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SECURITIES AND EXCHANGE COMMISSION
INVESTMENT COMPANIES
Chicago, IL 60611
25 East Erie Street
Chicago, IL 60611
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Driehaus Mutual Funds Trustees & Officers Richard H. Driehaus President A.R. Umans Chairman of the Board Francis J. Harmon Trustee Daniel F. Zemanek Trustee John E. Angley Vice President Michelle L. Cahoon Treasurer Joseph D. McDermott Chief Compliance Officer Tina M. Payne Secretary Kelly C. Dehler Assistant Secretary Candace A. Croal Assistant Secretary Investment Adviser Driehaus Capital Management LLC 25 East Erie Street Chicago, IL 60611 Distributor Driehaus Securities LLC 25 East Erie Street Chicago, IL 60611 Administrator PFPC Inc. 4400 Computer Drive Westborough, MA 01581 Transfer Agent PFPC Inc. 101 Sabin Street Pawtucket, RI 02862 Custodian JPMorgan Chase Bank, N.A. 3 Chase MetroTech Center Brooklyn, NY 11245 | Annual Report to Shareholders December 31, 2005 ![]() Driehaus International Discovery Fund Driehaus Emerging Markets Growth Fund Distributed by: Driehaus Securities LLC This report has been prepared for the shareholders of the Funds and is not an offering to sell or buy any Fund securities. Such offering is only made by the Funds’ prospectus. |
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Driehaus International Discovery Fund | |||||
Portfolio Manager’s Letter | 1 | ||||
Performance Overview | 4 | ||||
Schedule of Investments | 5 | ||||
Driehaus Emerging Markets Growth Fund | |||||
Portfolio Manager’s Letter | 12 | ||||
Performance Overview | 14 | ||||
Schedule of Investments | 15 | ||||
Each Fund section includes: | |||||
Statement of Assets and Liabilities | |||||
Statement of Operations | |||||
Statement of Changes in Net Assets | |||||
Financial Highlights | |||||
Notes to Financial Statements | 23 | ||||
Report of Independent Registered Public Accounting Firm | 29 | ||||
Interested and Independent Trustees of the Trust | 30 | ||||
Officers of the Trust | 31 | ||||
Fund Expense Examples | 32 | ||||
Shareholder Information | 33 | ||||
Board Considerations in Connection with the Annual Review of the Investment Advisory Agreement | 34 |
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Investment Philosophy: | ||
The Adviser seeks to achieve superior investment returns primarily by investing in companies outside the U.S. that are currently demonstrating rapid growth in their sales and earnings and which, in our judgement, have the ability to continue or accelerate their growth rates in the future. The Adviser manages the portfolios actively (above average turnover) to insure that the Funds are fully invested, under appropriate market conditions, in companies that meet these criteria. Investors should note that investments in overseas markets can pose more risks than U.S. investments, and the Funds’ share prices are expected to be more volatile than those of U.S.-only funds. In addition, the Funds’ returns will fluctuate with changes in stock market conditions, currency values, interest rates, foreign government regulations, and economic and political conditions in countries in which the Funds invest. These risks are generally greater when investing in emerging markets. |
Driehaus International Discovery Fund |
�� Driehaus Emerging Markets Growth Fund |
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Dear Fellow Shareholders,
The Driehaus International Discovery Fund was up 43.97% for the year ended December 31, 2005. This performance significantly exceeded the performance of the fund’s two major benchmark indices: the Morgan Stanley Capital International (MSCI) Europe, Australasia and Far East (EAFE®) Growth Index (which gained 13.28% for the year) and the MSCI All Country (AC) World ex USA Index (which gained 17.11%).
The fund has also outpaced these indices over longer periods. For the three years ended December 31, 2005, the average annualized return for the Driehaus International Discovery Fund was 37.81%, which compares favorably with the MSCI EAFE® Growth Index return of 20.19% and the MSCI AC World ex USA Index return of 26.20%. Over the past five years, the fund returned 14.32% on an average annualized basis (versus the MSCI EAFE® Growth Index return of 1.92% and the MSCI AC World ex USA Index return of 6.66%). Since inception of the fund (December 31, 1998), the average annualized return is 27.35%, which exceeds the returns on both the MSCI EAFE® Growth Index (at 1.03%) and the MSCI AC World ex USA Index (at 6.31%) by a considerable margin.1
The positive results for 2005 were consistent throughout the year, as the fund outperformed the relevant indices each quarter. A highlight of the year’s performance was the especially strong fourth quarter; the fund outperformed each index by over 1,000 basis points.
One of the key macroeconomic factors that contributed to the fund’s strong performance during the year was the strength of the dollar versus the euro and yen, as well as optimism in overseas markets reacting to the strength of the U.S. economy. In addition to the strong performance experienced in 2005, the assets under management in the fund also increased, from $345 million at year-end 2004 to $603 million at the end of 2005.
Investments in more smaller cap companies (versus 2004) benefited performance. In terms of overall contribution to return, over half of the year’s performance was attributable to smaller capitalization companies (with less than $1.0 billion U.S. Dollar market capitalization). The weighted median market capitalization of the fund was $3.3 billion at the end of 2004, and had fallen to $2.1 billion as of year-end 2005. Smaller cap international companies performed better on a relative basis than larger cap companies during 2005.
The fund’s allocation to Japan was a key component of the year’s strong results. The Japanese stock market was robust for much of the year, and despite sometimes lackluster Japanese economic data, the country’s economy was in recovery. The fund was slightly overweighted in Japanese stocks in general, and benefited from strong stock selection in particular. One of the fund’s best performing holdings was Ibiden Company Limited (4062 JP), a maker of ceramics, housing materials and electronics. One of their specialty ceramic product lines, diesel particulate filters (DPFs) for automotive applications, has expanded rapidly, and this growth is expected to continue. In addition, the company has also experienced strong demand for three of its electronics product lines: printed circuit boards (PCBs), integrated circuit (IC) packages and flip-chip (FC) packages.
Exposure to Western Europe was also a contributing factor to the strong performance, driven primarily by the fund’s positions in several United Kingdom stocks which enhanced returns despite an underweighted allocation to this country’s market.
While the fund’s allocation to the world’s mature markets was the predominant factor that led to the fund’s positive return, the emerging markets also contributed positively to the results. Companies based in Turkey, Taiwan and Egypt boosted the fund’s returns. The Turkish bank Denizbank A.S. (DENIZ TI) was a solid performer in the portfolio. Denizbank’s growth has been fueled by maturing acquisitions and increased penetration of the retail banking segment. Loan growth is expected to continue to exceed industry averages in 2006.
Finland had a negative impact on performance due to a disappointing investment in tire manufacturer Nokian Renkaat Oyj (NRE1V FH). Nokian issued a profit warning in October, cautioning that high margin passenger tire sales were flat during the company’s fiscal third quarter due to high distributor inventories.
Several industry sectors had a significant impact on results, and the consumer discretionary sector led with a positive impact on returns. Japanese real estate companies were especially strong, including Urban Corporation (8868 JP) and Kenedix Inc. (4321 JP). Urban is a Japanese real estate firm specializing in condominium sales and management. The company has successfully capitalized on the Japanese residential real estate boom,
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Retailers were also strong within the consumer discretionary segment. South Korea-based CJ Home Shopping (035760 KS) sells clothing, kitchen items, appliances and jewelry through home shopping, internet and catalog distribution channels, and also operates a cable television business. Sales of financial services products have fueled growth and growth should continue as the company furthers its expansion into China. Point Inc. (2685 JP), based in Japan, operates a chain of clothing stores, and is a strong competitor in the medium-priced market segment with a focus on private-label brands. Earnings have exceeded expectations. South Africa-based Foschini Limited (FOS SJ) operates chain stores in the clothing, cosmetics, jewelry and sporting goods segments, and has benefited from strong like-for-like merchandise sales growth and an aggressive store opening schedule.
The industrial sector was the second largest contributor to performance after the consumer discretionary segment. Toho Titanium Co. Ltd. (5727 JP) was one of the top 3 performers in the fund for the year. Toho, a Japanese titanium smelter, benefited from tight capacity and high demand from aircraft manufacturers. Domestic sales were especially strong, supported by demand for titanium for re-export to plant projects in China and the Middle East.
Although the energy sector’s impact on the portfolio was positive, one stock hindered performance. Regal Petroleum PLC (RPT LN), based in the United Kingdom, is an independent oil and gas producer with properties in Ukraine, Greece, Romania and Egypt. The stock price declined on news of the failure of the company’s Kallirachi K-2 well.
Another holding that had a negative impact on results was Arbeit-Times Co. Ltd. (2341 JP), a Japanese publisher of free job information newspapers and provider of employment services. Revenue and profit estimates were lowered slightly in April, 2005 based on the company’s withdrawal from some business lines, including used-car magazines and paid-ad job magazines, and softness in the temporary staffing segment.
One stock in the portfolio, Singapore-based Citiraya Industries Ltd. (CTR SP), was no longer traded at year-end and had been written down in value earlier in the year. Trading in the company’s stock was halted in January, 2005 when it was announced that a governmental agency had launched a bribery and fraud investigation of the electronics recycler. The scope of the investigation included top management, and the CEO’s brother was later arrested and charged with helping his brother bribe employees of customers to re-sell microprocessor chips that were to have been destroyed.
I re-joined Driehaus Capital Management, Inc. as portfolio manager of the Driehaus International Discovery Fund effective March 1, 2005. I had previously been a senior member of the firm’s international research team and a portfolio manager of the firm’s international portfolios from 1997 through 2000, after which I managed American Century Investment Management’s International Opportunities Fund. My return enabled Emery Brewer, who had previously managed both the Driehaus International Discovery Fund and the Driehaus Emerging Markets Growth Fund, to turn his attention full-time to the Driehaus Emerging Markets Growth Fund, which he has managed since its 1997 inception. Ivo St. Kovachev, who had previously been a member of the Driehaus International Discovery Fund’s management team, left Driehaus Capital Management, Inc., the fund’s adviser, in February, 2005.
In 2005 we implemented changes to the portfolio management process which we believe had a positive impact on performance. In the first quarter, our research efforts were refocused, allowing our research professionals to align with a given product (rather than industry or geographic sector). The international portfolio management and research team continue to work together and share information as always, but now have a stronger focus specifically on the Driehaus International Discovery Fund’s performance.
In addition, investment analyst Christopher Cintavey joined the Driehaus International Discovery Fund research team in June, 2005. He covers Japan for the fund.
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We are pleased with the fund’s performance in 2005. As we begin 2006, we are hopeful that the international markets and the Driehaus International Discovery Fund will again perform well for our shareholders, and we remain committed to finding the best growth ideas beyond our borders.
Sincerely,
1 | During these periods, the fund’s returns reflect fee waivers and/or reimbursements without which performance would have been lower. |
Performance is historical and does not represent future results.
Regional Weightings*
Western Europe | 36.6% | |||
Japan | 36.4% | |||
Asia/Far East Ex-Japan | 13.6% | |||
North America | 4.9% | |||
Eastern Europe | 2.3% | |||
Africa | 0.9% | |||
South America | 0.8% |
Top Ten Holdings*
Kenedix, Inc. | 2.2% | |||
Point, Inc. | 2.1% | |||
Toho Titanium Co., Ltd. | 2.1% | |||
Urban Corp. | 2.1% | |||
CJ Home Shopping | 1.9% | |||
Yamada Denki Co., Ltd. | 1.9% | |||
Chiyoda Corp. | 1.8% | |||
Tomra Systems ASA | 1.8% | |||
Hitachi Construction Machinery Co., Ltd. | 1.8% | |||
Logitech International SA | 1.8% |
* | All percentages are stated as a percent of net assets at December 31, 2005. |
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The performance summarized below is historical and does not represent future results. Investment returns and principal value vary, and you may have a gain or loss when you sell shares. Performance data presented measures the change in the value of an investment in the Fund, assuming reinvestment of all dividends and capital gains. Average annual total return reflects annualized change.
The table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The graph compares the results of a $10,000 investment in the Fund since December 31, 1998 (the date of the Fund’s inception), with all dividends and capital gains reinvested, with the indicated indexes (and dividends reinvested) for the same period.
