are included with the net realized and
unrealized gains and losses from investments.
E. Distribution to Shareholders. Distributions from net investment income and
realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions, net operating losses and post-October capital and
currency losses.
F. Deferred Organizational Expenses. All of the expenses of the Fund incurred
in connection with its organization and the public offering of its shares
have been assumed by the Fund. The organization expenses allocable to the
Fund are being amortized over a period of sixty (60) months.
G. Use of Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS AND OTHER--Pursuant to
an Investment Advisory Agreement, the Advisor, Vontobel USA, Inc.("VUSA")
provides investment services for an annual fee of 1.25% on the first $500
million of average daily net assets and 1.00% on average daily net assets over
$500 million.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $1,889 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky and certain shareholder
servicing on an hourly rate basis. For other administrative services, CSS
receives 0.20% of average daily net assets.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $6,739 for its services for the year ending December 31,
1999.
To discourage short term investing and recover certain administrative, transfer
agency, shareholder servicing and other costs associated with such short term
investing, the Fund charges a 2% fee on such redemption of shares held less than
six months. Such fees amounted to $78 for the year ended December 31, 1999.
Certain officers and/or directors of the Fund are also officers and/or directors
of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY--Purchases and sells of securities other than
short-term notes aggregated $10,034,770 and $2,612,384, respectively. The
custodian has provided credits in the amount of $583 against custodian and
accounting charges based on credits on cash balances of the Fund.
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of Vontobel
U.S. Equity Fund (formerly, Vontobel Emerging Markets Fund), a series of
Vontobel Funds, Inc., including the schedule of portfolio investments as of
December 31, 1999, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the two years in the
period then ended and for the period September 1, 1997 (commencement of
operations) to December 31, 1997. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Vontobel U.S. Equity Fund as of December 31, 1999, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended and the financial highlights for each of the two years
in the period then ended and the period September 1, 1997 to December 31, 1997,
in conformity with generally accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 20, 2000
<PAGE>
VONTOBEL GREATER EUROPEAN BOND FUND
ANNUAL REPORT 1999
Dear Shareholder:
On August 30, 1999 Vontobel International Bond Fund, which invested primarily in
Western European sovereign debt, was merged into Vontobel Eastern European Debt
Fund, whose primary investment focus was Eastern European sovereign debt. The
merged fund was renamed Vontobel Greater European Bond Fund, and its new ticker
symbol is VGEBX.
The fund's investment strategy is to generally invest about half its assets in
debt instruments of Western Europe, and half in those of Eastern Europe, with a
focus on issuers of the highest available credit quality. After the merger we
invested about 50% of the fund's assets in developing European countries,
including Greece, and about 42% in Western Europe. The fund's largest weighting
was, and remains, first-class euro-zone bonds.
As everybody knows, the euro wilted in its debut year, losing 14% against the
dollar. Eastern European currencies, which are strongly tied to the euro,
followed this trend; losses against the dollar were 18% for the Czech crown, 17%
for the Polish zloty, 15% for the Hungarian forint and 14% for the Slovakian
koruna. The Danish krone, the Swedish krona and the British pound lost 16%, 5%
and 3% respectively against the dollar.
In the wake of the euro's collapse, euro bond markets as a whole lost 16.8%. In
the non-euro Western European markets, the best performers were the UK (-4.4%)
and Sweden (-7.7%). Hungary, Poland and the Czech Republic posted negative
returns of -0.7%, -9.3% and -4.7% respectively. Slovakia was the only market in
our universe to generate positive dollar returns (7.9%).
Vontobel Greater European Bond Fund produced a negative total return of -9.01%,
vs. the -4.87% return of the benchmark composite. Fund assets at year end
totaled $9,335,949.
The bearishness in global bond markets reflected investors' mounting inflation
expectations. There were few signs of a pick-up in inflation as the year began.
Although the US economy had grown faster than the year before, recession fears
of the last quarter of 1998 dissipated as the Consumer Price Index barely
budged. However, as the East Asian economies started to rebound, so did the
price of oil and commodities (mainly metals). Moreover, the low unemployment
rate caused concern that wage increases would soon be reflected in prices. By
May, the new paradigm of growth without inflation began to be questioned in the
US.
Europe's main economies (Germany and France) started to show signs of a recovery
while the peripheral countries (Spain, Ireland) grew at a rapid pace.
