RULE 497(e):
33-34841;811-6011
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
Prospectus
November __, 1996
The following eighteen mutual funds (the "Funds") are offered in this
Prospectus:
Fund Number
o Montgomery Growth Fund 284
o Montgomery Equity Income Fund 293
o Montgomery Small Cap Fund 276
o Montgomery Small Cap Opportunities Fund 645
o Montgomery Micro Cap Fund 294
o Montgomery Global Opportunities Fund 285
o Montgomery Global Communications Fund 280
o Montgomery International Small Cap Fund 283
o Montgomery International Growth Fund 296
o Montgomery Emerging Asia Fund 648
o Montgomery Emerging Markets Fund 277
o Montgomery Select 50 Fund 295
o Montgomery Asset Allocation Fund 291
o Montgomery Short Government Bond Fund 279
o Montgomery Government Reserve Fund 278
o Montgomery Federal Tax-Free Money Fund 647
o Montgomery California Tax-Free Intermediate Bond Fund 281
o Montgomery California Tax-Free Money Fund 292
Each Fund's shares offered in this Prospectus (the Class R shares) are sold at
net asset value with no sales load, no commissions, no Rule 12b-1 fees, and no
redemption or exchange fees. The minimum initial investment in each Fund is
$1,000 ($5,000 for the Micro Cap Fund), and subsequent investments must be at
least $100 ($500 for the Micro Cap Fund). The Manager or the Distributor may
waive these minimums. See "How to Invest in the Funds."
Each Fund is a separate series of either The Montgomery Funds or The Montgomery
Funds II, both open-end management investment companies, and managed by
Montgomery Asset Management, L.P. (the "Manager"), an affiliate of Montgomery
Securities (the "Distributor"). Each Fund has its own investment objective and
policies designed to meet different investment goals. As with all mutual funds,
attainment of each Fund's investment objective cannot be assured.
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated November __, 1996, as may be
revised, has been filed with the Securities and Exchange Commission, is
incorporated by this reference and is available without charge by calling (800)
572-FUND. If you are viewing the electronic version of this prospectus through
an on-line computer service, you may request a printed version free of charge by
calling (800) 572-FUND.
The Internet address for The Montgomery Funds is www.xperts.montgomery.com/1.
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT MONTGOMERY GOVERNMENT RESERVE FUND,
MONTGOMERY FEDERAL TAX-FREE MONEY FUND AND MONTGOMERY CALIFORNIA TAX-FREE MONEY
FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------
The Montgomery Funds 3
Fees and Expenses of the Funds 5
Financial Highlights 7
The Funds' Investment Objectives and Policies 11
Portfolio Securities 18
Other Investment Practices 21
Risk Considerations 23
Management of the Funds 25
How to Contact the Funds 29
How To Invest in the Funds 29
How To Redeem an Investment in the Funds 32
Exchange Privileges and Restrictions 34
How Net Asset Value is Determined 36
Dividends and Distributions 36
Taxation 37
General Information 38
Backup Withholding 39
Glossary A1
2
<PAGE>
The Montgomery Funds
The Funds' investment objectives are summarized below. See "The Funds'
Investment Objectives and Policies" beginning on page 11, "Portfolio Securities"
beginning on page 18, "Other Investment Practices" beginning on page 21 and
"Risk Considerations" beginning on page 23 for more detailed information.