Since Inception | ||||||||||||||||||
Average Annual Total Returns as of 12/31/05 | 1 Year | 3 Years | 5 Years | (12/31/98 - 12/31/05) | ||||||||||||||
Driehaus International Discovery Fund (DRIDX)1 | 43.97% | 37.81% | 14.32% | 27.35% | ||||||||||||||
MSCI EAFE® Growth Index2 | 13.28% | 20.19% | 1.92% | 1.03% | ||||||||||||||
MSCI AC World ex USA Index3 | 17.11% | 26.20% | 6.66% | 6.31% | ||||||||||||||
MSCI AC World ex USA Growth Index4 | 17.08% | 22.74% | 3.84% | 3.02% | ||||||||||||||
1 | The returns for the periods prior to July 1, 2003, reflect fee waivers and/or reimbursements without which performance would have been lower. |
2 | The Morgan Stanley Capital International Europe, Australasia and Far East Growth Index (MSCI EAFE® Growth Index) is a subset of the MSCI EAFE® Index (a market capitalization-weighted index designed to measure equity performance in 21 developed markets, excluding the U.S. and Canada) and includes only the MSCI EAFE® Index stocks which are categorized as growth stocks. Data is in U.S. dollars. Source: Morgan Stanley Capital International Inc. |
3 | The Morgan Stanley Capital International All Country World ex USA Index (MSCI AC World ex USA Index) is a market capitalization-weighted index designed to measure equity market performance in 48 global developed and emerging markets, excluding the U.S. Data is in U.S. dollars. Source: Morgan Stanley Capital International Inc. |
4 | The Morgan Stanley Capital International All Country World ex USA Growth Index (MSCI AC World ex USA Growth Index) was added as a benchmark because the index includes certain emerging markets countries in which the Fund may invest and which are not included in the MSCI EAFE® Growth Index. The index is a subset of the MSCI AC World ex USA Index and is composed only of the MSCI AC World ex USA Index stocks which are categorized as growth stocks. Data is in U.S. dollars. Source: Morgan Stanley Capital International Inc. |
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Number | Market | |||||||||
of | Value | |||||||||
Shares | (Note A) | |||||||||
EQUITY SECURITIES — 92.7% | ||||||||||
FAR EAST — 47.2% | ||||||||||
Japan — 36.4% | ||||||||||
ABC-Mart, Inc. | 387,100 | $ | 10,897,291 | |||||||
Asset Managers Co., Ltd. | 644 | 4,477,721 | ||||||||
Chiyoda Corp. | 483,000 | 11,098,741 | ||||||||
Cosmos Pharmaceutical Corp. | 35,200 | 1,265,511 | ||||||||
Cosmos Pharmaceutical Corp. When Issued** | 35,200 | 1,265,511 | ||||||||
FCC Co., Ltd. | 88,100 | 4,414,898 | ||||||||
Hitachi Construction Machinery Co., Ltd. | 474,700 | 11,069,021 | ||||||||
Hitachi Koki Co., Ltd. | 513,000 | 8,490,914 | ||||||||
Ibiden Co., Ltd. | 189,300 | 10,144,368 | ||||||||
Kenedix, Inc. | 2,095 | 13,198,669 | ||||||||
Komatsu, Ltd. | 667,000 | 11,034,188 | ||||||||
Meiko Electronics Co., Ltd. | 123,800 | 10,182,389 | ||||||||
Micronics Japan Co., Ltd. | 58,400 | 2,287,769 | ||||||||
Miraca Holdings, Inc. | 266,100 | 5,798,762 | ||||||||
Musashino Bank, Ltd. | 62,200 | 3,459,804 | ||||||||
NGK Insulators, Ltd. | 254,000 | 3,777,640 | ||||||||
Nihon Parkerizing Co., Ltd. | 184,000 | 2,897,257 | ||||||||
Nippon Seiki Co., Ltd. | 379,000 | 7,760,928 | ||||||||
Okuma Holdings, Inc. | 682,000 | 8,628,007 | ||||||||
Pacific Management Corp. | 959 | 3,317,692 | ||||||||
Pacific Management Corp. When Issued** | 1,428 | 4,940,213 | ||||||||
Point, Inc. | 150,900 | 12,577,666 | ||||||||
Right On Co., Ltd. | 160,700 | 7,698,775 | ||||||||
Star Micronics Co., Ltd. | 449,000 | 7,344,054 | ||||||||
Sysmex Corp. | 155,300 | 5,925,722 | ||||||||
Toho Titanium Co., Ltd. | 120,800 | 12,547,590 | ||||||||
Urban Corp. | 115,700 | 12,498,563 | ||||||||
Yamada Denki Co., Ltd. | 90,900 | 11,376,470 | ||||||||
Yamaha Motor Co., Ltd. | 364,200 | 9,511,477 | ||||||||
219,887,611 | ||||||||||
South Korea — 3.3% | ||||||||||
CJ Home Shopping | 92,984 | 11,443,052 | ||||||||
Hyundai Department Store Co., Ltd. | 96,430 | 8,165,809 | ||||||||
19,608,861 | ||||||||||
Singapore — 3.1% | ||||||||||
Citiraya Industries, Ltd.**# | 5,320,000 | 0 | ||||||||
Cosco Corp., Ltd. | 6,894,000 | 8,956,208 | ||||||||
Hyflux, Ltd. | 419,500 | 693,847 | ||||||||
StarHub, Ltd. | 7,296,000 | 8,995,760 | ||||||||
18,645,815 | ||||||||||
Australia — 2.5% | ||||||||||
Macquarie Bank, Ltd. | 203,886 | 10,186,301 | ||||||||
Zinifex, Ltd. | 926,509 | 4,673,059 | ||||||||
14,859,360 | ||||||||||
Taiwan — 1.2% | ||||||||||
High Tech Computer Corp. | 397,000 | 7,449,835 | ||||||||
China — 0.7% | ||||||||||
Guangzhou R&F Properties Co., Ltd.** | 1,139,700 | 3,968,699 | ||||||||
Total FAR EAST | 284,420,181 | |||||||||
EUROPE — 38.9% | ||||||||||
Norway — 7.4% | ||||||||||
Aker Yards AS | 136,030 | 6,530,117 | ||||||||
Eltek ASA** | 252,100 | 4,174,088 | ||||||||
Fast Search & Transfer ASA** | 2,883,000 | 10,593,454 | ||||||||
Petroleum Geo-Services ASA** | 231,859 | 7,145,433 | ||||||||
Tandberg Television ASA** | 420,520 | 5,560,785 | ||||||||
Tomra Systems ASA | 1,548,700 | 11,082,958 | ||||||||
45,086,835 | ||||||||||
United Kingdom — 5.9% | ||||||||||
Ashtead Group PLC | 2,734,364 | 8,562,086 | ||||||||
Burren Energy PLC | 474,236 | 7,441,170 | ||||||||
CSR PLC** | 603,777 | 9,723,090 | ||||||||
NETeller PLC** | 163,121 | 2,066,972 | ||||||||
Tullow Oil PLC | 1,739,710 | 8,081,510 | ||||||||
35,874,828 | ||||||||||
Denmark — 4.5% | ||||||||||
Bang & Olufsen AS | 61,725 | 6,346,842 | ||||||||
GN Store Nord AS | 744,800 | 9,750,238 | ||||||||
Sondagsavisen AS** | 211,000 | 2,594,811 | ||||||||
Topdanmark AS** | 96,050 | 8,336,933 | ||||||||
27,028,824 | ||||||||||
Germany — 3.5% | ||||||||||
Bijou Brigitte Modische Accessoires AG | 5,642 | 1,526,273 | ||||||||
Continental AG | 32,265 | 2,864,112 | ||||||||
Software AG | 132,667 | 6,463,171 | ||||||||
United Internet AG | 160,727 | 6,136,652 | ||||||||
Wincor Nixdorf AG | 41,498 | 4,390,681 | ||||||||
21,380,889 | ||||||||||
Italy — 3.4% | ||||||||||
ERG SpA | 383,591 | 9,237,029 | ||||||||
Geox SpA | 560,894 | 6,172,244 | ||||||||
Tod’s SpA | 72,404 | 4,880,822 | ||||||||
20,290,095 | ||||||||||
Luxembourg — 2.7% | ||||||||||
Stolt Offshore SA** | 641,940 | 7,466,299 | ||||||||
Tenaris SA — ADR | 75,573 | 8,653,109 | ||||||||
16,119,408 | ||||||||||
Switzerland — 2.5% | ||||||||||
Logitech International SA** | 234,970 | 11,041,739 | ||||||||
Ypsomed Holding AG** | 26,256 | 4,076,119 | ||||||||
15,117,858 | ||||||||||
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Number | Market | |||||||||
of | Value | |||||||||
Shares | (Note A) | |||||||||
Spain — 2.5% | ||||||||||
Fadesa Inmobiliaria SA | 263,729 | $ | 8,692,407 | |||||||
Indra Sistemas SA | 315,856 | 6,173,751 | ||||||||
14,866,158 | ||||||||||
France — 2.4% | ||||||||||
Axalto Holding NV** | 98,438 | 2,713,056 | ||||||||
SR Teleperformance | 74,804 | 2,337,985 | ||||||||
Vallourec SA | 16,705 | 9,196,284 | ||||||||
14,247,325 | ||||||||||
Turkey — 1.4% | ||||||||||
Denizbank AS** | 1,263,215 | 8,184,473 | ||||||||
Belgium — 0.9% | ||||||||||
Option NV** | 76,368 | 5,673,330 | ||||||||
Poland — 0.9% | ||||||||||
TVN SA** | 216,756 | 5,204,786 | ||||||||
Sweden — 0.5% | ||||||||||
Munters AB | 106,800 | 2,944,074 | ||||||||
Ireland — 0.4% | ||||||||||
Anglo Irish Bank Corp. PLC | 169,183 | 2,569,782 | ||||||||
Total EUROPE | 234,588,665 | |||||||||
NORTH AMERICA — 4.9% | ||||||||||
Canada — 2.5% | ||||||||||
Precision Drilling Trust | 121,160 | 4,000,276 | ||||||||
Trican Well Service, Ltd.** | 226,247 | 10,899,249 | ||||||||
14,899,525 | ||||||||||
Bermuda — 1.5% | ||||||||||
Marvell Technology Group, Ltd. — ADR** | 157,046 | 8,808,710 | ||||||||
Mexico — 0.9% | ||||||||||
America Movil SA de CV — L — ADR | 195,200 | 5,711,552 | ||||||||
Total NORTH AMERICA | 29,419,787 | |||||||||
AFRICA — 0.9% | ||||||||||
South Africa — 0.9% | ||||||||||
Foschini, Ltd. | 668,041 | 5,500,583 | ||||||||
Total AFRICA | 5,500,583 | |||||||||
SOUTH AMERICA — 0.8% | ||||||||||
Brazil — 0.8% | ||||||||||
Lojas Renner SA** | 159,500 | 5,115,214 | ||||||||
Total SOUTH AMERICA | 5,115,214 | |||||||||
Total EQUITY SECURITIES (Cost $407,922,884) | 559,044,430 | |||||||||
EQUITY CERTIFICATES — 2.8% | ||||||||||
FAR EAST — 2.8% | ||||||||||
India — 2.8% | ||||||||||
Bharat Heavy Electricals, Ltd.† | 276,206 | 8,496,621 | ||||||||
Bharti Tele-Ventures, Ltd.**† | 1,112,201 | 8,503,333 | ||||||||
16,999,954 | ||||||||||
Total EQUITY CERTIFICATES (Cost $12,502,848) | 16,999,954 | |||||||||
TOTAL INVESTMENTS (COST $420,425,732) | 95.5 | % | $ | 576,044,384 | ||||||
Other Assets in Excess of Liabilities | 4.5 | % | 27,204,777 | |||||||
Net Assets | 100.0 | % | $ | 603,249,161 | ||||||
The federal income tax basis and unrealized appreciation (depreciation) for all investments is as follows: | ||||||||||
Basis | $ | 421,015,470 | ||||||||
Gross Appreciation | $ | 159,723,375 | ||||||||
Gross Depreciation | (4,694,461 | ) | ||||||||
Net Appreciation | $ | 155,028,914 | ||||||||
** | Non-income producing security |
† | Restricted security — Investments in securities not registered under the Securities Act of 1933, excluding 144A securities. At December 31, 2005, the value of these restricted securities amounted to $16,999,954 or 2.8% of net assets. |
Additional information on each restricted holding is as follows: |
Acquisition | Acquisition | |||||||
Security | Date(s) | Cost | ||||||
Bharat Heavy Electricals, Ltd. | 05/25/05 to 11/02/05 | $ | 6,174,400 | |||||
Bharti Tele-Ventures, Ltd. | 12/02/04 to 12/21/05 | $ | 6,328,448 |
ADR — American Depository Receipt
# | This security has been halted from trading since January 24, 2005 and is being valued at a fair value as determined in good faith by or under the direction of the Driehaus Mutual Funds’ Board of Trustees. |
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Percent of | ||||
Industry | Net Assets | |||
Appliances | 2.3% | |||
Auto Parts | 0.7% | |||
Automobiles | 1.3% | |||
Banking | 4.0% | |||
Basic Industries/Multi-Industry | 1.0% | |||
Broadcasting & Publishing Services | 1.3% | |||
Business & Public Services | 3.0% | |||
Chemicals | 2.2% | |||
Construction | 2.5% | |||
Consumer Durables/Multi-Industry | 2.1% | |||
Consumer Non-Durables/Multi-Industry | 3.3% | |||
Consumer Services/Multi-Industry | 4.2% | |||
Department Stores | 1.0% | |||
Electrical & Electronics | 4.1% | |||
Electronic Components | 11.4% | |||
Energy Equipment | 2.4% | |||
Energy Sources | 4.1% | |||
Financial Services | 0.3% | |||
Gas Pipelines | 1.4% | |||
Health Care | 1.6% | |||
Industrial Components | 1.1% | |||
