VFI CORE PORTFOLIO
VFI INTERMEDIATE DURATION PORTFOLIO
VFI SHORT DURATION PORTFOLIO
A N N U A L R E P O R T
Dated October 31, 1996
Dear Shareholder;
At the time of my last report to you, April 30, 1996, the Voyageur Financial
Institutions Funds (VFI Funds) had only been in operation for approximately two
months. Since then, the Funds have continued to gain acceptance from the
financial institution marketplace. As of October 31, 1996, total net assets of
the combined three VFI Funds have grown to over $100 million - - exceptional
growth for approximately seven months of operation. Because of this encouraging
response, Voyageur Asset Management has decided to further refine the VFI Fund
offerings by adding a money market fund option. We are hoping to make this new
enhancement available to shareholders sometime early in the first quarter of
1997.
Throughout the first two quarters of 1996, the fixed income markets turned in
lackluster results as uncertainty over inflation and the Fed remained at the
forefront of concern for investors. By late August, bond investors anticipated a
25 basis point hike in the fed funds rate. Hesitant to make dramatic alterations
during an election year, the Fed decided to leave the rate unchanged at its
September Federal Open Market Committee meeting. Investors saw this as a sign
that the economy's rate of growth had slowed enough, from its second quarter
pace, to keep inflation at bay for the immediate future. The resulting forward
march in Treasury prices benefitted VFI Fund shareholders by boosting the NAV of
all three VFI Funds.
The Fed remains diligent in its quest to preserve slow economic growth and to
holding inflationary pressures in check. Because of this attentiveness on the
part of the Fed we expect growth and inflation to remain positive for the bond
market throughout the remainder of 1996.
Along with this Annual Report, I would also like to remind our shareholders of
the built-in "cover the yield curve" flexibility of the VFI Funds. Multiple fund
offerings, across the yield curve, allow investors to strategically reposition
portfolio holdings during the course of a full market cycle. As levels of risk
tolerance shift or objectives change, shareholders have the opportunity to
reallocate assets and continually tailor their overall holdings.
Below you will find a summary of the results for each of the VFI Funds net asset
value, dividends paid, and total net assets for the reporting period.
<TABLE>
<CAPTION>
Dividends
Net Asset Value Net Asset Value Pd Per Share Total Net Assets
(as of (as of (period from (as of
Period 03/27/96)* 10/31/96) 3/27 - 10/31) 10/31/96)
- ------ ----------------- ----------------- -----------------------------
<S> <C> <C> <C> <C>
Period ended October 31, 1996:
VFI Core Portfolio $10.00 $10.04 $ 0.37 $41,034,578
VFI Intermediate Duration Portfolio $10.00 $10.02 $ 0.34 $30,711,741
VFI Short Duration Portfolio $10.00 $10.02 $ 0.32 $29,051,709
- -------------------------------------
* Commencement of operations
</TABLE>
On the page that follows, VFI Funds Co-managers, Randal W. Harrison, CFA
(Voyageur Asset Management) and Robert C. Brownlee (Cadre Financial Services,
Inc.), will update you on the economy, current/anticipated interest rate
environment, and the overall tone of the bond market.
We thank you for your confidence and the opportunity to serve your investment
needs.
Sincerely,
John G. Taft
President
VFI Core Portfolio
VFI Intermediate Duration Portfolio
VFI Short Duration Portfolio
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
by Randal W. Harrison, CFA - Portfolio Manager, VOYAGEUR ASSET MANAGEMENT
and Robert C. Brownlee - Portfolio Manager, CADRE FINANCIAL SERVICES, INC.
DISCUSSION OF THE FUNDS' PERFORMANCE
The investment objective of each VFI Fund is to seek an attractive level of
current income while maintaining total rate of return performance commensurate
with the duration risk of the respective Fund. The net asset values (NAV) of the
Funds rose modestly, since their inception seven months ago, as a result of
declining interest rates. Similarly, the Funds' distribution rates have
generally risen during their relatively short lives.
* THE VFI CORE PORTFOLIO achieved a total return of 4.25%, since March
27, 1996 (commencement of operations). Voyageur has sought to achieve
an attractive distribution rate and total rate of return performance
throughout the life of the Fund. These objectives were pursued by
strategically adjusting the sector allocations and managing the Fund's
duration exposure.