The Equity Funds
- --------------------------------------------------------------
Montgomery Growth Fund
Seeks capital appreciation by investing primarily in equity
securities, usually common stocks, of domestic companies of
all sizes and emphasizes companies having market
capitalizations of $1 billion or more.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Small Cap Fund
Seeks capital appreciation by investing primarily in equity
securities, usually common stocks, of small-capitalization
domestic companies, which the Fund currently considers to be
companies having total market capitalizations of less than
$1 billion.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Micro Cap Fund
Seeks capital appreciation by investing primarily in equity
securities, usually common stocks, of domestic companies
that have the potential for rapid growth and are
micro-capitalization companies, which the Fund currently
considers to be companies having total market
capitalizations that would place them in the smallest 10% of
market capitalization for domestic companies as measured by
the Wilshire 5000 Index.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Emerging Markets Fund
Seeks capital appreciation by investing primarily in equity
securities of companies in countries having economies and
markets generally considered by the World Bank or the United
Nations to be emerging or developing.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Global Opportunities Fund
Seeks capital appreciation by investing primarily in equity
securities of companies of all sizes throughout the world
but emphasizes companies having market capitalizations of $1
billion or more, sound fundamental values and potential for
long-term growth at a reasonable price.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery International Small Cap Fund
Seeks capital appreciation by investing primarily in equity
securities of companies outside the U.S. having total market
capitalizations of less than $1 billion, sound fundamental
values and potential for long-term growth at a reasonable
price.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Equity Income Fund
Seeks current income and capital appreciation by
investing primarily in income-producing equity
securities of domestic companies, with the goal to
provide significantly greater yield than the average
yield offered by the stocks of the S&P 500 and a low
level of price volatility.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Small Cap Opportunities Fund
Seeks capital appreciation by investing primarily in
equity securities, usually common stocks, of
small-capitalization domestic companies, which the Fund
currently considers to be companies having total market
capitalizations of less than $1 billion.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Emerging Asia Fund
Seeks long-term capital appreciation through investment
primarily in the equity securities of emerging Asian
companies.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Global Communications Fund
Seeks capital appreciation by investing primarily in
equity securities of communications companies (i.e.,
companies primarily engaged in developing, manufacturing
or selling communications equipment or services)
throughout the world having sound fundamental values and
potential for long-term growth at a reasonable price.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery International Growth Fund
Seeks capital appreciation by investing primarily in
equity securities of companies outside the United States
having total market capitalizations over $1 billion,
sound fundamental values and potential for long-term
growth at a reasonable price.
- --------------------------------------------------------------
3
<PAGE>
The Multi-Strategy Funds
- --------------------------------------------------------------
Montgomery Select 50 Fund
Seeks capital appreciation by investing primarily in at
least 50 different equity securities of companies of all
sizes throughout the world. Each of the Manager's five
equity discipline management teams selects 10 equity
securities based on the potential for capital appreciation.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Asset Allocation Fund
Seeks high total return, while also seeking to reduce
risk, through a strategic or active allocation of assets
among domestic stocks, fixed-income securities and cash
or cash equivalents.
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The Fixed Income Funds
- --------------------------------------------------------------
Montgomery Short Government Bond Fund
Seeks maximum total return consistent with preservation of
capital and prudent investment management by investing
primarily in U.S. government securities and, to manage
interest rate risk, maintains an average portfolio effective
duration comparable to or less than three-year U.S. Treasury
notes. It targets higher yields than money market funds
generally with less fluctuation in the value of its shares
than long-term bond funds. This Fund does not maintain a
stable net asset value of $1.00 per share.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund
Seeks current income exempt from federal income tax
consistent with liquidity and preservation of capital. It
seeks to maintain a stable net asset value of $1.00 per
share.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund
Seeks maximum current income exempt from federal and
California personal income taxes consistent with preserving
capital and prudent investment management. It targets
higher yields than tax-free money market funds but generally
with less fluctuation in the value of its shares than
long-term tax-free bond funds. It does not maintain a
stable net asset value of $1.00 per share.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery Government Reserve Fund
Seeks current income consistent with liquidity and
preservation of capital by investing exclusively in U.S.
government securities, repurchase agreements for U.S.
government securities and other money market funds
investing exclusively in U.S. government securities and
such repurchase agreements. It seeks to maintain a
stable net asset value of $1.00 per share.
- --------------------------------------------------------------
- --------------------------------------------------------------
Montgomery California Tax-Free Money Fund
Seeks maximum current income exempt from federal and
California personal income taxes consistent with
liquidity and preservation of capital. It seeks to
maintain a stable net asset value of $1.00 per share.
- --------------------------------------------------------------
The Funds offer other classes of shares to eligible investors. The other classes
of shares may have different fees and expenses that may affect performance. For
information concerning the other classes of shares not offered in this
Prospectus, call The Montgomery Funds at (800) 572-FUND or contact sales
representatives or financial intermediaries who offer those classes.