Industrial Machinery | 1.4% | |||
Insurance | 1.4% | |||
Machinery & Engineering | 10.3% | |||
Merchandising | 3.4% | |||
Metals — Nonferrous | 2.9% | |||
Oil | 2.5% | |||
Real Estate | 4.1% | |||
Recreation | 1.6% | |||
Semiconductors | 1.5% | |||
Technology/Multi-Industry | 2.8% | |||
Telecommunications | 1.9% | |||
Telephone Utilities | 2.4% | |||
Textiles & Apparel | 4.0% | |||
Other Assets in Excess of Liabilities | 4.5% | |||
TOTAL | 100.0% | |||
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ASSETS: | |||||||
Investments, at market value (Cost $420,425,732) | $ | 576,044,384 | |||||
Foreign currency (Cost $6,967,976) | 7,036,828 | ||||||
Cash | 21,558,531 | ||||||
Receivables: | |||||||
Dividends | 296,267 | ||||||
Interest | 46,617 | ||||||
Investment securities sold | 11,119,332 | ||||||
Fund shares sold | 9,601,826 | ||||||
Net unrealized appreciation on unsettled foreign currency forward contracts from transaction hedges | 25,864 | ||||||
Prepaid expenses and other assets | 59,652 | ||||||
TOTAL ASSETS | 625,789,301 | ||||||
LIABILITIES: | |||||||
Payables: | |||||||
Investment securities purchased | 16,993,416 | ||||||
Fund shares redeemed | 4,642,709 | ||||||
Due to affiliates | 712,133 | ||||||
Accrued expenses | 191,882 | ||||||
TOTAL LIABILITIES | 22,540,140 | ||||||
NET ASSETS | $ | 603,249,161 | |||||
SHARES OUTSTANDING (Unlimited shares authorized, no par value) | 14,641,797 | ||||||
NET ASSET VALUE PER SHARE | $ | 41.20 | |||||
NET ASSETS CONSISTED OF THE FOLLOWING AT DECEMBER 31, 2005: | |||||||
Paid-in capital | $ | 574,671,440 | |||||
Accumulated net investment loss | (292,339 | ) | |||||
Accumulated net realized loss | (126,811,121 | ) | |||||
Unrealized net foreign exchange gain | 62,529 | ||||||
Unrealized net appreciation on investments | 155,618,652 | ||||||
NET ASSETS | $ | 603,249,161 | |||||
8
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INVESTMENT LOSS: | ||||||||
Income: | ||||||||
Dividends (Net of non-reclaimable taxes of $240,796) | $ | 6,569,323 | ||||||
Interest | 286,475 | |||||||
Other | 20,932 | |||||||
Total income | 6,876,730 | |||||||
Expenses: | ||||||||
Investment advisory fee | 5,889,585 | |||||||
Administration fee | 448,349 | |||||||
Professional fees | 185,582 | |||||||
Federal and state registration fees | 36,000 | |||||||
Custodian fee | 260,888 | |||||||
Transfer agent fees | 88,599 | |||||||
Trustees’ fees | 39,600 | |||||||
Miscellaneous | 203,427 | |||||||
Total expenses | 7,152,030 | |||||||
Fees paid indirectly | (207,826 | ) | ||||||
Net expenses | 6,944,204 | |||||||
Net investment loss | (67,474 | ) | ||||||
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: | ||||||||
Net realized gain from security transactions | 63,603,618 | |||||||
Net realized foreign exchange loss | (573,917 | ) | ||||||
Net change in unrealized foreign exchange gain | (62,144 | ) | ||||||
Net change in unrealized appreciation of investments | 96,247,912 | |||||||
Net realized and unrealized gain on investments and foreign currency transactions | 159,215,469 | |||||||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | 159,147,995 | ||||||
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For the year | For the year | ||||||||||
ended | ended | ||||||||||
December 31, 2005 | December 31, 2004 | ||||||||||
INCREASE IN NET ASSETS: | |||||||||||
Operations: | |||||||||||
Net investment loss | $ | (67,474 | ) | $ | (163,581 | ) | |||||
Net realized gain on investments and foreign currency transactions | 63,029,701 | 20,131,509 | |||||||||
Net change in unrealized gain on investments and foreign currency transactions | 96,185,768 | 15,335,681 | |||||||||
Net increase in net assets resulting from operations | 159,147,995 | 35,303,609 | |||||||||
Distributions to shareholders: | |||||||||||
Net investment income | (446,477 | ) | — | ||||||||
Capital gains | (54,300,819 | ) | (11,619,269 | ) | |||||||
Total distributions to shareholders | (54,747,296 | ) | (11,619,269 | ) | |||||||
Capital share transactions: | |||||||||||
Proceeds from shares sold | 212,627,542 | 156,011,529 | |||||||||
Reinvestment of distributions | 53,670,719 | 11,443,961 | |||||||||
Cost of shares redeemed | (112,461,237 | ) | (106,830,015 | ) | |||||||
Redemption fees | 25,182 | 56,976 | |||||||||
Net increase in net assets derived from capital share transactions | 153,862,206 | 60,682,451 | |||||||||
Total increase in net assets | 258,262,905 | 84,366,791 | |||||||||
NET ASSETS: | |||||||||||
Beginning of period | $ | 344,986,256 | $ | 260,619,465 | |||||||
End of period (Including accumulated net investment loss of $292,339 and $555,072, respectively) | $ | 603,249,161 | $ | 344,986,256 | |||||||
Capital share transactions are as follows: | |||||||||||
Shares issued | 5,567,641 | 5,186,245 | |||||||||
Shares reinvested | 1,341,768 | 382,485 | |||||||||
Shares redeemed | (3,162,244 | ) | (3,574,362 | ) | |||||||
Net increase from capital share transactions | 3,747,165 | 1,994,368 | |||||||||
10
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For the year | For the year | For the year | For the year | For the year | ||||||||||||||||||
ended | ended | ended | ended | ended | ||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | ||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||
Net asset value, beginning of period | $ | 31.67 | $ | 29.28 | $ | 18.03 | $ | 20.70 | $ | 24.17 | ||||||||||||
INCOME (LOSS) FROM INVESTMENT OPERATIONS: | ||||||||||||||||||||||
Net investment income (loss) | 0.02 | (0.02 | ) | (0.15 | ) | (0.12 | ) | (0.24 | ) | |||||||||||||
Net realized and unrealized gain (loss) on investments and foreign currency transactions | 13.78 | 3.45 | 11.40 | (2.57 | ) | (3.23 | ) | |||||||||||||||
Total income (loss) from investment operations | 13.80 | 3.43 | 11.25 | (2.69 | ) | (3.47 | ) | |||||||||||||||
LESS DISTRIBUTIONS: | ||||||||||||||||||||||
Dividends from net investment income | (0.04 | ) | — | — | — | — | ||||||||||||||||
Distributions from capital gains | (4.23 | ) | (1.05 | ) | — | — | — | |||||||||||||||
Total distributions | (4.27 | ) | (1.05 | ) | — | — | — | |||||||||||||||
Redemption fees added to paid-in capital | 0.00 | ~ | 0.01 | 0.00 | ~ | 0.02 | 0.00 | ~ | ||||||||||||||
Net asset value, end of period | $ | 41.20 | $ | 31.67 | $ | 29.28 | $ | 18.03 | $ | 20.70 | ||||||||||||
Total Return | 43.97 | % | 11.95 | % | 62.40 | % | (12.90 | )% | (14.36 | )% | ||||||||||||
RATIOS/SUPPLEMENTAL DATA | ||||||||||||||||||||||
Net assets, end of period (in 000’s) | $ | 603,249 | $ | 344,986 | $ | 260,619 | $ | 68,113 | $ | 44,847 | ||||||||||||
Ratio of expenses before fees paid indirectly to average net assets | 1.82 | % | 1.94 | % | 2.02 | %† | 2.26 | %† | 2.34 | %† | ||||||||||||
Ratio of net expenses to average net assets | 1.77 | %# | 1.70 | %# | 2.02 | %†# | 1.86 | %†# | 2.31 | %†# | ||||||||||||
Ratio of net investment loss to average net assets | (0.02 | )%# | (0.05 | )%# | (1.11 | )%†# | (0.71 | )%†# | (1.12 | )%†# | ||||||||||||
Portfolio turnover | 180.42 | % | 518.81 | % | 515.76 | % | 405.69 | % | 612.64 | % |
~ | Amount represents less than $0.01 per share |
† | Such ratios are after administrative agent and transfer agent waivers and Adviser expense reimbursements, when applicable. PFPC Inc., the administrative agent and transfer agent, waived a portion of its fees from December 31, 1998 through December 31, 2001. The Adviser agreed to absorb other operating expenses to the extent necessary to ensure that the total Fund operating expenses (other than interest, taxes, brokerage commissions and other portfolio transaction expenses, capital expenditures, and extraordinary expenses) would not exceed the Fund’s operating expense cap for the first fifty-four months of its operations. For the period June 1, 1999 through June 30, 2002, the operating expense cap was 2.40% of average net assets. For the period July 1, 2002 through June 30, 2003, the Fund was reimbursed for expenses exceeding the 2.40% expense cap after reduction of amounts received through commission recapture programs that were applied to Fund expenses. |
# | Such ratios are net of fees paid indirectly (see Note B in the Notes to Financial Statements). |
11
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Dear Fellow Shareholders,
The Driehaus Emerging Markets Growth Fund was up 38.95% for the year ended December 31, 2005. This exceeded the performance of the fund’s major benchmark index, the Morgan Stanley Capital International (MSCI) Emerging Markets Index which gained 34.53% for the year.
The fund has also outpaced this index over longer periods. For the three years ended December 31, 2005, the average annualized return for the Driehaus Emerging Markets Growth Fund was 41.85% (versus a return of 38.35% for the index) and for the five years ended December 31, 2005, the average annualized return was 20.92% (versus 19.43% for the index). Since inception, the average annual total return is 17.90% versus 9.68% for the index.1
The positive results for 2005 were primarily driven by strength in the second half of the year. After lagging the indices during the first half, the fund outperformed its benchmarks during the third and fourth quarters, exceeding each index by over 300 basis points in the third quarter and by over 500 basis points in the fourth quarter. The emerging markets sector gained strength in the final quarter of the year as economic strength in the U.S. and China positively impacted many emerging markets.
Companies based in Turkey, Taiwan and Egypt added to the fund’s return, and the most positive contribution to the fund’s return relative to the index came from our allocation to Taiwan. Our weighting was roughly in line with the index weighting, and much of the performance was due to stock selection within this market. Technology companies High Tech Computer Corp. (2498 TT) and Largan Precision Co. Ltd. (3008 TT) both enhanced the fund’s performance. High Tech makes Windows-based pocket personal computers and wireless personal digital assistants (PDAs). Continued strong demand for wireless PDAs and a solid product pipeline have driven the company’s growth. Largan Precision makes lenses and shutters for digital and film cameras, scanners and liquid crystal display (LCD) projectors. Largan’s main growth vehicle is their niche in phone camera lenses. The company had a 30% market share in the earlier generation .35 megapixel product line, and is currently ramping up production to meet the needs of the next generation 1.0 megapixel market.