* THE VFI INTERMEDIATE DURATION PORTFOLIO achieved a total return of
3.65%, since March 27, 1996 (commencement of operations). Voyageur has
sought to achieve an attractive distribution rate and total rate of
return performance throughout the life of the Fund as well. These
objectives were pursued by strategically adjusting the sector
allocations and managing the Fund's duration exposure, similar to the
VFI Core Portfolio.
* THE VFI SHORT DURATION PORTFOLIO achieved a total return of 3.41%,
since March 27, 1996 (commencement of operations). The Fund was
positioned relatively neutral with an opportunistic approach towards
yield enhancement through the use of yield curve strategies, sector
allocation, and spread anomalies. Management of the Fund felt a neutral
position was justified by the lack of direction from the Federal
Reserve and conflicting economic data.
OUTLOOK FOR THE VFI FUNDS
Our outlook for the VFI Funds is one of balanced optimism. We expect that during
the near-term the recent strength in bond prices will help in boosting NAV.
However, given recent strength in bond prices, it appears that the market has
already priced in a fair amount of the positive factors that are expected to
effect the market during the coming year. In light of this view, we are likely
to maintain duration that is neutral to slightly aggressive versus the
benchmark.
(GRAPH PAGES)
VFI CORE PORTFOLIO INDEX
INVESTMENT $10,000
LEHMAN BROTHERS
TOTAL RETURN SINCE INCEPTION MUTUAL FUND GOVERNMENT MORTGAGE INDEX
DATE VALUE DATE VALUE
- --------------------------------------- -------------------------------------
03/27/96 10,000.00 03/27/96 10,000.00
03/31/96 9,977.29 03/31/96 9,991.00
04/30/96 9,923.93 04/30/96 9,940.00
05/31/96 9,904.73 05/31/96 9,919.00
06/30/96 10,028.47 06/30/96 10,050.00
07/31/96 10,062.75 07/31/96 10,079.00
08/31/96 10,034.61 08/31/96 10,065.00
09/30/96 10,214.26 09/30/96 10,233.00
10/31/96 10,424.85 10/31/96 10,449.00
VFI INTERMEDIATE DURATION
INVESTMENT $10,000 LEHMAN BROTHERS
MUTUAL FUND (1-5 YEAR) US GOVERNMENT INDEX
TOTAL RETURN SINCE INVESTMENT
DATE VALUE DATE VALUE
- --------------------------------------- --------------------------------------
03/27/96 10,000.00 03/27/96 10,000.00
03/31/96 10,007.11 03/31/96 9,996.00
04/30/96 10,001.22 04/30/96 9,988.00
05/31/96 10,007.70 05/31/96 9,995.00
06/30/96 10,063.75 06/30/96 10,082.00
07/31/96 10,110.72 07/31/96 10,118.00
08/31/96 10,117.90 08/31/96 10,144.00
09/30/96 10,241.88 09/30/96 10,254.00
10/31/96 10,364.78 10/31/96 10,395.00
VFI SHORT DURATION
INVESTMENTS 1 YEAR TREASURY BILL
TOTAL RETURN SINCE INCEPTION
DATE VALUE DATE VALUE
- ---------------------------------------- -------------------------------------
03/27/96 10,000.00 03/27/96 10,000.00
03/31/96 9,996.98 03/31/96 10,006.00
04/30/96 10,029.25 04/30/96 10,052.00
05/31/96 10,073.59 05/31/96 10,099.00
06/30/96 10,116.80 06/30/96 10,146.00
07/31/96 10,161.80 07/31/96 10,193.00
08/31/96 10,206.65 08/31/96 10,242.00
09/30/96 10,273.81 09/30/96 10,289.00
10/31/96 10,341.30 10/31/96 10,335.00
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Voyageur Funds, Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments in securities, of Voyageur Financial
Institutions (VFI) Core Portfolio, VFI Intermediate Duration Portfolio and VFI
Short Duration Portfolio, funds within Voyageur Funds, Inc., as of October 31,
1996 and the related statements of operations, the statements of changes in net
assets, and the financial highlights for the period from March 27, 1996
(commencement of operations) to October 31, 1996. These financial statements and
the financial highlights are the responsibility of Fund management. Our
responsibility is to express an opinion on these financial statements and the
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 the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by 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 the financial highlights referred
to above present fairly, in all material respects, the financial position of VFI
Core Portfolio, VFI Intermediate Duration Portfolio and VFI Short Duration
Portfolio at October 31, 1996 and the results of their operations, the changes
in their net assets and the financial highlights for the period from March 27,
1996 to October 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 6, 1996