4
<PAGE>
Fees And Expenses Of The Funds
<TABLE>
Shareholder Transaction Expenses
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load
Imposed on Purchases Imposed on Reinvested Dividends Deferred Sales Load Redemption Fees+ Exchange Fees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
<CAPTION>
Total Fund Operating
Other Expenses Expenses
The Equity Funds Management Fee* (after reimbursement)* (after reimbursement)*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Montgomery Growth Fund 1.00% 0.50% 1.50%
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Montgomery Equity Income Fund 0.60% 0.25% 0.85%
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Montgomery Small Cap Fund 1.00% 0.37% 1.37%
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Montgomery Small Cap Opportunities Fund 1.20% 0.30% 1.50%
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Montgomery Micro Cap Fund 1.40% 0.35% 1.75%
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Montgomery Global Opportunities Fund 1.25% 0.65% 1.90%
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Montgomery Global Communications Fund 1.25% 0.65% 1.90%
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Montgomery International Small Cap Fund 1.25% 0.65% 1.90%
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Montgomery International Growth Fund 1.10% 0.55% 1.65%
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Montgomery Emerging Asia Fund 1.25% 0.65% 1.90%
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Montgomery Emerging Markets Fund 1.07% 0.73% 1.80%
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Total Fund Operating
Other Expenses Expenses
The Multi-Strategy and Fixed Income Funds Management Fee* (after reimbursement)* (after reimbursement)*
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund 1.25% 0.55% 1.80%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund 0.80% 0.50% 1.30%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund 0.50% 0.20% 0.70%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund 0.40% 0.20% 0.60%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund 0.40% 0.20% 0.60%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund 0.50% 0.20% 0.70%
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund 0.40% 0.20% 0.60%
- --------------------------------------------------------------------------------------------------------------------------------
These tables are intended to assist the investor in understanding the various
expenses of each Fund. Operating expenses are paid out of a Fund's assets and
are factored into the Fund's share price. Each Fund estimates that it will have
the expenses listed (expressed as a percentage of average net assets) for the
current fiscal year.
+ Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. The Montgomery Funds reserve the right upon 60
days' advance notice to shareholders to impose a redemption fee of up to 1%
on shares redeemed within 90 days of purchase. The Funds also reserve the
right to impose a $20 annual account maintenance fee on accounts that fall
below the minimum investment because of redemptions. See "How to Redeem an
Investment in the Funds."
5
<PAGE>
* Expenses for the Funds are based on actual expenses and expense limitations
for the fiscal year ended June 30, 1996. Expenses for the Montgomery
Emerging Asia Fund and Montgomery Federal Tax-Free Money Fund are estimated.
The Manager will reduce its fees and may absorb or reimburse a Fund for
certain expenses to the extent necessary to limit total annual fund
operating expenses to the lesser of the amount indicated in the table for a
Fund or the maximum allowed by applicable state expense limitations. A Fund
is required to reimburse the Manager for any reductions in the Manager's fee
only during the two years (three years in the case of the Montgomery Asset
Allocation Fund) following that reduction and only if such reimbursement can
be achieved within the foregoing expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment for fees
and expenses for the current year. Absent reduction, actual total Fund
operating expenses for the period ended June 30, 1996 (annualized) would
have been as follows: Montgomery Equity Income Fund, 1.45% (0.85% other
expenses); Montgomery Small Cap Opportunities Fund, 2.16% (0.96% other
expenses); Montgomery Micro Cap Fund, 1.79% (0.39% other expenses);
Montgomery Global Opportunities Fund, 2.05% (0.80% other expenses);
Montgomery Global Communications Fund, 2.01% (0.76% other expenses);
Montgomery International Growth Fund, 2.91% (1.81% other expenses);
Montgomery International Small Cap Fund, 2.76% (1.53% other expenses);
Montgomery Asset Allocation Fund, 1.55% (0.95% other expenses); Montgomery
Select 50 Fund, 2.11% (0.86% other expenses); Montgomery Short Government
Bond Fund, 2.31% (1.81% other expenses); Montgomery Government Reserve Fund,
0.74% (0.36% other expenses); Montgomery California Tax-Free Intermediate
Bond Fund, 1.43% (0.93% other expenses); and Montgomery California Tax-Free
Money Fund, 0.80% (0.40% other expenses). Absent the reduction, actual total
Fund operating expenses are estimated to be as follows: Montgomery Federal
Tax-Free Money Fund, 1.00%(0.60% other expenses); Montgomery Emerging Asia
Fund, 3.25% (2.00% other expenses). The Manager may terminate these
voluntary reductions at any time. See "Management of the Funds."