Some emerging markets negatively impacted results. Our exposure to Israeli stocks hurt performance, and even though the Israeli market was relatively strong last year, a number of the companies that we held underperformed the market.
The portfolio was overweighted in financial stocks, and this industry group had the most positive impact on performance. Several individual stocks in this group, including Sberbank RF (SBER RU), Ghaungzhou R & F Properties (2777 HK) and Denizbank A.S. (DENIZ TI) were particularly strong performers. Sberbank, also known as the Savings Bank of the Russian Federation, is a provider of both consumer and commercial banking services. Consumer loan growth and faster-than-expected commission and fee income growth, have led to stronger-than-expected net profit growth. Guangzhou R & F Properties, which is traded in Hong Kong, develops, sells and manages real estate in Guangzhou and Beijing, China. The company operates in a large and relatively untapped market with strong brand recognition, and average net profits are expected to grow 60% over the next two years. Turkish bank Denizbank’s growth has been fueled by maturing acquisitions and increased penetration of the retail banking segment. Loan growth is expected to exceed industry averages in 2006.
Although the information technology and telecommunications industries were not significant contributors to the fund’s performance relative to the index, the three best stocks in the fund were in these sectors. High Tech Computer Corp. (detailed above) was the fund’s best performing stock, followed by Orascom Telecom Holdings SAE (OTLD LI) and NHN Corp. (035420 KS). Orascom, based in Egypt, operates and participates in joint ventures that run GSM (global systems for mobile communications) networks and has operations in Africa and the Middle East. The stock has been a strong performer based on its strong presence in relatively underpenetrated cellular markets and population growth in the markets it serves. NHN Corp., based in South Korea, provides Internet sites with web portal services (such as search engine, online game and content development) and Internet marketing services. The company has benefited from growth in search ad revenues (which still has significant growth potential as the volume of search queries is relatively low). In addition, the monetization of search queries is increasing, as has NHN’s market share in the search ad segment.
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Table of Contents
The consumer staples industry represented the largest negative impact of any industry group on the fund, relative to the performance of the index. This was largely due to the fact that the fund was underweighted in this relatively strong sector (rather than any specific stock situation).
Several stocks had a negative impact on the fund’s return. Shanda Interactive Entertainment Ltd. (SNDA US), based in China, operates online games licensed from third parties as well as developed in-house. The company’s two major games, Mir II and Woool, have reached the mature phase of the gaming cycle, and the pipeline is not very strong, which led to disappointing price performance. JD Group Limited (JDG SJ), a South African furniture, appliance and home entertainment products retailer, sells a high proportion of goods on credit. Lower interest rates negatively impacted credit revenues, and there were increasing concerns about potential credit regulation in South Africa. Korea Zinc Co. Ltd. (010130 KS), a smelter of non-ferrous metals including zinc, electrolytic gold, silver, lead, sulfuric acid and copper, posted an operating profit shortfall during the first quarter of 2005 due to weakness in the U.S. dollar. Lastly, Singapore-based Citiraya Industries Limited (CTR SP) was written down in value earlier in the year and was no longer trading at year end. Trading in Citiraya was halted in January, 2005 as news of a government-led investigation into fraud at the company surfaced. It was later found that the CEO’s brother had been bribing employees of Citiraya’s customers to re-sell chips that Citiraya was supposed to have destroyed.
Effective March 1, 2005, Lynette Schroeder rejoined the firm to manage the Driehaus International Discovery Fund. This allowed me to focus exclusively on the management of the Driehaus Emerging Markets Growth Fund, which I have managed since its 1997 inception. As always, we continue to seek the fastest growing companies in the world’s emerging markets, and we thank you for your continued interest in the Driehaus Emerging Markets Growth Fund.
Sincerely,
/s/ Emery R. Brewer
Emery R. Brewer
1 | During these periods, the fund’s returns reflect fee waivers and/or reimbursements without which performance would have been lower. |
Performance is historical and does not represent future results.
Regional Weightings*
Asia/ Far East Ex-Japan | 50.9% | |||
Western Europe | 11.2% | |||
South America | 11.1% | |||
Africa | 7.1% | |||
North America | 6.6% | |||
Eastern Europe | 5.6% | |||
Middle East | 1.4% |
Top Ten Holdings*
NHN Corp. | 2.2% | |||
Sberbank RF | 2.0% | |||
Guangzhou R & F Properties Co., Ltd | 1.9% | |||
Unimicron Technology Corp. | 1.9% | |||
Urbi Desarrollos Urbanos SA de CV | 1.8% | |||
Hyundai Motor Co., Ltd. | 1.8% | |||
Wal-Mart de Mexico SA de CV | 1.7% | |||
Zijin Mining Group Co., Ltd. | 1.7% | |||
Shinhan Financial Group Co., Ltd. | 1.7% | |||
America Movil SA de CV — L — ADR | 1.7% |
* | All percentages are stated as a percent of net assets at December 31, 2005. |
13
Table of Contents
The performance summarized below is historical and does not represent future results. Investment returns and principal value vary, and you may have a gain or loss when you sell shares. Performance data presented measures the change in the value of an investment in the Fund, assuming reinvestment of all dividends and capital gains. Average annual total return reflects annualized change.
The table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The graph compares the results of a $10,000 investment in the Fund since December 31, 1997 (the date of the Fund’s inception), with all dividends and capital gains reinvested, with the indicated indexes (and dividends reinvested) for the same period.
Since Inception | ||||||||||||||||||
Average Annual Total Returns as of 12/31/05 | 1 Year | 3 Years | 5 Years | (12/31/97 - 12/31/05) | ||||||||||||||
Driehaus Emerging Markets Growth Fund (DREGX)1 | 38.95% | 41.85% | 20.92% | 17.90% | ||||||||||||||
MSCI Emerging Markets Index2 | 34.53% | 38.35% | 19.43% | 9.68% | ||||||||||||||
MSCI Emerging Markets Growth Index3 | 35.40% | 34.80% | 16.18% | 8.80% | ||||||||||||||
1 | The returns for the periods prior to July 1, 2003, reflect fee waivers and/or reimbursements without which performance would have been lower. |
2 | The Morgan Stanley Capital International Emerging Markets Index (MSCI Emerging Markets Index) is a market capitalization-weighted index designed to measure equity market performance in 26 global emerging markets. Data is in U.S. dollars. Source: Morgan Stanley Capital International Inc. |
3 | The Morgan Stanley Capital International Emerging Markets Growth Index (MSCI Emerging Markets Growth Index) is a subset of the MSCI Emerging Markets Index and includes only the MSCI Emerging Markets Index stocks which are categorized as growth stocks. The index was added in August 2005 as a comparison to the Fund’s growth-oriented investment style. Data is in U.S. dollars. Source: Morgan Stanley Capital International Inc. |
14
Table of Contents
Market | ||||||||||
Number | Value | |||||||||
of Shares | (Note A) | |||||||||
EQUITY SECURITIES — 89.2% | ||||||||||
FAR EAST — 46.2% | ||||||||||
South Korea — 16.4% | ||||||||||
Daishin Securities Co., Ltd. | 142,500 | $ | 3,185,933 | |||||||
Fine DNC Co., Ltd.** | 167,621 | 1,129,247 | ||||||||
Handsome Co., Ltd. | 190,430 | 2,825,790 | ||||||||
Humax Co., Ltd. | 98,629 | 2,658,792 | ||||||||
Hynix Semiconductor, Inc.** | 110,560 | 3,860,877 | ||||||||
Hyundai Motor Co. | 43,960 | 4,231,397 | ||||||||
LG Card Co., Ltd.** | 54,070 | 2,701,227 | ||||||||
LG Electronics, Inc. | 23,520 | 2,077,792 | ||||||||
NHN Corp.** | 19,618 | 5,240,006 | ||||||||
Samsung Fire & Marine Insurance Co., Ltd. | 18,654 | 2,362,083 | ||||||||
Shinhan Financial Group Co., Ltd. | 99,170 | 4,027,233 | ||||||||
Shinsegae Co., Ltd. | 8,938 | 3,917,034 | ||||||||
Wooree ETI Co., Ltd.** | 102,142 | 1,626,835 | ||||||||
39,844,246 | ||||||||||
Taiwan — 12.3% | ||||||||||
Acer, Inc. | 1,345,260 | 3,380,925 | ||||||||
Asustek Computer, Inc. | 918,000 | 2,824,486 | ||||||||
Compeq Manufacturing Co., Ltd.** | 4,344,000 | 2,507,693 | ||||||||
Delta Electronics, Inc. | 1,533,000 | 3,142,915 | ||||||||
High Tech Computer Corp. | 134,000 | 2,514,554 | ||||||||
Janfusun Fancyworld Corp.** | 3,932,000 | 2,569,308 | ||||||||
Largan Precision Co., Ltd. | 183,750 | 2,899,563 | ||||||||
Taiwan Fertilizer Co., Ltd. | 1,726,000 | 2,011,165 | ||||||||
Taiwan Semiconductor Manufacturing Co., Ltd. — ADR | 353,824 | 3,506,396 | ||||||||
Unimicron Technology Corp. | 3,312,000 | 4,681,486 | ||||||||
30,038,491 | ||||||||||
China — 10.3% | ||||||||||
China Medical Technologies, Inc. — ADR** | 58,100 | 1,850,485 | ||||||||
China Mengniu Dairy Co., Ltd. | 2,600,000 | 2,213,151 | ||||||||
China Mobile, Ltd. | 604,500 | 2,861,252 | ||||||||
Focus Media Holding, Ltd. — ADR** | 87,029 | 2,938,969 | ||||||||
Guangzhou R & F Properties Co., Ltd.** | 1,346,800 | 4,689,869 | ||||||||
Lee & Man Paper Manufacturing Ltd. | 2,238,000 | 2,482,289 | ||||||||
Li Ning Co., Ltd. | 3,746,400 | 2,657,484 | ||||||||
Suntech Power Holdings Co., Ltd.** | 46,200 | 1,258,950 | ||||||||
Zijin Mining Group Co., Ltd. | 9,164,800 | 4,048,344 | ||||||||
25,000,793 | ||||||||||
Indonesia — 1.8% | ||||||||||
PT Bank Mandiri Tbk | 11,886,500 | 1,983,099 | ||||||||
PT Perusahaan Gas Negara Tbk | 3,273,000 | 2,297,426 | ||||||||
�� | 4,280,525 | |||||||||
Malaysia — 1.4% | ||||||||||
Digi.com Berhad** | 1,591,100 | 3,283,657 | ||||||||
Thailand — 1.2% | ||||||||||
Bank of Ayudhya Public Co., Ltd. — NVDR | 7,872,300 | 2,859,166 | ||||||||
Pakistan — 1.2% | ||||||||||
Fauji Fertilizer Co., Ltd. | 1,228,535 | 2,815,949 | ||||||||
Singapore — 0.9% | ||||||||||
Citiraya Industries, Ltd.**# | 2,216,000 | 0 | ||||||||
Olam International, Ltd. | 2,358,000 | 2,141,509 | ||||||||
2,141,509 | ||||||||||
India — 0.7% | ||||||||||
Sify, Ltd. — ADR** | 154,602 | 1,663,518 | ||||||||
Total FAR EAST | 111,927,854 | |||||||||
EUROPE — 16.8% | ||||||||||
Russia — 4.2% | ||||||||||
Lukoil — ADR | 51,703 | 3,050,477 | ||||||||
Sberbank RF | 3,600 | 4,716,000 | ||||||||
Vimpel Communications — ADR** | 53,400 | 2,361,882 | ||||||||
10,128,359 | ||||||||||
United Kingdom — 3.5% | ||||||||||
BHP Billiton PLC | 171,057 | 2,794,395 | ||||||||
Burren Energy PLC | 124,394 | 1,951,849 | ||||||||
Cairn Energy PLC** | 47,229 | 1,560,134 | ||||||||
Tullow Oil PLC | 419,811 | 1,950,157 | ||||||||
8,256,535 | ||||||||||
Turkey — 3.2% | ||||||||||
Denizbank AS** | 515,117 | 3,337,485 | ||||||||
Dogus Otomotiv Servis ve Ticaret AS | 514,940 | 2,611,876 | ||||||||
Yapi Kredi Koray Gayrimenkul Yatirim Ortakligi AS** | 544,934 | 1,839,984 | ||||||||
7,789,345 | ||||||||||
Poland — 2.4% | ||||||||||
Grupa Lotos SA** | 175,979 | 2,394,530 | ||||||||
TVN SA** | 142,321 | 3,417,439 | ||||||||
5,811,969 | ||||||||||
Austria — 1.5% | ||||||||||
Raiffeisen International Bank Holding AG** | 56,200 | 3,696,011 | ||||||||
Kazakhstan — 1.3% | ||||||||||