<TABLE>
<CAPTION>
THE VOYAGEUR FINANCIAL INSTITUTIONS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES OCTOBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------
VFI VFI
VFI INTERMEDIATE SHORT
CORE DURATION DURATION
PORTFOLIO PORTFOLIO PORTFOLIO
------------ ----------- ------------
ASSETS
<S> <C> <C> <C>
Investments in securities, at market value (note 1)
(identified costs, $40,391,339, $30,326,115 and
$28,940,146, respectively)................................. $40,941,947 $30,560,877 $28,992,475
Cash in bank on demand deposit.................................. 914 77 975
Accrued interest receivable..................................... 316,745 231,519 200,441
Receivable for investment securities sold....................... -- 77,363 --
Organizational costs (note 3)................................... 6,825 6,825 6,825
------------ ----------- ------------
Total assets................................................. 41,266,431 30,876,661 29,200,716
------------ ----------- ------------
LIABILITIES
Dividends payable to shareholders.............................. 214,779 151,473 132,500
Organizational costs payable................................... 2,204 2,204 2,204
Other accrued expenses......................................... 14,870 11,243 14,303
------------ ----------- ------------
Total liabilities........................................... 231,853 164,920 149,007
------------ ----------- ------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK............. $ 41,034,578 $30,711,741 $ 29,051,709
============ =========== ============
Represented by:
Capital stock-authorized 10 billion shares of $.01 par value
(note 1)................................................. $ 40,890 $ 30,662 $ 29,000
Additional paid-in capital.................................. 40,643,703 30,628,243 28,969,348
Accumulated net realized gain (loss) on investments......... (200,623) (181,926) 1,032
Unrealized appreciation of investments...................... 550,608 234,762 52,329
------------ ----------- ------------
TOTAL NET ASSETS.......................................... $ 41,034,578 $30,711,741 $ 29,051,709
============ =========== ============
SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE
Shares of Capital stock outstanding: 4,089,020; 3,066,213
and 2,899,996, respectively (note 4)...................... $10.04 $10.02 $10.02
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
THE VOYAGEUR FINANCIAL INSTITUTIONS FUNDS
STATEMENTS OF OPERATIONS PERIOD ENDED OCTOBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------
VFI VFI
VFI INTERMEDIATE SHORT
CORE DURATION DURATION
PORTFOLIO* PORTFOLIO* PORTFOLIO*
---------- ---------- ---------
<S> <C> <C> <C>
Investment income:
Interest....................................................... $1,366,514 $1,093,636 $ 990,992
---------- ---------- ---------
Expenses (note 3):
Investment advisory and management fee......................... 40,795 36,234 17,532
Service fees................................................... 10,199 9,058 8,766
Custodian fees................................................. -- -- 17,532
Dividend-disbursing, transfer, administrative
and accounting services fees................................. 15,914 14,044 13,650
Other expenses................................................. 3,873 3,464 3,272
Amortization of organizational costs........................... 610 610 610
---------- ---------- ---------
Total expenses............................................... 71,391 63,410 61,362
---------- ---------- ---------
Investment income - net...................................... 1,295,123 1,030,226 929,630
---------- ---------- ---------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) on security transactions (note 2)......... (200,623) (181,926) 1,032
Net change in unrealized appreciation or depreciation
of investments.............................................. 550,608 234,762 52,329
---------- ---------- ---------
Net gain on investments.................................... 349,985 52,836 53,361
---------- ---------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $1,645,108 $1,083,062 $ 982,991
========== ========== =========
</TABLE>
- -----------------------------------------
* Period from March 27, 1996 (commencement of operations) to October 31, 1996.