</TABLE>
<TABLE>
Example of Expenses for the Funds
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Growth Fund $15 $47 $82 $179
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund $9 $27 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund $14 $43 $75 $165
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund $15 $47 $82 $179
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund $18 $55 $95 $206
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Opportunities Fund $19 $55 $95 $206
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund $19 $60 $103 $222
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund $19 $60 $103 $222
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund $17 $52 $90 $195
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Asia Fund $19 $55 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund $18 $57 $97 $212
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund $18 $57 $97 $212
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Montgomery Asset Allocation Fund $13 $41 $71 $157
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund $6 $19 $33 $75
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund $6 $19 $33 $75
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Montgomery Federal Tax-Free Money Fund $6 $19 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund $6 $19 $34 $76
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund $6 $19 $33 $74
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
This example is to show the effect of expenses. This example does not represent
past or future expenses or returns; actual expenses and returns may vary.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
Financial Highlights
Selected Per Share Data and Ratios
The following financial information for the periods ended June 30, 1992
through June 30, 1996 was audited by Deloitte & Touche LLP, whose report, dated
August 16, 1996, appears in the 1996 Annual Report of the Funds. The information
for the period ended June 30, 1991 was audited by other independent accountants
whose report is not included herein.
<CAPTION>
GROWTH FUND MICRO CAP FUND
Selected Per Share Data for the Year or Period Ended June 30: 1996 1995 1994(a) 1996 1995(b)#
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of year $19.16 $15.27 $12.00 $13.75 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.17 0.12 0.04 (0.04) 0.09
Net realized and unrealized gain on investments 4.32 3.91 3.31++ 4.26 1.66
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 4.49 4.03 3.35 4.22 1.75
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.17) (0.07) (0.01) (0.04) --
Distributions from net realized capital gains (1.54) (0.07) -- (0.11) --
Distribution in excess of net realized capital gains -- -- (0.07) -- --
Distributions from capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.71) (0.14) (0.08) (0.15) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $21.94 $19.16 $15.27 $17.82 $13.75
- ------------------------------------------------------------------------------------------------------------------------------------
Total return** 24.85% 26.53% 27.98% 30.95% 14.58%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $926,382 $878,776 $149,103 $306,217 $162,949
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/loss to average net assets 0.78% 0.98% 1.09%+ (0.11)% 1.40%+
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.35% 1.50% 1.49%+ 1.75% 1.75%+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 118.14% 128.36% 110.65% 88.98% 36.81%
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Average commission rate paid+++ $0.0596 N/A N/A $0.0573 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager -- -- $0.03 ($0.05) $0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager -- -- 1.79%+ 1.79% 2.07%+
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Growth Fund's Class R Shares commenced operations on September 30, 1993.
(b) The Micro Cap Fund's Class R Shares commenced operations on December 30,
1994.
(c) The Small Cap Fund's Class R Shares became available for investment by the
public on July 13, 1990.