Inflationary expectations rose sharply, as the Old World has not yet implemented
the structural reforms that would help to keep inflation at bay in a positive
growth environment. As expected, the higher inflation rate factored into the
futures markets translated into higher bond yields. The European Central Bank
responded with a rate hike of 50 basis points in November. After a short bond
market rally, yields started to rise again as stronger than expected economic
figures raised fears that this hike would be insufficient to deter inflationary
pressures.
Although they continue to be less correlated with Europe's traditional bond
markets, the so-called "convergence" countries also suffered from the pick-up in
yields. Sweden and Denmark, whose economies are strongly tied to those of the
major continental countries, are particularly sensitive to developments in the
euro-zone. The UK experienced a slower rate of increase in yields as the Bank of
England hiked rates sooner than expected.
In Eastern Europe, rate cuts during the first half of the year resulted in lower
yields and good local currency returns. In the second half only Hungary and the
Czech Republic continued to cut rates. Hungary's action was tied to the fall in
the inflation rate to target levels and the slow pace of growth. The Czech
Republic is a special case. As it started to emerge from recession, the monetary
authorities cut the Lombard rate from 12.5% to 7.5% to accelerate the economic
rebound. GDP and credit expansion figures indicate that this loosening has had
less than the intended effect. Contrary to a year ago, we expect structural
reforms to be implemented in 2000 that will have a positive effect on economic
recovery. Poland's bond market was very volatile in the second half. Inflation
and credit expansion grew at a higher than expected pace, prompting a rate hike
by the Monetary Council. Contrary to the excellent local currency returns in
Hungary (16.4%) and the Czech Republic (13.7%), the Polish market had a mere
negative local currency total return of 3.1% in 1999. In Slovakia, following a
currency crisis in May, the new government assiduously pushed through reforms
and curbed the fiscal and current account deficits. Slovakia's bond market, as
noted above, was the hero of the year, producing a stellar local currency total
return of 23.3%.
We expect that the euro and other European currencies will rebound against the
dollar in 2000, and that, if current conditions prevail, European bond markets
will generate a positive total return in 2000, mainly in the second half of the
year.
At year end the fund had about 41% of total assets invested in Western European
debt instruments and about 56% in Eastern European debt. We overweighted the
Eastern European markets against the benchmark as we expect them to outperform
the euro markets. In the non-euro Western European markets we are slightly
underweight the British pound, and hold no positions in Danish krone or Swedish
krone as we do not expect outperformance in these markets.
Monica Mastroberardino
Fund Manager
January 21, 2000
<PAGE>
[graph goes here]
Vontobel Greater Bank Austria-Creditanstalt
European Bond Fund Eastern European Bond Index
------------------ ----------------------------
9/1/1997 $10,000 $10,000
12/31/1997 $ 9,945 $ 9,630
12/31/1998 $12,385 $ 6,955
12/31/1999 $11,269 $ 6,617
[end graph]
<PAGE>
VONTOBEL GREATER EUROPEAN BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1999
Principal Amount* Security Description Market Value
- ----------------- -------------------- -------------
Bonds: 96.21%
CZECH CROWN: 15.09%
20,000,000 ING Verzekeringen NV 10.625% 20 Jan 2000
Corporate Bond $ 559,307
10,000,000 Commerzbank AG Ser Emtn 7.25% 22 Apr 2002
Corporate Bond 283,307
10,000,000 European Investment Bank 14.5% 29 Jan 2001
Corporate Bond 301,969
8,000,000 Czech Republic 12.2% 15 Aug 2002
Government Bond 264,611
--------
1,409,194
---------
EURO: 27.99%
300,000 DSL Bank 4.75% 27 May 2003
Corporate Bond 300,697
511,292 Deutschland Republic 6.5% 14 Oct 2005
Government Bond 550,093
300,000 Deutschland Republic 6% 4 Jan 2007
Government Bond 315,038
250,000 Deutschland Republic 5.25% 4 Jan 2008
Government Bond 249,977
762,245 France Oat 7.25% 25 Apr 2006
Government Bond 860,670