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
THE VOYAGEUR FINANCIAL INSTITUTIONS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------------------
VFI VFI
VFI INTERMEDIATE SHORT
CORE DURATION DURATION
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- -----------
PERIOD FROM PERIOD FROM PERIOD FROM
MARCH 27, 1996* MARCH 27, 1996* MARCH 27, 1996*
TO OCTOBER 31, TO OCTOBER 31, TO OCTOBER 31,
1996 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operations:
Investment income - net................................ $ 1,295,123 $ 1,030,226 $ 929,630
Realized gain (loss) on investments - net.............. (200,623) (181,926) 1,032
Net change in unrealized appreciation or
depreciation of investments.......................... 550,608 234,762 52,329
----------- ----------- -----------
Net increase in net assets
resulting from operations....................... 1,645,108 1,083,062 982,991
----------- ----------- -----------
Distributions to shareholders from:
Investment income - net................................ (1,295,733) (1,030,836) (930,240)
----------- ----------- -----------
Capital share transactions (note 4):
Proceeds from sale of shares........................... 40,695,466 30,761,353 30,599,043
Net asset value of shares issued in reinvestment of net
investment income distributions...................... 79,011 334 5,913
Payments for redemption of shares...................... (89,274) (102,172) (1,605,998)
----------- ----------- -----------
Increase in net assets from
capital share transactions........................... 40,685,203 30,659,515 28,998,958
----------- ----------- -----------
Total increase in net assets....................... 41,034,578 30,711,741 29,051,709
Net assets at beginning of period......................... -- -- --
----------- ----------- -----------
Net assets at end of period............................... $41,034,578 $30,711,741 $29,051,709
=========== =========== ===========
</TABLE>
- -----------------------------------------
* Commencement of operations.
See accompanying notes to financial statements.
THE VOYAGEUR FINANCIAL INSTITUTIONS FUNDS
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Voyageur Financial Institutions (VFI) Core Portfolio, VFI Intermediate
Duration Portfolio and VFI Short Duration Portfolio (the Funds) are series
within Voyageur Funds, Inc. and are registered under the Investment Company Act
of 1940 (as amended) as diversified, open-end management investment companies.
The investment objective of each Fund is to seek as high a level of current
income as is consistent with preservation of principal and the average duration
of its respective portfolio securities by investing in securities issued or
guaranteed by the United States Government or its agencies or instrumentalities.
The significant accounting policies followed by the Funds are summarized as
follows:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of net increase (decrease) in net assets resulting from
operations during the reporting period. Actual results could differ from those
estimates.
INVESTMENTS IN SECURITIES
The values of fixed income securities are determined using pricing services
or prices quoted by independent brokers. When market quotations are not readily
available, or in certain other circumstances, securities are valued at fair
value according to methods selected in good faith by the Board of Directors.
Short-term securities are valued at amortized cost which approximates market
value.
Security transactions are accounted for on the trade date. Securities gains
and losses are calculated on the identified-cost basis. Interest income,
including level- yield amortization of premium and discount, is accrued daily.
FEDERAL INCOME TAXES
The Funds' policy is to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute income to
shareholders in amounts that will avoid or minimize federal income or excise
taxes for the Funds. Net investment income and net realized gains (losses) for
the Funds may differ for financial statement and tax purposes primarily because
of losses deferred for tax purposes due to "wash sale" transactions. The
character of distributions made during the year from net investment income or
net realized gains may differ from their ultimate characterization for federal
income tax purposes. Also, due to the timing of dividend distributions, the
fiscal year in which amounts are distributed may differ from the year that the
income or realized gains (losses) were recorded by the Funds.
On the statements of assets and liabilities, as a result of permanent
book-to-tax differences, reclassification adjustments have been made to increase
undistributed net investment income and decrease additional paid-in capital by
$610 for each fund.
For federal income tax purposes, as of October 31, 1996, VFI Core Portfolio
had a capital loss carryover of $200,623 and VFI Intermediate Duration Portfolio
had a capital loss carryover of $181,926 that will expire in 2004 if not offset
by subsequent capital gains. It is unlikely the Board of Directors will
authorize a distribution of any net realized capital gains until the available
capital loss carryover has been offset or expires.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends declared daily from net investment income are payable monthly in
cash or may be reinvested in additional shares of each Fund at net asset value.