Kazakhmys PLC** | 237,584 | 3,161,764 | ||||||||
15
Table of Contents
Market | ||||||||||
Number | Value | |||||||||
of Shares | (Note A) | |||||||||
Luxembourg — 0.7% | ||||||||||
Tenaris SA — ADR | 15,500 | $ | 1,774,750 | |||||||
Total EUROPE | 40,618,733 | |||||||||
SOUTH AMERICA — 11.1% | ||||||||||
Brazil — 11.1% | ||||||||||
Banco Bradesco SA | 126,360 | 3,484,992 | ||||||||
Cyrela Brazil Realty SA | 179,710 | 2,459,359 | ||||||||
Gol-Linhas Aereas Inteligentes SA — ADR | 137,196 | 3,870,299 | ||||||||
Localiza Rent-a-Car SA | 189,500 | 2,320,226 | ||||||||
Natura Cosmeticos SA | 54,640 | 2,406,375 | ||||||||
Net Servicos de Comunicacao SA (Pref.)** | 8,117,200 | 3,714,410 | ||||||||
Petroleo Brasileiro SA — ADR | 46,200 | 3,292,674 | ||||||||
Submarino SA | 169,800 | 3,013,600 | ||||||||
Tele Norte Leste Participacoes SA — ADR | 120,904 | 2,166,600 | ||||||||
26,728,535 | ||||||||||
Total SOUTH AMERICA | 26,728,535 | |||||||||
AFRICA — 7.1% | ||||||||||
South Africa — 7.1% | ||||||||||
Aspen Pharmacare Holdings, Ltd.** | 567,441 | 2,995,264 | ||||||||
Foschini, Ltd. | 352,060 | 2,898,827 | ||||||||
Harmony Gold Mining Co., Ltd.** | 201,528 | 2,704,026 | ||||||||
MTN Group, Ltd. | 330,511 | 3,246,347 | ||||||||
Nedbank Group, Ltd. | 182,334 | 2,881,612 | ||||||||
Sasol, Ltd. | 67,239 | 2,406,896 | ||||||||
17,132,972 | ||||||||||
Total AFRICA | 17,132,972 | |||||||||
NORTH AMERICA — 6.6% | ||||||||||
Mexico — 6.2% | ||||||||||
America Movil SA de CV — L — ADR | 136,945 | 4,007,011 | ||||||||
Fomento Economico Mexicano, SA de CV — ADR | 33,000 | 2,392,830 | ||||||||
Urbi Desarrollos Urbanos SA de CV** | 634,736 | 4,387,782 | ||||||||
Wal-Mart de Mexico SA de CV | 748,600 | 4,154,000 | ||||||||
14,941,623 | ||||||||||
Canada — 0.4% | ||||||||||
Yamana Gold Inc.** | 148,800 | 983,568 | ||||||||
Total NORTH AMERICA | 15,925,191 | |||||||||
MIDDLE EAST — 1.4% | ||||||||||
Israel — 1.4% | ||||||||||
Teva Pharmaceutical Industries, Ltd. — ADR | 77,100 | 3,316,071 | ||||||||
Total MIDDLE EAST | 3,316,071 | |||||||||
Total EQUITY SECURITIES (Cost $158,603,984) | 215,649,356 | |||||||||
EQUITY CERTIFICATES — 4.6% | ||||||||||
FAR EAST — 4.6% | ||||||||||
India — 4.6% | ||||||||||
Bharat Heavy Electricals, Ltd.† | 59,906 | 1,842,822 | ||||||||
Bharti Tele-Ventures, Ltd.**† | 378,011 | 2,890,083 | ||||||||
Cipla, Ltd.† | 269,609 | 2,655,379 | ||||||||
Jaiprakash Associates, Ltd.† | 440,691 | 3,805,896 | ||||||||
11,194,180 | ||||||||||
Total EQUITY CERTIFICATES (Cost $8,208,494) | 11,194,180 | |||||||||
RIGHTS — 0.1% | ||||||||||
FAR EAST — 0.1% | ||||||||||
Korea — 0.1% | ||||||||||
Fine DNC Co., Ltd. (Foreign) — Rights** | 71,578 | 125,333 | ||||||||
Total RIGHTS (Cost $0) | 125,333 | |||||||||
TOTAL INVESTMENTS (COST $166,812,478) | 93.9% | $ | 226,968,869 | |||||||
Other Assets in Excess of Liabilities | 6.1% | 14,617,958 | ||||||||
Net Assets | 100.0% | $ | 241,586,827 | |||||||
16
Table of Contents
The federal income tax basis and unrealized appreciation (depreciation) for all investments is as follows: | |||||||||
Basis: | $ | 169,492,077 | |||||||
Gross Appreciation | $ | 58,935,183 | |||||||
Gross Depreciation | (1,458,391 | ) | |||||||
Net Appreciation | $ | 57,476,792 | |||||||
** | Non-income producing security |
† | Restricted security — Investments in securities not registered under the Securities Act of 1933, excluding 144A securities. At December 31, 2005, the value of these restricted securities amounted to $11,194,180 or 4.6% of net assets. |
Additional information on each restricted holding is as follows: |
Acquisition | Acquisition | |||||||
Security | Date(s) | Cost | ||||||
Bharat Heavy Electricals, Ltd. | 10/31/05 to 12/13/05 | $ | 1,545,604 | |||||
Bharti Tele-Ventures, Ltd. | 10/07/04 to 11/11/05 | $ | 1,375,400 | |||||
Cipla, Ltd. | 07/15/05 to 12/12/05 | $ | 2,190,865 | |||||
Jaiprakash Associates, Ltd. | 08/05/05 to 12/28/05 | $ | 3,096,625 |
ADR — American Depository Receipt
# | This security has been halted from trading since January 24, 2005 and is being valued at a fair value as determined in good faith by or under the direction of the Driehaus Mutual Funds’ Board of Trustees. |
17
Table of Contents
Percent of | ||||
Industry | Net Assets | |||
Airlines | 1.6% | |||
Automobiles | 3.8% | |||
Banking | 9.5% | |||
Beverages | 1.0% | |||
Broadcasting & Publishing Services | 1.4% | |||
Business & Public Services | 2.9% | |||
Chemicals | 3.0% | |||
Consumer Durables/ Multi-Industry | 2.3% | |||
Consumer Non-Durables/ Multi-Industry | 1.0% | |||
Consumer Services/ Multi-Industry | 3.4% | |||
Drugs | 1.4% | |||
Electrical & Electronics | 5.0% | |||
Electronic Components | 7.7% | |||
Energy Equipment | 1.0% | |||
Energy Sources | 3.7% | |||
Financial Services | 4.9% | |||
Food & Household | 1.8% | |||
Gas Pipelines | 0.7% | |||
Gold Mining | 3.2% | |||
Health Care | 2.3% | |||
Industrial Machinery | 0.8% | |||
Insurance | 1.0% | |||
International Trading | 1.2% | |||
Leisure & Tourism | 1.0% | |||
Medical Instruments | 0.8% | |||
Merchandising | 5.6% | |||
Metals — Nonferrous | 2.5% | |||
Oil | 2.6% | |||
Real Estate | 2.9% | |||
Semiconductors | 1.4% | |||
Software & EDP Services | 0.7% | |||
Technology/ Multi-Industry | 2.4% | |||
Telecommunications | 4.7% | |||
Telecommunications Equipment & Services | 1.0% | |||
Telephone Utilities | 3.7% | |||
Other Assets in Excess of Liabilities | 6.1% | |||
TOTAL | 100.0% | |||
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Table of Contents
ASSETS: | |||||||
Investments, at market value (Cost $166,812,478) | $ | 226,968,869 | |||||
Foreign currency (Cost $3,359,450) | 3,411,139 | ||||||
Cash | 11,724,886 | ||||||
Receivables: | |||||||
Dividends | 348,112 | ||||||
Interest | 18,383 | ||||||
Investment securities sold | 4,297,063 | ||||||
Fund shares sold | 2,722,148 | ||||||
Net unrealized appreciation on unsettled foreign currency forward contracts from transaction hedges | 5,986 | ||||||
Prepaid expenses and other assets | 40,793 | ||||||
TOTAL ASSETS | 249,537,379 | ||||||
LIABILITIES: | |||||||
Payables: | |||||||
Investment securities purchased | 7,284,828 | ||||||
Fund shares redeemed | 206,662 | ||||||
Distribution payable | 4,824 | ||||||
Due to affiliates | 287,917 | ||||||
Foreign taxes | 7,642 | ||||||
Accrued expenses | 158,679 | ||||||
TOTAL LIABILITIES | 7,950,552 | ||||||
NET ASSETS | $ | 241,586,827 | |||||
SHARES OUTSTANDING (Unlimited shares authorized, no par value) | 8,538,540 | ||||||
NET ASSET VALUE PER SHARE | $ | 28.29 | |||||
NET ASSETS CONSISTED OF THE FOLLOWING AT DECEMBER 31, 2005: | |||||||
Paid-in capital | $ | 182,168,744 | |||||
Accumulated net investment loss | (152,608 | ) | |||||
Accumulated net realized loss | (644,733 | ) | |||||
Unrealized net foreign exchange gain | 59,033 | ||||||
Unrealized net appreciation on investments | 60,156,391 | ||||||
NET ASSETS | $ | 241,586,827 | |||||
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Table of Contents
INVESTMENT LOSS: | �� | ||||||||
Income: | |||||||||
Dividends (Net of non-reclaimable taxes of $322,397) | $ | 3,044,332 | |||||||
Interest | 79,050 | ||||||||
Other | 1,295 | ||||||||
Total income | 3,124,677 | ||||||||
Expenses: | |||||||||
Investment advisory fee | 2,350,950 | ||||||||
Administration fee | 218,318 | ||||||||
Professional fees | 111,897 | ||||||||
Federal and state registration fees | 26,500 | ||||||||
Custodian fee | 336,026 | ||||||||
Transfer agent fees | 53,401 | ||||||||
Trustees’ fees | 26,400 | ||||||||
Miscellaneous | 127,343 | ||||||||
Total expenses | 3,250,835 | ||||||||
Fees paid indirectly | (94,456 | ) | |||||||
Net expenses | 3,156,379 | ||||||||
Net investment loss | (31,702 | ) | |||||||
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: | |||||||||
Net realized gain from security transactions | 26,582,648 | ||||||||
Net realized foreign exchange loss | (806,952 | ) | |||||||
Net change in unrealized foreign exchange gain | 12,332 | ||||||||
Net change in unrealized appreciation of investments | 28,761,259 | ||||||||
Net realized and unrealized gain on investments and foreign currency transactions | 54,549,287 | ||||||||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | 54,517,585 | |||||||
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For the year | For the year | ||||||||||
ended | ended | ||||||||||
December 31, 2005 | December 31, 2004 | ||||||||||
INCREASE IN NET ASSETS: | |||||||||||
Operations: | |||||||||||
Net investment loss | $ | (31,702 | ) | $ | (301,840 | ) | |||||
Net realized gain on investments and foreign currency transactions | 25,775,696 | 15,605,052 | |||||||||
Net change in unrealized gain on investments and foreign currency transactions | 28,773,591 | 10,297,495 | |||||||||
Net increase in net assets resulting from operations | 54,517,585 | 25,600,707 | |||||||||
Distributions to shareholders: | |||||||||||
Net investment income | (570,827 | ) | (245,634 | ) | |||||||
Capital gains | (25,810,044 | ) | (11,194,675 | ) | |||||||
Total distributions to shareholders | (26,380,871 | ) | (11,440,309 | ) | |||||||
Capital share transactions: | |||||||||||
Proceeds from shares sold | 119,850,579 | 56,874,273 | |||||||||
Reinvestment of distributions | 25,961,648 | 11,397,087 | |||||||||
Cost of shares redeemed | (75,911,982 | ) | (38,979,744 | ) | |||||||
Redemption fees | 70,067 | 42,180 | |||||||||
Net increase in net assets derived from capital share transactions | 69,970,312 | 29,333,796 | |||||||||
Total increase in net assets | 98,107,026 | 43,494,194 | |||||||||
NET ASSETS: | |||||||||||
Beginning of period | $ | 143,479,801 | $ | 99,985,607 | |||||||
End of period (Including accumulated net investment loss of $152,608 and $702,077, respectively) | $ | 241,586,827 | $ | 143,479,801 | |||||||
Capital share transactions are as follows: | |||||||||||
Shares issued | 4,518,939 | 2,661,957 | |||||||||
Shares reinvested | 938,938 | 530,591 | |||||||||
Shares redeemed | (3,157,344 | ) | (1,881,701 | ) | |||||||
Net increase from capital share transactions | 2,300,533 | 1,310,847 | |||||||||
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For the year | For the year | For the year | For the year | For the year | ||||||||||||||||||
ended | ended | ended | ended | ended | ||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | ||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||
Net asset value, beginning of period | $ | 23.00 | $ | 20.29 | $ | 12.26 | $ | 13.27 | $ | 13.57 | ||||||||||||
INCOME (LOSS) FROM INVESTMENT OPERATIONS: | ||||||||||||||||||||||
Net investment income (loss) | 0.04 | (0.01 | ) | 0.00 | (0.09 | ) | (0.11 | ) | ||||||||||||||
Net realized and unrealized gain (loss) on investments and foreign currency transactions | 8.83 | 4.75 | 8.03 | (0.93 | ) | (0.16 | ) | |||||||||||||||
Total income (loss) from investment operations | 8.87 | 4.74 | 8.03 | (1.02 | ) | (0.27 | ) | |||||||||||||||
LESS DISTRIBUTIONS: | ||||||||||||||||||||||
Dividends from net investment income | (0.08 | ) | (0.04 | ) | — | — | (0.03 | ) | ||||||||||||||
Distributions from capital gains | (3.51 | ) | (2.00 | ) | — | — | — | |||||||||||||||
Total distributions | (3.59 | ) | (2.04 | ) | — | — | (0.03 | ) | ||||||||||||||
Redemption fees added to paid-in capital | 0.01 | 0.01 | 0.00 | ~ | 0.01 | 0.00 | ~ | |||||||||||||||
Net asset value, end of period | $ | 28.29 | $ | 23.00 | $ | 20.29 | $ | 12.26 | $ | 13.27 | ||||||||||||
Total Return | 38.95 | % | 24.12 | % | 65.50 | % | (7.61 | )% | (1.98 | )% | ||||||||||||
RATIOS/SUPPLEMENTAL DATA | ||||||||||||||||||||||