317,435 Rep of Ireland 6.25% 18 Oct 2004
Government Bond 336,381
---------
2,612,856
---------
BRITISH POUND: 12.65%
250,000 Intl Fin Corp 5.625% 7 Dec 2009
Corporate Bond 382,921
150,000 UK Treasury Bill 8.5% 7 Dec 2005
Government Bond 271,559
150,000 UK Treasury Bill 7.25% 7 Dec 2007
Government Bond 262,737
150,000 UK Treasury Bill 7.5% 7 Dec 2006
Government Bond 263,319
---------
1,180,536
---------
GREEK DRACHMA: 3.36%
100,000,000 Hellenic Republic 9.7% 27 May 2001
Corporate Bond 314,034
---------
HUNGARY FORINT: 12.34%
50,000,000 Government of Hungary 13.5% 12 Jun 2001
Government Bond 201,265
135,000,000 Government of Hungary 16.0% 12 May 2000
Government Bond 539,281
60,000,000 Government of Hungary 14.0% 24 Jun 2002
Government Bond 253,233
38,000,000 Euro Invest Bank Ser 3 11.75% 25 Jun 2004
Corporate Bond 158,552
---------
1,152,331
---------
POLISH ZLOTY: 18.05%
1,000,000 Government of Poland 12.0% 12 Jun 2002
Government Bond 233,222
1,000,000 Interamerican Dev Bank 19.0% 27 Apr 2001
Corporate Bond 249,940
1,000,000 Helaba Finance Emtn 10.5% 4 May 2001
Corporate Bond 227,811
1,000,000 Nordic Investment Mtn 17.75% 15 Apr 2002
Corporate Bond 256,348
1,000,000 International Bank for
Recon & Dev 18.0% 27 Feb 2003
Corporate Bond 267,594
1,000,000 LB Rheinland 10% 07 May 2002
Corporate Bond 223,942
1,000,000 Deutsche Bank 10.0% 21 May 2004
Corporate Bond 225,756
---------
1,684,613
---------
SLOVAKIA KORUNA: 6.73%
12,000,000 Government of Solvakia 15.0% 14 Jan 2001
Government Bond 286,643
14,000,000 European Bank Recon &
Dev Mtn 15.7% 10 May 2002
Corporate Bond 342,055
---------
628,698
---------
Total Investments:
(Cost:$9,950,308 )** 96.21% 8,982,262
Other assets, net 3.79% 353,686
------- ---------
100.00% $9,335,948
======= ==========
* Stated in local currencies
** Cost for Federal income tax purposes is $9,950,308 and net unrealized
depreciation consists of:
Gross unrealized appreciation $ 50,334
Gross unrealized depreciation (1,018,380)
-----------
Net unrealized depreciation $ (968,046)
===========
Forward Currency Contracts Outstanding
Contracts to Buy Statement Unrealized
Foreign Currency In Exchange for Date Gain (Loss)
- ------------------ --------------- ---------- -------------
2,086,000 Polish Zloty US$ 500,000 1/14/2000 $ 1,809
Contracts to Sell
Foreign Currency
- ------------------
522,500 Czech Crown US$ 14,574 1/10/2000 (27)
104,000 Polish Zloty US$ 23,660 1/10/2000 (1,474)
------ -----------
38,234 (1,501)
------ -----------
Unrealized gain on forward currency contracts $ 308
===========
See Notes to Financial Statements
<PAGE>
VONTOBEL GREATER EUROPEAN BOND FUND
Statement of Assets and Liabilities
December 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments at value
(identified cost of $9,950,308 )(Notes 1 & 3) $ 8,982,262
Foreign currencies at value 83,380
Receivables:
Interest receivable $ 506,097
Forward currency contracts 308
Capital stock subscriptions 12,600
----------- 519,005
Deferred organizational costs 37,752
----------
TOTAL ASSETS 9,622,399
----------
LIABILITIES
Payables:
Bank overdraft 240,448
Forward currency contracts closed 38,234
Accrued expenses 7,769
----------
TOTAL LIABILITIES 286,451
----------
NET ASSETS $ 9,335,948
===========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($9,335,948/1,005,110 shares outstanding) $ 9.29
===========
At December 31, 1999 there were 50,000,000 shares of $.01 par value stock
authorized and components of net assets are:
Paid in capital $10,382,050
Accumulated loss on investments and foreign currencies (22,264)
Accumulated deficit in undistributed net income (4,404)
Net unrealized depreciation on investments and
currency transactions (1,019,434)
-----------
Net Assets $9,335,948
===========
See Notes to Financial Statements
<PAGE>
VONTOBEL GREATER EUROPEAN BOND FUND
STATEMENT OF OPERATIONS
For the year ended December 31, 1999
- --------------------------------------------------------------------------------
Investment Income
Interest $ 915,999
Expenses:
Investment management fees (Note 2) $ 104,623
Recordkeeping and administrative
services (Note 2) 17,728
Custodian and accounting fees 108,317
Legal and audit 20,820
Filing and registration fees (Note 2) 17,256
Organizational costs 14,308
Transfer agent fees (Note 2) 12,307