Net realized short-term capital gains, when available, may be distributed
throughout the year. Net realized long-term capital gains, when available, are
distributed annually.
REPURCHASE AGREEMENTS
Securities pledged as collateral for repurchase agreements are held by the
Fund's custodian bank until maturity of the repurchase agreement. Procedures for
all agreements ensure that the daily market value of the collateral is in excess
of the repurchase agreement in the event of default.
(2) INVESTMENT SECURITIES TRANSACTIONS
Purchase cost and proceeds of sales of investment securities, other than
short-term securities, aggregated $151,599,587 and $112,941,388 for VFI Core
Portfolio, $188,045,198 and $163,327,863 for VFI Intermediate Duration Portfolio
and $41,183,088 and $27,259,128 for VFI Short Duration Portfolio, respectively,
for the period ended October 31, 1996.
(3) EXPENSES
VFI Core Portfolio and VFI Intermediate Duration Portfolio have an investment
advisory agreement with Marquette Trust Company (Marquette). VFI Short Duration
Portfolio has an investment advisory agreement with Cadre Consulting Services,
Inc. (Cadre). Marquette has retained Voyageur Fund Managers, Inc. (Voyageur) as
the sub-adviser to VFI Core Portfolio and VFI Intermediate Duration Portfolio.
Each investment adviser furnishes, at its own expense, office facilities,
equipment and personnel for servicing the investments of the respective funds.
Under the investment advisory agreements of VFI Core Portfolio and VFI
Intermediate Duration Portfolio each Fund's investment adviser is entitled to
receive from the Fund a monthly advisory and management fee equivalent on an
annual basis to .20% of the average daily net assets of such Fund, subject to a
performance adjustment of up to plus or minus .15%. Voyageur is entitled to a
fee equal to an annual rate of 50% of the monthly advisory fee plus or minus 50%
of the performance fee adjustment. The performance fee adjustment will be
determined based on a comparison to a predetermined index. VFI Core Portfolio
will be compared to the Lehman Brothers Mutual Fund Government/Mortgage Index
and VFI Intermediate Duration Portfolio will be compared to the Lehman Brothers
Mutual Fund (1-5 year) U.S. Government Index. No performance fee adjustments
will be made in the first 12 months the Funds are under management. The
investment adviser for VFI Short Duration Portfolio is entitled to receive a
monthly advisory and management fee equivalent on an annual basis to .10% of the
average daily net assets of such Fund and is not subject to a performance
adjustment.
Each Fund also pays a monthly service fee equal on an annual basis, of .05%
of each Fund's average daily net assets. Such fee is paid to Voyageur Fund
Distributors, Inc. (the Underwriter) to compensate the Underwriter for expenses
incurred in connection with servicing of Fund shareholder accounts.
Marquette serves as the custodian of each Fund's portfolio securities and
cash. Marquette receives no additional compensation for acting as the custodian
of VFI Core Portfolio and VFI Intermediate Duration Portfolio and a monthly fee
from VFI Short Duration Portfolio equal on an annual basis to .10% of such
Fund's average daily net assets for its services as custodian.
Voyageur acts as each Fund's dividend disbursing, transfer, administrative
and accounting services agent. Voyageur receives a monthly fee from each Fund
equal on an annual basis to .10% of each Fund's average daily net assets.
In addition to the fees above, the Funds are responsible for paying most
other operating expenses including directors fees, registration fees, legal and
auditing services and other miscellaneous expenses. Organizational costs are
being amortized over 60 months on a straight-line basis.
Marquette, Cadre, Voyageur and the Underwriter reserve the right to
voluntarily waive their fees in whole or part and/or to voluntarily absorb
certain other of the Fund's expenses. Any such waiver or absorption, however,
will be in their sole discretion and may be lifted or reinstated at any time.
As of October 31, 1996, affiliated parties owned 3,057,129 shares, 3,054,835
shares and 2,899,996 shares of VFI Core Portfolio, VFI Intermediate Duration
Portfolio and VFI Short Duration Portfolio, respectively. This represents
ownership of 74.8%, 99.6% and 100%, respectively.