(d) The Small Cap Opportunities Fund's Class R Shares commenced operations on
December 29, 1995.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME FUND INTERNATIONAL GROWTH
FUND
Selected Per Share Data for the Year or Period Ended June 30: 1996 1995(a) 1996(b)
<S> <C> <C> <C>
Net asset value -- beginning of year $13.38 $12.00 $12.00
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.43 0.31 0.02
Net realized and unrealized gain/(loss) on investments 2.82 1.38 3.29
- --------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 3.25 1.69 3.31
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.42) (0.31) --
Distributions from net realized capital gains (0.12) -- --
Distribution in excess of net realized capital gains -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.31) --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $16.09 $13.38 $15.31
- --------------------------------------------------------------------------------------------------------------------------------
Total return** 24.56% 14.26% 27.58%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $19,312 $6,383 $18,303
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 3.03% 4.06%+ 0.26%+
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets, excluding interest expense 0.85% 0.84%+ 1.65%+
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 89.77% 29.46% 238.91%
- --------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0423 N/A $0.0176
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $0.34 $0.13 ($0.07)
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager, including interest expense 1.45% 3.16%+ 2.91%+
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- -- --
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<FN>
(a) The Equity Income Fund's Class R Shares commenced operations on September
30, 1994.
(b) The International Growth Fund's Class R Shares commenced operations on July
3, 1995.
(c) The International Small Cap Fund's Class R Shares commenced operations on
September 30, 1993.
(d) The Global Opportunities Fund's Class R Shares commenced operations on
September 30, 1993.
(e) The Global Communications Fund's Class R Shares commenced operations on June
1, 1993.
** Total return represents aggregate total return for the periods indicated
+ Annualized.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP
SMALL CAP FUND OPPORTUNITIES
FUND
1996 1995 1994 1993 1992 1991 1990(c) 1996(d)#
<S> <C> <C> <C> <C> <C> <C> <C>
$17.11 $15.15 $16.83 $12.90 $13.24 $10.05 $10.62 $12.00
- ---------------------------------------------------------------------------------------------------------------------------------
(0.09) (0.10) (0.12) (0.11) (0.06) (0.06) (0.07) 0.02
6.31 3.04 (0.47) 4.04 3.25 3.27 2.71 3.78++
- ---------------------------------------------------------------------------------------------------------------------------------
6.22 2.94 (0.59) 3.93 3.19 3.21 2.64 3.80
- ---------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- --
(1.78) (0.98) (1.09) -- (2.75) (0.02) (0.02) --
-- -- -- -- -- -- -- --
-- -- -- -- (0.78) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
(1.78) (0.98) (1.09) -- (3.53) (0.02) (0.02) --
- ---------------------------------------------------------------------------------------------------------------------------------
$21.55 $17.11 $15.15 $16.83 $12.90 $13.24 $13.24 $15.80
- ---------------------------------------------------------------------------------------------------------------------------------
39.28% 20.12% (1.59)% 30.47% 27.69% 31.97% 24.89% 31.67%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
$275,062 $202,399 $209,063 $219,968 $176,588 $27,181 $27,181 $136,140
- ---------------------------------------------------------------------------------------------------------------------------------
(0.47)% (0.57)% (0.68)% (0.69)% (0.44)% (0.47)% (0.45)%+ 0.23%+
- ---------------------------------------------------------------------------------------------------------------------------------
1.24% 1.37% 1.35% 1.40% 1.50% 1.50% 1.45%+ 1.50%+
- ---------------------------------------------------------------------------------------------------------------------------------
80.00% 85.07% 95.22% 130.37% 80.67% 194.63% 188.16% 81.29%
- ---------------------------------------------------------------------------------------------------------------------------------
$0.0529 N/A N/A N/A N/A N/A N/A $0.0578
- ---------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- ($0.04)
- ---------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- 2.16%+
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Per share numbers have been calculated using the average share method,
which more appropriately represent the per share data for the period
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL GLOBAL OPPORTUNITIES GLOBAL COMMUNICATIONS
SMALL CAP FUND FUND FUND
1996 1995 1994(c) 1996 1995 1994(d) 1996 1995 1994 1993(e)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11.75 $12.02 $12.00 $13.25 $12.92 $12.00 $15.42 14.20 $12.45 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