Net assets, end of period (in 000’s) | $ | 241,587 | $ | 143,480 | $ | 99,986 | $ | 35,932 | $ | 21,953 | ||||||||||||
Ratio of expenses before fees paid indirectly to average net assets | 2.07 | % | 2.23 | % | 2.35 | %† | 2.50 | %† | 2.50 | %† | ||||||||||||
Ratio of net expenses to average net assets | 2.01 | %# | 2.03 | %# | 2.34 | %†# | 2.16 | %†# | 2.49 | %†# | ||||||||||||
Ratio of net investment income (loss) to average net assets | (0.02 | )%# | (0.29 | )%# | 0.04 | %†# | (0.76 | )%†# | (0.79 | )%†# | ||||||||||||
Portfolio turnover | 349.69 | % | 356.90 | % | 432.47 | % | 355.14 | % | 505.50 | % |
~ | Amount represents less than $0.01 per share |
† | Such ratios are after administrative agent and transfer agent waivers and Adviser expense reimbursements, when applicable. PFPC Inc., the administrative agent and transfer agent, waived a portion of its fees from December 31,1997 through December 31, 2000. The Adviser agreed to absorb other operating expenses to the extent necessary to ensure that the total Fund operating expenses (other than interest, taxes, brokerage commissions and other portfolio transaction expenses, capital expenditures, and extraordinary expenses) would not exceed the Fund’s operating expense cap for the first sixty-six months of its operations. For the period June 1, 1999 through June 30, 2002, the operating expense cap was 2.50% of average net assets. For the period July 1, 2002 through June 30, 2003, the Fund was reimbursed for expenses exceeding the 2.50% expense cap after reduction of amounts received through commission recapture programs that were applied to Fund expenses. |
# | Such ratios are net of fees paid indirectly (see Note B in the Notes to Financial Statements). |
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A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization
The Driehaus Mutual Funds (the “Trust”) is a registered management investment company, organized as a Delaware statutory trust, with two separate series (“Funds”). The Trust was organized under an Agreement and Declaration of Trust dated May 31, 1996 and may issue an unlimited number of full and fractional units of beneficial interest (shares) without par value. The two Funds included in the Trust are as follows:
Fund | Commencement of Operations | |||
Driehaus International Discovery Fund | 12/31/98 | |||
Driehaus Emerging Markets Growth Fund | 12/31/97 | |||
The investment objective of the Funds is to maximize capital appreciation.
The Driehaus International Discovery Fund seeks to achieve its objective by generally investing in equity securities of small to mid-size foreign companies; however, the Fund may shift its focus toward large cap foreign stocks when market conditions suggest doing so will help the Fund achieve its objective.
The Driehaus Emerging Markets Growth Fund seeks to achieve its objective by investing primarily in equity securities of emerging markets companies.
Fiscal Year End
The fiscal year end for the Funds is December 31.
Securities Valuation and Transactions
Equity securities are valued at the last sale price as of the close of the appropriate exchange or other designated time. In addition, if quotations are not readily available, if the values have been materially affected by events occurring after the closing of a foreign market, or if there has been a movement in the United States market that exceeds a certain threshold, assets may be valued at fair value as determined in good faith by or under the direction of the Trust’s Board of Trustees. Events that may materially affect asset values that could cause a fair value determination include, but are not limited to: corporate announcements relating to a specific security; natural and other disasters which may impact an entire market or region; and political and other events which may be global or impact a particular country or region.
Securities transactions are accounted for on trade date. The cost of investments sold is determined by the use of specific identification method for both financial reporting and income tax purposes. Interest income is recorded on an accrual basis. Dividend income, net of non-reclaimable foreign taxes withheld, is recorded on the ex-dividend date.
The Funds determine income and expenses daily.
Federal Income Taxes
No provision is made for Federal income taxes since each Fund has elected to be taxed as a “regulated investment company” under Subchapter M of the Internal Revenue Code (the “Code”) and has made and declared all the required distributions to its shareholders in amounts sufficient to relieve the Fund from all or substantially all Federal income and excise taxes under provisions of current Federal tax law.
The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with Federal income tax regulations, which may differ from generally accepted accounting principles.
For the year ended December 31, 2005, the following permanent reclassifications were recorded to the components of net assets to reflect tax character. These reclassifications relate primarily to foreign currency
23
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losses, sales of passive foreign investment companies and net operating losses. Results of operations and net assets were not affected by these classifications.
Driehaus | Driehaus | |||||||
International | Emerging Markets | |||||||
Discovery Fund | Growth Fund | |||||||
Undistributed ordinary income | $ | 776,684 | $ | 1,151,998 | ||||
Undistributed net realized gain | (776,684 | ) | (1,151,998 | ) |
During the year ended December 31, 2005, the Driehaus International Discovery Fund utilized $5,786,701 of capital loss carryforwards and as of December 31, 2005, the Fund has capital loss carryforwards of $111,765,702 expiring in 2008 and $24,839,330 expiring in 2009. During the year ended December 31, 2005, the Driehaus Emerging Markets Growth Fund utilized $949,637 of capital loss carryforwards and as of December 31, 2005, the Fund has capital loss carryforwards of $645,275 expiring in 2008 and $707,360 expiring in 2009. To the extent that the Funds realize future net capital gains, those capital gains will be offset by any unused capital loss carryforward subject to the limitations described below. For the year ended December 31, 2005, the Driehaus International Discovery Fund and the Driehaus Emerging Markets Growth Fund realized no post-October capital losses. The Driehaus International Discovery Fund realized post-October foreign currency losses of $292,339, which were deferred for tax purposes and will be recognized on January 1, 2006, and the Driehaus Emerging Markets Growth Fund realized post-October foreign currency losses of $152,608 which were deferred for tax purposes and will be recognized on January 1, 2006.
Included in the capital loss carryforward amounts stated above are capital losses that the Driehaus International Discovery Fund inherited from its merger with the Driehaus International Growth Fund and the Driehaus European Opportunity Fund on September 29, 2003 of approximately $133,980,941 and $2,624,091, respectively, which may be applied against any realized net taxable capital gains in future years or until December 31, 2009. Section 382 of the Code imposes certain limitations that will likely reduce the Fund’s ability to use the majority of these capital loss carryforwards.
Included in the capital loss carryforward amounts stated above are capital losses that the Driehaus Emerging Markets Growth Fund inherited from its merger with the Driehaus Asia Pacific Growth Fund on September 29, 2003 of approximately $1,352,635, which may be applied against any realized net taxable capital gains in future years or until December 31, 2009. Section 382 of the Code imposes certain limitations that will likely reduce the Fund’s ability to use the majority of these capital loss carryforwards.
Distributions to Shareholders
The tax character of distributions paid during the fiscal years ended December 31, 2005 and December 31, 2004 was as follows:
Driehaus | Driehaus | ||||||||||||||||
International | Emerging Markets | ||||||||||||||||
Discovery Fund | Growth Fund | ||||||||||||||||
Distributions paid from: | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Ordinary income | $ | 41,961,124 | $ | 4,447,267 | $ | 16,037,581 | $ | 5,508,814 | |||||||||
Net long-term capital gains | 12,786,172 | 7,172,002 | 10,343,290 | 5,931,495 | |||||||||||||
Total distributions paid | $ | 54,747,296 | $ | 11,619,269 | $ | 26,380,871 | $ | 11,440,309 | |||||||||
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Table of Contents
As of December 31, 2005, the components of net assets on a tax basis were as follows:
Driehaus | Driehaus | ||||||||
International | Emerging Markets | ||||||||
Discovery Fund | Growth Fund | ||||||||
Undistributed ordinary income | $ | 6,024,483 | $ | 1,568,624 | |||||
Undistributed long-term capital gain | 4,359,166 | 1,818,878 | |||||||
Accumulated earnings | $ | 10,383,649 | $ | 3,387,502 | |||||
Paid-in capital | 574,671,440 | 182,168,744 | |||||||
Accumulated capital and other losses | (136,897,371 | ) | (1,505,244 | ) | |||||
Unrealized appreciation/(depreciation) on foreign currency | 62,529 | 59,033 | |||||||
Unrealized appreciation on investments | 155,028,914 | 57,476,792 | |||||||
Net assets | $ | 603,249,161 | $ | 241,586,827 | |||||
The differences between book-basis and tax-basis unrealized appreciation are attributable primarily to the tax deferral of losses on wash sales.
Foreign Currency Translation
Foreign currency is translated into U.S. dollar values based upon the current rates of exchange on the date of the Funds’ valuations.
Net realized foreign exchange gains or losses which are reported by the Funds result from currency gains and losses on transaction hedges arising from changes in exchange rates between the trade and settlement dates on forward contracts underlying securities transactions, and the difference between the amounts accrued for dividends, interest, and foreign taxes and the amounts actually received or paid in U.S. dollars for these items. Net unrealized foreign exchange gains and losses result from changes in the U.S. dollar value of assets and liabilities (other than investments in securities), which are denominated in foreign currencies, as a result of changes in exchange rates.
Net realized foreign exchange gains or losses on portfolio hedges result from the use of forward contracts to hedge portfolio positions denominated or quoted in a particular currency in order to reduce or limit exposure in that currency. The Funds had no portfolio hedges during the year ended December 31, 2005.
The Funds do not isolate that portion of the results of operations which results from fluctuations in foreign exchange rates on investments. These fluctuations are included with the net realized gain (loss) from security transactions and the net change in unrealized appreciation (depreciation) of investments.
Use of Estimates
The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net increases or decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Indemnifications
Under the Trust’s organizational documents, the Officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business, the Trust enters into contracts that provide general indemnifications to other parties. The Funds’ maximum exposure under these agreements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred. However, the Funds have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote.