(4) SHARE TRANSACTIONS
Transactions in shares during the period ended October 31, 1996 were as follows:
<TABLE>
<CAPTION>
VFI VFI
VFI INTERMEDIATE SHORT
CORE DURATION DURATION
PORTFOLIO PORTFOLIO PORTFOLIO
PERIOD FROM PERIOD FROM PERIOD FROM
MARCH 27, 1996* MARCH 27, 1996* MARCH 27, 1996*
TO OCTOBER 31, TO OCTOBER 31, TO OCTOBER 31,
1996 1996 1996
--------- --------- ---------
<S> <C> <C> <C>
Shares sold............................. 4,090,115 3,076,520 3,060,177
Shares issued for
reinvested distributions............. 8,031 34 592
Shares redeemed......................... (9,126) (10,341) (160,773)
--------- --------- ---------
Increase in shares outstanding.......... 4,089,020 3,066,213 2,899,996
========= ========= =========
- -----------------------------------------
* Commencement of operations.
</TABLE>
(5) FINANCIAL HIGHLIGHTS
Per shares data (rounded to the nearest cent) for a share of capital stock
outstanding and selected information for each period are as follows:
<TABLE>
<CAPTION>
VFI VFI
VFI INTERMEDIATE SHORT
CORE DURATION DURATION
PORTFOLIO PORTFOLIO PORTFOLIO
PERIOD FROM PERIOD FROM PERIOD FROM
MARCH 27, 1996(a) MARCH 27, 1996(a) MARCH 27, 1996(a)
TO OCTOBER 31, TO OCTOBER 31, TO OCTOBER 31,
1996 1996 1996
----------------------------------------------------------------
<S> <C> <C> <C>
Net asset value:
Beginning of period......................... $10.00 $10.00 $10.00
------ ------ ------
Operations:
Net investment income....................... .37 .34 .32
Net realized and unrealized gain (loss)
on investments............................ .04 .02 .02
-------- --------- --------
Total from operations................... .41 .36 .34
-------- --------- --------
Distributions to shareholders:
From net investment income.................. (.37) (.34) (.32)
--------- --------- ---------
Net asset value:
End of period............................... $10.04 $10.02 $10.02
====== ====== ======
Total investment return (b).................... 4.25% 3.65% 3.41%
Net assets at end of
period (000's omitted)...................... $41,035 $30,712 $29,052
Ratios:
Ratio of expenses to
average daily net assets.................. .35%(c) .35%(c) .35%(c)
Ratio of net investment income
to average daily net assets............... 6.31%(c) 5.64%(c) 5.26%(c)
Portfolio turnover rate
(excluding short-term securities)........... 304.10% 487.04% 223.43%
See accompanying notes to Financial Highlights.
</TABLE>
NOTES TO FINANCIAL HIGHLIGHTS
(a) Commencement of operations.
(b) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
(c) Annualized.
<TABLE>
<CAPTION>
VFI CORE PORTFOLIO
INVESTMENTS IN SECURITIES OCTOBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
NAME OF ISSUER AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
(Percentage of investment category relates to total net assets)
BONDS: ( 95.1%)
U. S. GOVERNMENT AGENCY OBLIGATIONS: (92.7%)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Mortgage Corporation
6.44%, due 08/21/01 $1,000,000 $1,006,560
4.00%, due 05/15/03 275,000 268,639
7.00%, due 08/01/03 298,289 301,141
7.00%, due 11/15/05 333,038 337,823
7.00%, due 09/01/11 2,960,976 2,967,313
7.00%, due 10/01/11 3,010,001 3,016,443
6.50%, due 10/15/16 250,000 251,875
7.00%, due 02/15/20 144,546 145,720
7.00%, due 01/01/26 30,169 29,687
7.00%, due 02/01/26 516,087 507,855
6.50%, due 03/01/26 8,812,899 8,452,342
7.00%, due 03/01/26 4,957,092 4,878,026
7.00%, due 04/01/26 1,918,876 1,888,271
7.50%, due 04/01/26 4,152,108 4,168,176
6.50%, due 05/01/26 982,179 942,253
----------
29,162,124
----------
Federal National Mortgage Association
5.32%, due 01/10/99 2,600,000 2,543,867
6.80%, due 01/10/03 4,000,000 4,081,880
4.75%, due 12/25/11 1,254,107 1,242,343
6.15%, due 01/25/16 1,000,000 1,000,310
----------
8,868,400
----------
TOTAL U.S. AGENCY OBLIGATIONS (cost: $37,482,249) 38,030,524
----------
See accompanying notes to investments in securities.