Shareholder servicing and reports (Note 2) 7,696
Other 21,974
--------
Total expenses 325,029
Fee waivers and reimbursements (104,623)
Custody credits (Note 3) (16,822)
---------
Expenses, net 203,584
---------
Net investment income 712,415
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES
Net realized loss on investments (1,001,322)
Net realized loss on foreign currency
conversions and forward currencies (74,631)
Change in unrealized depreciation of investments
and foreign currencies (423,926)
-----------
Net loss on investments (1,499,879)
-----------
Net decrease in net assets resulting from operations ($787,464)
===========
See Notes to Financial Statements
<PAGE>
VONTOBEL GREATER EUROPEAN BOND FUND
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Year ended Year ended
December 31, December 31,
1999 1998
------------- ------------
OPERATIONS
Net investment income $ 712,415 $ 1,482,919
Net realized gain (loss) on
investments and foreign
currency (1,075,953) 182,598
Net change in unrealized
appreciation (depreciation)
on investments
and foreign currencies (423,926) 443,033
------------ -----------
Net increase (decrease) in net
assets resulting from
operations (787,464) 2,108,550
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
($0 and $1.64 per share,
respectively) --- (1,089,508)
Realized gains on investments
($0 and $.21 per share,
respectively) --- (139,510)
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net
assets resulting
from capital share
transactions** 2,241,527 (7,435,572)
---------- -----------
Net increase (decrease)
in net assets 1,454,063 (6,556,040)
Net assets at beginning of year 7,881,885 14,437,925
--------- -----------
NET ASSETS at end of year
(Includes accumulated deficit
in undistributed net investment
income of $4,404 and
$0, respectively) $ 9,335,948 $ 7,881,885
=========== ===========
**A summary of capital share transactions follows:
Year ended Year ended
December 31, 1999 December 31, 1998
------------------ --------------------
Shares Value Shares Value
------- ----- ------ ------
Shares sold 80,625 $788,114 193,930 $2,052,642
Shares issued in
connection with
acquisition of
Vontobel
International
Bond Fund (Note 4) 643,554 6,043,878 --- ---
Shares reinvested
from distributions --- --- 113,695 1,148,320
Shares redeemed (490,700) (4,590,465) (1,024,536) (10,636,534)
--------- ----------- ---------- ------------
Net increase (decrease) 233,479 $2,241,527 (716,911) ($7,435,572)
========= ========== =========== ============
See Notes to Financial Statements
<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.
See Notes to Financial Statements
<PAGE>
Vontobel Greater European Bond Fund
Notes to the Financial Statements
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Vontobel Greater European Bond Fund
(formerly Vontobel Eastern European Debt Fund) (the "Fund") is a series of
Vontobel Funds, Inc. ("VFI") which is registered under The Investment Company
Act of 1940, as amended, as a diversified open-end management company. The Fund
was established in September, 1997 as a series of VFI which has allocated to the
Fund 50,000,000 of its 500,000,000 shares of $.01 par value common stock. The
effective date of the name change was August 27, 1999.
The objective of the Fund is to maximize total return from capital growth and
income by investing in a carefully selected and continuously managed
non-diversified portfolio consisting primarily of debt instruments issued by
borrowers located in European countries.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
Security Valuation. Money Market investments with a remaining maturity of less
than sixty days are valued using the amortized cost method; debt securities are
valued by appraising them at prices supplied by a pricing agent approved by the
Fund, which prices may reflect broker-dealer supplied valuations and electronic
date processing techniques. Those values are then translated into U.S. dollars
at the current exchange rate. Securities for which a pricing agent is unable to
supply a valuation are valued on a consistent basis at fair market value as
determined in good faith by or under the direction of the Fund's officers in a
manner specifically authorized by the Board of Directors of the Fund.