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B. | INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES, AND ADMINISTRATIVE FEES |
Richard H. Driehaus, the President of the Trust, is also the Chairman of the Board, sole director, and sole shareholder of Driehaus Capital Management, Inc. (“DCM”), a registered investment adviser, and of Driehaus Securities Corporation (“DSC”), a registered broker-dealer.
DCM serves as the Funds’ investment adviser. In return for its services to the Funds, DCM receives a monthly fee, computed and accrued daily at an annual rate of 1.5% of each Fund’s average daily net assets.
The amounts accrued and payable to DCM during the year ended December 31, 2005, are as follows:
Advisory Fees | ||||||||
Payable | ||||||||
(included in Due | ||||||||
Fund | Advisory Fees | to affiliates) | ||||||
Driehaus International Discovery Fund | $ | 5,889,585 | $ | 712,133 | ||||
Driehaus Emerging Markets Growth Fund | 2,350,950 | 287,917 | ||||||
The Funds direct certain portfolio trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the Funds part of the commissions generated. Such rebates are currently used to offset a portion of the Funds’ operating expenses. For the year ended December 31, 2005, these arrangements reduced the expenses of the Driehaus International Discovery Fund and the Driehaus Emerging Markets Growth Fund by $207,826 (2.9%) and $94,456 (2.9%), respectively.
DSC is the Funds’ distributor. DSC also acts as a broker for the Funds for domestically traded securities. For the year ended December 31, 2005, the Funds paid the following brokerage commissions:
Total | Commissions | Shares Traded | ||||||||||
Fund | Commissions | Paid to DSC | through DSC | |||||||||
Driehaus International Discovery Fund | $ | 3,319,794 | $ | 104,376 | 4,684,728 | |||||||
Driehaus Emerging Markets Growth Fund | 2,902,135 | 326,637 | 8,488,543 | |||||||||
A portion of these commissions are, in turn, paid by DSC to third parties for clearing and execution services.
Certain officers of the Trust are also officers of DCM and DSC. No such officers received compensation from the Funds.
PFPC Inc. (“PFPC”), an indirect subsidiary of PNC Bank Corp., serves as the Funds’ administrative and accounting agent. In compensation for these services, PFPC receives the larger of a monthly minimum fee or a monthly fee based upon average net assets. PFPC also acts as the transfer agent and dividend disbursing agent for the Funds. In compensation for these services, PFPC receives a monthly fee based on shareholder processing activity during the month.
C. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The Funds invest in equity certificates which allow the Funds to participate in the appreciation (depreciation) of the underlying security without actually owning the underlying security. These instruments are purchased pursuant to an agreement with a financial institution and are valued at a calculated market price based on the value of the underlying security in accordance with the agreement. At December 31, 2005, the Driehaus International Discovery Fund and the Driehaus Emerging Markets Growth Fund had unrealized appreciation of $4,497,106 and $2,985,686, respectively, as a result of their investment in these financial instruments. The aggregate market values of these certificates for the Driehaus International Discovery Fund and the Driehaus Emerging Markets Growth Fund represented 3.0% and 4.9%, respectively, of their total market values at December 31, 2005.
At December 31, 2005, the Funds had foreign currency forward contracts outstanding under which they are obligated to exchange currencies at specified future dates. At December 31, 2005, the Funds’ currency transactions are limited to transaction hedges.
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The contractual amounts of foreign currency forward contracts do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. Risks arise from the possible inability of counter parties to meet the terms of their contracts and from movements in currency values.
The Funds had the following outstanding contracts at December 31, 2005:
Driehaus International Discovery Fund Transaction Hedges: | |
Foreign Currency Purchased: |
Unrealized | ||||||||||||||||
Appreciation | ||||||||||||||||
US Dollars | Settlement | (Depreciation) | ||||||||||||||
Sold | Foreign Currency Purchased | Date | at December 31, 2005 | |||||||||||||
$ | 604,306 | 824,316 | Australian Dollar | January 2006 | $ | 1,814 | ||||||||||
968,723 | 2,265,165 | Brazilian Real | January 2006 | (2,617 | ) | |||||||||||
2,673,184 | 1,553,735 | British Pound Sterling | January 2006 | 3,372 | ||||||||||||
529,638 | 615,678 | Canadian Dollar | January 2006 | 1,929 | ||||||||||||
639,922 | 4,961,734 | Hong Kong Dollar | January 2006 | (51 | ) | |||||||||||
4,522,410 | 533,350,455 | Japanese Yen | January 2006 | (4,952 | ) | |||||||||||
1,330,300 | 8,978,594 | Norwegian Krone | January 2006 | 729 | ||||||||||||
1,508,984 | 2,508,912 | Singapore Dollar | January 2006 | 272 | ||||||||||||
830,524 | 1,091,350 | Swiss Franc | January 2006 | 789 | ||||||||||||
$ | 1,285 | |||||||||||||||
Foreign Currency Sold:
Unrealized | ||||||||||||||||
Appreciation | ||||||||||||||||
US Dollars | Settlement | (Depreciation) | ||||||||||||||
Purchased | Foreign Currency Sold | Date | at December 31, 2005 | |||||||||||||
$ | 7,144,609 | 842,599,475 | Japanese Yen | January 2006 | $ | 29,016 | ||||||||||
2,160,214 | 1,824,668 | Euro | January 2006 | (2,800 | ) | |||||||||||
1,814,465 | 3,016,820 | Singapore Dollar | January 2006 | (1,637 | ) | |||||||||||
$ | 24,579 | |||||||||||||||
Net unrealized appreciation | $ | 25,864 | ||||||||||||||
Transaction Hedges:
Foreign Currency Purchased:
Unrealized | ||||||||||||||||
Appreciation | ||||||||||||||||
US Dollars | Settlement | (Depreciation) | ||||||||||||||
Sold | Foreign Currency Purchased | Date | at December 31, 2005 | |||||||||||||
$ | 587,315 | 1,373,318 | Brazilian Real | January 2006 | $ | (1,587 | ) | |||||||||
248,217 | 144,271 | British Pound Sterling | January 2006 | 723 | ||||||||||||
474,404 | 3,001,789 | South African Rand | January 2006 | 1,420 | ||||||||||||
1,082,490 | 1,094,234,610 | South Korean Won | January 2006 | (6,843 | ) | |||||||||||
482,190 | 19,781,844 | Thai Baht | January 2006 | (294 | ) | |||||||||||
$ | (6,581 | ) | ||||||||||||||
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Table of Contents
Driehaus Emerging Markets Growth Fund — (Continued)
Foreign Currency Sold:
Unrealized | ||||||||||||||||
Appreciation | ||||||||||||||||
US Dollars | Settlement | (Depreciation) | ||||||||||||||
Purchased | Foreign Currency Sold | Date | at December 31, 2005 | |||||||||||||
$ | 305,434 | 714,197 | Brazilian Real | January 2006 | $ | 2,705 | ||||||||||
471,056 | 3,652,400 | Hong Kong Dollar | January 2006 | 36 | ||||||||||||
1,782,067 | 94,503,034 | Philippine Peso | January 2006 | 9,120 | ||||||||||||
146,366 | 147,923,852 | South Korean Won | January 2006 | 706 | ||||||||||||
$ | 12,567 | |||||||||||||||
Net unrealized appreciation | $ | 5,986 | ||||||||||||||
D. | INVESTMENT TRANSACTIONS |
The aggregate purchases and sales of investment securities, other than short-term obligations, for the year ended December 31, 2005, were as follows:
Fund | Purchases | Sales | ||||||
Driehaus International Discovery Fund | $ | 763,864,556 | $ | 683,103,032 | ||||
Driehaus Emerging Markets Growth Fund | 559,167,172 | 525,897,436 | ||||||
E. | RESTRICTED SECURITIES |
Restricted securities are securities that are not registered for sale under the Securities Act of 1933 or applicable foreign law and that may be re-sold only in transactions exempt from applicable registration. Restricted securities include Rule 144A securities which may be sold normally to qualified institutional buyers. At December 31, 2005, the Funds held no restricted securities, other than equity certificates. Since an investment in equity certificates represents an agreement entered into with a financial institution, with terms set by such financial institution, these instruments are also deemed to be restricted (see Note C).
F. | LINE OF CREDIT |
The Funds have a $50 million line of credit consisting of a $25 million committed line and a $25 million uncommitted line. This line of credit is available primarily to meet large, unexpected shareholder withdrawals subject to certain restrictions. The Funds have agreed to pay commitment fees computed at a rate of 0.125% per annum on the average daily amount of the available committed line. Interest is charged at a rate per annum equal to the Federal Funds Rate in effect at the time of borrowings plus 1%. At December 31, 2005, the Funds had no outstanding borrowings under the line of credit.
G. | OFF BALANCE SHEET RISKS |
The Funds’ investments in foreign securities may entail risks due to the potential for political and economic instability in the countries where the issuers of these securities are located. In addition, foreign exchange fluctuations could affect the value of positions held. These risks are generally intensified in emerging markets.
H. | REDEMPTION FEES |
The Funds may charge a redemption fee of 2.00% of the redemption amount for shares redeemed within 60 days of purchase. This redemption fee became effective for shares purchased after July 31, 2000. The redemption fees are recorded in paid-in capital.
I. | SUBSEQUENT EVENTS |
As of January 1, 2006, Driehaus Capital Management, Inc. and Driehaus Securities Corporation each merged with and changed their names to Driehaus Capital Management LLC and Driehaus Securities LLC, respectively. This is only a change in legal structure and there is no change in control or business operations of the companies.
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To the Shareholders and Board of Trustees of the Driehaus Mutual Funds:
We have audited the accompanying statements of assets and liabilities of the Driehaus Mutual Funds (comprising the Driehaus International Discovery Fund and the Driehaus Emerging Markets Growth Fund) (the “Funds”), including the schedules of investments, as of December 31, 2005, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the year ended December 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial highlights in their report dated February 8, 2002.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 misstatement. We were not engaged to perform an audit of the Funds’ internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2005, by correspondence with the custodian and brokers. 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 each of the respective Funds constituting the Driehaus Mutual Funds at December 31, 2005, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended and the financial highlights for each of the four years in the period then ended, in conformity with U.S. generally accepted accounting principles.