</TABLE>
<TABLE>
<CAPTION>
VFI CORE PORTFOLIO
INVESTMENTS IN SECURITIES OCTOBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
NAME OF ISSUER AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
U.S. TREASURY ISSUES ( 2.4%):
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Notes
5.88%, due 02/15/04 (cost: $975,327) $1,000,000 $ 977,660
-------------
TOTAL BONDS (cost: $38,457,576) 39,008,184
-------------
SHORT-TERM SECURITIES ( 4.7%):
- -------------------------------------------------------------------------------------------------------------------
Benchmark U.S. Government Money Market Fund, 5.04%(c) 1,785,000 1,785,000
Federal Home Loan Bank Discount Note
5.40%, due 12/26/96 150,000 148,763
-------------
TOTAL SHORT-TERM SECURITIES (cost:$1,933,763) 1,933,763
-------------
TOTAL INVESTMENTS IN SECURITIES (cost: $40,391,339) (b) $ 40,941,947
=============
See accompanying notes to investments in securities.
</TABLE>
<TABLE>
<CAPTION>
VFI INTERMEDIATE DURATION PORTFOLIO
INVESTMENTS IN SECURITIES OCTOBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
NAME OF ISSUER AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
(Percentage of investment category relates to total net assets)
U. S. GOVERNMENT AGENCY OBLIGATIONS: (80.7%)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Government National Mortgage Association
6.50%, due 11/15/09 $3,401,583 $ 3,371,853
6.50%, due 05/20/26(e) 1,292,157 1,312,147
------------
4,684,000
------------
Government National Mortgage Association II
6.50%, due 03/20/23(e) 1,430,108 1,454,019
------------
Federal Home Loan Mortgage Corporation
8.50%, due 06/01/01 2,421,108 2,507,005
5.75%, due 01/15/02 24,060 24,007
5.60%, due 06/15/02 600,000 598,122
5.50%, due 10/15/02 250,000 249,063
6.50%, due 05/01/03 4,516,012 4,492,167
5.25%, due 06/15/03 468,844 466,204
7.00%, due 08/01/03 397,752 401,556
5.40%, due 01/15/08 625,414 613,488
5.10%, due 10/15/09 407,505 405,846
7.00%, due 10/01/11 2,794,752 2,800,732
7.00%, due 11/01/11 571,248 572,470
5.00%, due 12/15/12 500,000 496,250
5.00%, due 06/15/16 94,046 92,987
6.80%, due 02/15/18 1,500,000 1,512,645
6.80%, due 04/15/18 300,000 302,625
5.00%, due 09/15/18 250,000 247,108
7.50%, due 10/01/26 495,000 496,916
------------
16,279,191
Federal National Mortgage Association
5.00%, due 11/25/02 159,304 158,257
5.00%, due 02/25/03 275,489 273,508
5.50%, due 02/25/13 250,000 248,438
5.90%, due 01/25/16 224,372 223,739
6.15%, due 01/25/16 500,000 500,155
7.00%, due 05/25/17 199,668 201,289
6.75%, due 09/25/18 167,683 168,521
See accompanying notes to investments in securities.