B. Federal Income Taxes. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required. The fund has capital loss carryforwards,
available to offset future capital gains, if any, of $9,932 which expires in
2007. Additionally the Fund incurred capital losses of $12,332 and currency
losses of $4,404 after October 31, 1999 which are deemed, under income tax
regulations, to occur on the first day of the Fund's next fiscal year (January
1, 2000).
C. Security Transactions. Security transactions are accounted for on the
trade date. The cost of securities sold is determined generally on a
first-in, first-out basis.
D. Currency Translation. The market values of foreign securities, currency
holdings, other assets and liabilities initially expressed in foreign currencies
are recorded in the financial statements after translation to U.S. dollars based
on the exchange rates at the end of the period. The cost of such holdings is
determined using historical exchange rates. Income and expenses are translated
at approximate rates prevailing when accrued or incurred. The Fund does not
isolate that portion of gains and losses on investments which is due to changes
in foreign exchange rates from that which is due to changes in market prices of
the investments. Such fluctuations are included with the net realized and
unrealized gains and losses from investments. Foreign securities and currency
transactions may involve certain considerations and risks not typically
associated with those of domestic origin.
E. Forward Currency Contracts. Forward sales of currencies are undertaken to
hedge certain assets denominated in currencies that Vontobel USA, Inc. ("VUSA"),
the Fund's investment advisor, expects to decline in value in relation to other
currencies. A forward currency contract is an agreement between two parties to
buy or sell a currency at a set price on a future date. Forward contracts are
marked to market daily and the change in market value is recorded by the fund as
an unrealized gain or loss. When a contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed. The Fund
could be at risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably.
F. Deferred Organizational Expenses. All of the expenses of the fund
incurred in connection with its organization and the public offering of its
shares have been assumed by the Fund.
G. Distribution to Shareholders. Distributions from net investment income and
realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations that may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions, net operating losses and post-October capital and
currency losses.
H. Accounting Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS AND OTHER--Pursuant to
an Investment Advisory Agreement, the Advisor, Vontobel USA, Inc.("VUSA")
provides investment services for an annual fee of 1.25% on the first $100
million of average daily net assets.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $23,728 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky and certain shareholder
servicing on an hourly rate basis. For other administrative services, CSS
receives 0.20% of average daily net assets.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $14,289 for its services for the year ending December 31,
1999.
To discourage short term investing and recover certain administrative, transfer
agency, shareholder servicing and other costs associated with such short term
investing, the Fund charges a 2% fee on such redemption of shares held less than
six months. Such fees amounted to $3,903 for the year ended December 31, 1999,
representing 0.05% of average net assets.
Certain officers and/or directors of the Fund are also officers and/or directors
of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY--Purchases and sells of securities other than
short-term notes aggregated $4,597,030 and $5,987,133, respectively. The
custodian has provided credits in the amount of $16,822 against custodian and
accounting charges based on credits on cash balances of the Fund.
NOTE 4-ACQUISITION OF VONTOBEL INTERNATIONAL BOND FUND--On August 27, 1999, the
Fund acquired all the net assets of Vontobel International Bond Fund pursuant to
a plan of reorganization approved by Vontobel International Bond Fund
shareholders on August 25, 1999. The acquisition was accomplished by a tax-free
exchange of 643,554 shares of the Fund (valued at $6,043,878) for the 646,999
shares of Vontobel International Bond Fund outstanding on August 27, 1999.
Vontobel International Bond Fund net assets at that date ($6,043,878), involving
unrealized depreciation of investments and foreign currencies of $482,806, were
combined with those of the Fund.
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders and Board of Directors of
Vontobel Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of Vontobel
Greater European Bond Fund (formerly, Vontobel Eastern European Debt Fund), a
series of Vontobel Funds, Inc., including the schedule of portfolio investments
as of December 31, 1999, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the two years in
the period then ended and the period September 1, 1997 (commencement of
operations) to December 31, 1997. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Vontobel Greater European Bond Fund as of December 31, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the two years in the period then ended and the period September 1, 1997 to
December 31, 1997, in conformity with generally accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 20, 2000