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Chicago, Illinois
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The following table sets forth certain information with respect to the Trustees of the Trust:
Number of | ||||||||||
Term of | Portfolios in | |||||||||
Office and | the Fund | Other | ||||||||
Position(s) | Length of | Principal | Complex | Directorships | ||||||
Name, Address and | Held with | Time | Occupations(s) | Overseen by | Held by | |||||
Date of Birth | the Trust | Served** | During Past 5 Years | Trustee | Trustee | |||||
Interested Trustee:* | ||||||||||
Richard H. Driehaus 25 East Erie Street Chicago, IL 60611 DOB: 07/1942 | Trustee and President | Since 1996 | Chairman of the Board of the Adviser and the Distributor; Chief Executive Officer of Driehaus Capital Management (USVI) LLC (“USVI”); Chief Investment Officer and Portfolio Manager of the Adviser and USVI. | 2 | Driehaus Enterprise Management, Inc.; Vintage Properties, Inc.; Davies 53 Limited; The Richard H. Driehaus Foundation; and The Richard H. Driehaus Museum | |||||
Independent Trustees: | ||||||||||
A.R. Umans c/o Driehaus Capital Management LLC 25 East Erie Street Chicago, IL 60611 DOB: 03/1927 | Trustee and Chairman | Since 1996 Since 2005 | Chairman of the Board, Commerce National Group (investment co.) since 2005; Chairman of the Board and Chief Executive Officer, RHC/Spacemaster Corporation (manufacturing) prior thereto. | 2 | None | |||||
Francis J. Harmon c/o Driehaus Capital Management LLC 25 East Erie Street Chicago, IL 60611 DOB: 11/1942 | Trustee | Since 1998 | Principal Account Executive — Labor Affairs, Blue Cross and Blue Shield of Illinois. | 2 | None | |||||
Daniel F. Zemanek c/o Driehaus Capital Management LLC 25 East Erie Street Chicago, IL 60611 DOB: 05/1942 | Trustee | Since 1996 | Senior Vice President of Sunrise Development, Inc. since January 2003; Consultant, real-estate development, August 1998 to January 2003. | 2 | None |
* | Mr. Driehaus is an “interested person” of the Trust, the Adviser and the Distributor, as defined in the Investment Company act of 1940, because he is an officer of the Adviser and the Distributor. In addition, Mr. Driehaus controls the Adviser and the Distributor. |
** | Each Trustee will serve as a Trustee of the Trust until (i) termination of the Trust, or (ii) until the Trustee’s retirement, resignation or death, or (iii) as otherwise specified in the Trust’s governing documents. |
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The following table sets forth certain information with respect to the advisory board member and officers of the Trust:
Term of | ||||||
Office and | ||||||
Position(s) | Length of | Principal | ||||
Name, Address and | Held with | Time | Occupations(s) | |||
Date of Birth | the Trust | Served | During Past 5 Years | |||
Arthur B. Mellin1 190 South LaSalle Street Chicago, IL 60603 DOB: 11/1942 | Advisory Board Member | Since 1998 | President of Mellin Securities Incorporated and Mellin Asset Management, Inc. | |||
John E. Angley 25 East Erie Street Chicago, IL 60611 DOB: 07/1949 | Vice President | Since 20042 | Director of Sales of the Adviser since 1999; President and Chief Operating Officer of Kemper Asset Management, Inc., prior thereto. | |||
Michelle L. Cahoon 25 East Erie Street Chicago, IL 60611 DOB: 07/1966 | Treasurer | Since 20022 | Vice President, Treasurer and Chief Financial Officer of the Adviser and Distributor since 2004; Vice President and Controller of the Adviser since 2003; Vice President, Treasurer and Controller of the Distributor since 2003; Controller of the Adviser and the Distributor since 2002; Manager with Arthur Andersen LLP from 1992-2002. | |||
Joseph D. McDermott 25 East Erie Street Chicago, IL 60611 DOB: 10/1968 | Chief Compliance Officer | Since 20042 | Chief Compliance Officer of the Adviser and Distributor and Chief Compliance Officer of Driehaus Capital Management (USVI) LLC since 2004; Director of Compliance of the Adviser and Distributor from 2000-2003. | |||
Tina M. Payne 301 Bellevue Parkway Wilmington, DE 19809 DOB: 05/1974 | Secretary | Since 20052 | Vice President and Associate Counsel, PFPC Inc. (financial services company) since 2003; Associate, Stradley, Ronon, Stevens & Young, LLC (law firm) from 2001-2003. | |||
Kelly C. Dehler 25 East Erie Street Chicago, IL 60611 DOB: 10/1961 | Assistant Secretary | Since 20042 | Attorney with the Adviser since 2004; Regulatory Compliance Officer Allstate Financial Services, L.L.C. (retail broker dealer) from 2003-2004; Assistant Secretary and Regulatory Associate of the Adviser from 2002-2003; Senior Paralegal with the Adviser from 2000-2002. | |||
Candace A. Croal 301 Bellevue Parkway Wilmington, DE 19809 DOB: 06/1975 | Assistant Secretary | Since 20052 | Senior Regulatory Administrator, PFPC Inc. (financial services company) since 2002; Senior Paralegal, Morgan Lewis & Bockius, L.L.P. (law firm) from 1999-2002. |
1 | Mr. Driehaus and Mr. Mellin are brothers-in-law. |
2 | Officers of the Trust are elected annually. |
The Statement of Additional Information for the Driehaus Mutual Funds contains more detail about the Trust’s trustees and officers and is available upon request, without charge. For further information, please call 1-800-560-6111.
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As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, including sales charges; redemption fees; and exchange fees and (2) ongoing costs, including management fees; distribution (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire six months ended December 31, 2005.
Actual Expenses
The first line of the tables below (“Actual”) provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expense that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the tables below (“Hypothetical”) provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. You may use this information to compare the ongoing costs of investing in the Funds versus other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges, redemption fees or exchange fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Driehaus International Discovery Fund
Expenses Paid During | ||||||||||||
Beginning Account | Ending Account Value | Six Months Ending | ||||||||||
July 1, 2005 | December 31, 2005 | December 31, 2005* | ||||||||||
Actual | $ | 1,000 | $ | 1,337.90 | $ | 10.43 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,016.28 | $ | 9.00 | ||||||
Driehaus Emerging Markets Growth Fund
Expenses Paid During | ||||||||||||
Beginning Account | Ending Account Value | Six Months Ending | ||||||||||
July 1, 2005 | December 31, 2005 | December 31, 2005* | ||||||||||
Actual | $ | 1,000 | $ | 1,368.12 | $ | 11.88 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,015.17 | $ | 10.11 | ||||||
* | Expenses are equal to the Fund’s annualized expense ratio for the six-month period in the table below multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (184), then divided by 365 to reflect the half-year period. |
Driehaus International Discovery Fund | 1.77 | % | ||
Driehaus Emerging Markets Growth Fund | 1.99 | % |
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TAX INFORMATION (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 2005
We are providing this information as required by the Internal Revenue Code. The amounts shown may differ from those elsewhere in this report because of differences between tax and financial reporting requirements.
The Funds’ distributions included capital gain amounts as follows:
Driehaus | Driehaus | |||||||
International | Emerging Markets | |||||||
Discovery Fund | Growth Fund | |||||||
Total long-term gains 20% rate gains | $ | 12,786,172 | $ | 10,614,120 |
For taxable non-corporate shareholders, the following percentages of income and short-term capital gains represent qualified dividend income subject to the 15% rate category:
Driehaus | Driehaus | |||||||
International | Emerging Markets | |||||||
Discovery Fund | Growth Fund | |||||||
8.63% | 8.45% |
For corporate shareholders, the following percentages of income and short-term capital gains qualified for the dividends-received deduction:
Driehaus | Driehaus | |||||||
International | Emerging Markets | |||||||
Discovery Fund | Growth Fund | |||||||
0% | 0% |
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the Funds’ policies and procedures with respect to the voting of proxies relating to the Funds’ portfolio securities is available without charge, upon request, by calling 1-800-560-6111. This information is also available on the Funds’ website at http://www.driehaus.com.
Information regarding how the Funds voted proxies related to portfolio securities during the 12-month period ended June 30, 2005 is available without charge, upon request, by calling 1-800-560-6111. This information is also available on the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.
HOW TO OBTAIN QUARTERLY PORTFOLIO HOLDINGS
Each Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Form N-Q is available electronically on the SEC’s website at http://www.sec.gov; hard copies may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330. Each Fund’s complete schedule of portfolio holdings is also available on the Funds’ website at http://www.driehaus.com.
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The Board of Trustees approved the renewal of the investment advisory agreement (the “Agreement”) with Driehaus Capital Management, Inc. (the “Adviser”) for Driehaus Emerging Markets Growth Fund (“DEMG”) and Driehaus International Discovery Fund (“DIDF”) in September 2005. As part of its review process, the Board requested and evaluated all information it deemed reasonably necessary to evaluate the Agreement. The Board reviewed comprehensive materials received from the Adviser, including data prepared by independent third parties, and independent legal counsel. The Board also received extensive information throughout the year regarding performance and operating results of each Fund. After their review of the information received, the Independent Trustees presented their findings and their recommendation to renew the Agreement to the full Board.
In connection with the contract review process, the Board considered the factors discussed below, among others. The Board also considered that the Adviser has managed each Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious adviser is in the best interests of each Fund. The Board considered, generally, that shareholders invested in each Fund, knowing that the Adviser managed the Fund and knowing the investment advisory fee schedule.
Nature, Quality and Extent of Services. The Board considered the nature, extent and quality of services provided under the Agreement, including portfolio management services and administrative services. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of the Adviser to attract and retain high-quality personnel, and the organizational depth of the Adviser. The Board also considered compliance with legal and regulatory requirements, as well as the Adviser’s handling of portfolio brokerage, including its processes for seeking and measuring whether the Funds were obtaining best execution. The Board reviewed each Fund’s performance on a gross and net return basis over one-year, three-year and five-year periods ended June 30, 2005 and July 31, 2005, as well as over rolling periods since inception of each Fund. The Board also received and reviewed updated performance information through September 16, 2005. The Board noted that the Adviser represented that because its aggressive growth investment style resulted in performance volatility over shorter time periods, it was meaningful to analyze performance over rolling time periods to show the consistent out-performance to their benchmark indices over the life of the Funds. The Board compared short-term and long-term returns to various agreed-upon performance measures, including market indices and peer groups. The Board considered whether investment results were consistent with each Fund’s investment objective and policies.
On the basis of this evaluation and its ongoing review of investment results, the Board concluded that the nature, quality and extent of services provided by the Adviser historically have been and continue to be satisfactory. The Board noted that the Funds’ gross and net performance for the three and five-year periods, as compared to their respective peer groups (from data compiled from Morningstar Inc. and Lipper Inc., independent providers of mutual fund data), and the Funds’ net performance as compared to their benchmark indices, was satisfactory. The Board noted that DEMG’s gross and net performance for the year-to-date and one-year periods as compared to both peer groups and its benchmarks was below expectations, but the Board took into account the factors contributing to DEMG’s recent under-performance, including the fact that its peer groups include all styles of funds, and noted its favorable longer-term and rolling year performance. The Board noted that DIDF’s gross and net performance for the year-to-date and one-year periods as compared to both peer groups and its benchmarks was good.
Fees and Expenses. The Board considered each Fund’s advisory fee rates, operating expenses and total expense ratio, and compared them to fees and expenses of peer groups based on data compiled from Lipper as of June 30, 2005 (which includes data as of earlier period-ends). The information provided to the Board showed that each Fund’s advisory fee rate ranked high as compared to its total peer group. However, because of the Funds’ fee structure, total expense ratios were comparatively much lower, with DEMG’s total expense ratio slightly above the median of its peer group and with DIDF’s total expense ratio slightly below the median of its total peer group. When total expenses were compared to smaller-sized funds, both Funds had total expense ratios below the median, based upon Lipper information. The Board also considered each Fund’s advisory fee rates as compared to fees charged by the Adviser for similarly managed institutional accounts. With respect to institutional accounts, the Board noted that (i) both the mix of services provided and the level of responsibility required under the Agreement were significantly greater as compared to the Adviser’s obligations for similarly managed institutional accounts; and (ii) the advisory fees of institutional accounts are less relevant to the
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On the basis of the information provided, the Board concluded that the advisory fee schedule was reasonable and appropriate in light of the quality of services provided by the Adviser.
Profitability. The Board reviewed information regarding revenues received by the Adviser under the Agreement. The Board considered the estimated costs to the Adviser of managing the Funds. The Board reviewed the Adviser’s methodology in allocating its costs to the management of the Funds. The Board noted the inherently subjective nature of any allocation methodology, but concluded that the methodology presented was not unreasonable. The Board noted that, based on the information provided, the Adviser anticipates moderate profit from providing services to the Funds.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Funds and whether the Funds benefit from any economies of scale. The Board considered whether the advisory fee rate under the Agreement is reasonable in relation to the asset size of each Fund and whether any economies of scale should result in a reduction in the fee schedule. The Board accepted the Adviser’s conclusion that it has not yet experienced any economies of scale in connection with its services to the Funds.
Other Benefits to the Adviser and its Affiliates. The Board also considered the character and amount of other incidental benefits received by the Adviser and its affiliates, including fees received by an affiliate of the Adviser for brokerage services. The Board also considered benefits to the Adviser related to soft dollar allocations. The Board concluded that advisory fees were reasonable in light of these fall-out benefits.
Based on all of the information considered and the conclusions reached, the Board determined that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests of each Fund. No single factor was determinative in the Board’s analysis.
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(a) | The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. | ||
(b) | No response required. | ||
(c) | None. | ||
(d) | None. | ||
(e) | Not applicable | ||
(f) | The registrant’s Code of Ethics for Principal Executive and Principal Financial Officers was filed as Exhibit 10(a)(1) to the registrant’s Certified Shareholder Report on Form N-CSR, File No. 811-07655, on March 8, 2004, and is incorporated herein by reference. |
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Investment Companies.
(a) | The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
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(b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
(a)(1) | Code of ethics, that is the subject of disclosure required by Item 2, filed as Exhibit 10(a)(1) to the Registrant’s Form N-CSR, filed on March 8, 2004 (Accession No. 0000950137-04-001539). | |||
(a)(2) | Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. | |||
(a)(3) | Not applicable. | |||
(b) | Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
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Richard H. Driehaus, President
(principal executive officer)
Richard H. Driehaus, President
(principal executive officer)
Michelle L. Cahoon, Treasurer
(principal financial officer)