</TABLE>
<TABLE>
<CAPTION>
VFI INTERMEDIATE DURATION PORTFOLIO
INVESTMENTS IN SECURITIES (CONTINUED) OCTOBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
NAME OF ISSUER AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
7.00%, due 03/25/19 $ 426,779 $ 428,111
7.25%, due 01/25/19 146,294 147,893
--------------
2,349,911
--------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (cost: $24,535,409) 24,767,121
--------------
SHORT-TERM SECURITIES (18.8%):
- -------------------------------------------------------------------------------------------------------------------
Benchmark U.S. Government Money Market Fund, 5.04% (c) 177,700 177,700
Federal National Mortgage Association Discount Notes
5.47%, due 11/01/96(d) 100,000 100,000
5.19%, due 11/08/96(d) 500,000 499,496
U.S. Treasury Notes
7.50%, due 01/31/97 3,000,000 3,015,000
5.63%, due 08/31/97 2,000,000 2,001,560
--------------
TOTAL SHORT-TERM SECURITIES (cost: $5,790,706) 5,793,756
--------------
TOTAL INVESTMENTS IN SECURITIES (cost: $30,326,115) (b) $ 30,560,877
=============
See accompanying notes to investments in securities.
</TABLE>
<TABLE>
<CAPTION>
VFI SHORT DURATION PORTFOLIO
INVESTMENTS IN SECURITIES OCTOBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
NAME OF ISSUER AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
(Percentage of investment category relates to total net assets)
LONG-TERM SECURITIES: (48.1%)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Notes
5.50%, due 09/30/97 $4,000,000 $ 4,000,640
5.25%, due 12/31/97 4,500,000 4,483,125
5.13%, due 02/28/98 1,975,000 1,961,728
6.25%, due 07/31/98 2,500,000 2,521,875
6.00%, due 09/30/98 1,000,000 1,004,530
------------
TOTAL LONG-TERM SECURITIES (cost: $13,924,992) 13,971,898
------------
SHORT-TERM SECURITIES (51.7 %):
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (22.1%)
Federal Home Loan Bank
6.25%, due 04/24/97 2,000,000 2,009,380
5.35%, due 05/16/97 2,500,000 2,427,180
Federal Home Loan Mortgage Corporation
5.20%, due 11/29/96 1,000,000 995,956
Federal National Mortgage Association
5.05%, due 03/14/97 1,000,000 998,440
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATION (cost: $6,429,383) 6,430,956
------------
U.S. TREASURY ISSUES (28.2%)
U.S. Treasury Notes
5.63%, due 06/30/97 1,500,000 1,502,115
U.S. Treasury Bills
5.34%, due 08/21/97 6,000,000 5,736,707
5.63%, due 09/18/97 1,000,000 949,799
------------
TOTAL U.S. TREASURY ISSUES (cost: $8,184,771) 8,188,621
------------
CASH EQUIVALENTS (1.4%):
- -------------------------------------------------------------------------------------------------------------------
Benchmark U.S. Government Money Market Fund, 5.04% (c)(cost: $401,000) 401,000
------------
TOTAL SHORT-TERM SECURITIES (cost: $15,015,154) 15,020,577
------------
TOTAL INVESTMENTS IN SECURITIES (cost: $28,940,146) (b) $ 28,992,475
============
See accompanying notes to investments in securities.
</TABLE>
VFI CORE PORTFOLIO
VFI INTERMEDIATE DURATION PORTFOLIO
VFI SHORT DURATION PORTFOLIO
NOTES TO INVESTMENTS IN SECURITIES
- --------------------------------------------------------------------------------
(a) Securities are valued by procedures described in note 1 to the financial
statements.
(b) The cost of securities for federal income tax purposes was $40,391,339,
$30,326,115 and $28,940,146 for Core Portfolio, Intermediate Duration
Portfolio and Short Duration Portfolio, respectively. The aggregate gross
unrealized appreciation and depreciation based on this cost was:
<TABLE>
<CAPTION>
Gross Gross Net
Unrealized Unrealized Unrealized
Appreciation Depreciation Appreciation
------------ ------------ ------------
<S> <C> <C> <C>
VFI Core Portfolio............................... $550,622 $ (14) $550,608
VFI Intermediate Duration Portfolio.............. 235,121 (359) 234,762
VFI Short Duration Portfolio..................... 54,432 (2,103) 52,329
</TABLE>
(c) Dividend yields change daily to reflect current market conditions. Rate
shown is quoted yield as of October 31, 1996.
(d) The interest rate disclosed represents the effective yield on the date of
acquisition.
(e) Adjustable rate mortgage security. The interest rate disclosed represents
the interest rate in effect as of October 31, 1996.