0.03 0.12 0.00# (0.06) 0.13 0.01 (0.20) (0.03) (0.05) 0.00#
3.10 (0.39) 0.02 3.84 0.70 0.91 2.83 1.28 1.80++ 0.45
- ------------------------------------------------------------------------------------------------------------------------------------
3.13 (0.27) 0.02 3.78 0.83 0.92 2.63 1.25 1.75 0.45
- ------------------------------------------------------------------------------------------------------------------------------------
(0.02) (0.00)# -- (0.07) -- -- -- -- -- --
-- -- -- -- (0.50) -- -- -- -- --
-- -- -- -- -- -- (0.03) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
(0.02) (0.00) -- (0.07) (0.50) -- -- (0.03) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
14.86 $11.75 $12.02 $16.96 $13.25 $12.92 $18.05 $15.42 $14.20 $12.45
- ------------------------------------------------------------------------------------------------------------------------------------
26.68% (2.23)% 0.17% 28.64% 6.43% 7.67 17.06% 8.83% 14.06% 3.75%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
$41,640 $28,516 $34,555 $28,496 $13,677 $12,504 $206,671 $209,644 $234,886 $4,670
- ------------------------------------------------------------------------------------------------------------------------------------
0.20% 0.95% 0.04%+ (0.56)% 1.03% 0.02%+ (1.01)% (0.10)% (0.46)% (0.05)%+
- ------------------------------------------------------------------------------------------------------------------------------------
1.90% 1.90% 1.90%+ 1.90% 1.90% 1.90%+ 1.90% 1.90% 1.90% 1.90%+
- ------------------------------------------------------------------------------------------------------------------------------------
177.36% 156.13% 123.50% 163.80% 118.75% 67.22% 103.73% 50.17% 29.20% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------------
$0.0123 N/A N/A $0.0235 N/A N/A $0.0129 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
($0.08) $0.05 ($0.02) ($0.16) ($0.01) ($0.05) ($0.22) ($0.07) ($0.06) ($0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
2.76% 2.50% 2.32%+ 3.10% 2.99% 2.75%+ 2.11% 2.09% 2.04% 8.96%+
- ------------------------------------------------------------------------------------------------------------------------------------
1.96% 1.91% 1.99%+ 2.05% 1.91% 1.99%+ 2.01% 1.91% 1.94% --
- ------------------------------------------------------------------------------------------------------------------------------------
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
EMERGING MARKETS
FUND
Selected Per Share Data for the Year or Period Ended June 30: 1996 1995++ 1994 1993 1992(a)
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of year $13.17 $13.68 $11.07 $9.96 $10.00
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.08 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss) on investments 0.94 0.25## 2.92 1.05 (0.07)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 1.02 0.28 2.89 1.12 (0.04)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- (0.01) --
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- (0.42) (0.28) (0.00)# --
Distributions in excess of net realized capital gains -- (0.37) -- -- --
Distributions from capital -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.79) (0.28) (0.01) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $14.19 $13.17 $13.68 $11.07 $9.96
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return** 7.74% 1.40% 26.10% 11.27% (0.40)%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $994,378 $998,083 $654,960 $206,617 $54,625
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.58% 0.23% (0.14)% 0.66% 1.70%+
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest 1.72% 1.80% 1.85% 1.90% 1.90%+
expense
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 109.92% 92.09% 63.79% 21.40% 0.19%
- -----------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0007 N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager -- -- -- $0.06 $0.01
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense -- -- -- 1.93% 2.80%+
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Emerging Markets Fund's Class R Shares commenced operations on March 1,
1992.
(b) The Select 50 Fund's Class R Shares commenced operations on October 2, 1995.
(c) The Asset Allocation Fund's Class R Shares commenced operations on March 31,
1994.
(d) The Short Government Bond Fund's Class R Shares commenced operations on
December 18, 1992.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INTERMEDIATE
BOND FUND
Selected Per Share Data for the Year or Period Ended June 30: 1996 1995 1994(a)
<S> <C> <C> <C>
Net asset value -- beginning of year $12.04 $11.79 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.54 0.44 0.41
Net realized and unrealized gain/(loss) on investments 0.19 0.25 (0.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 0.73 0.69 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.54) (0.44) (0.41)
Dividends in excess of net investment income -- -- --
Distributions from net realized capital gains -- (0.00)# --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.44) (0.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $12.23 $12.04 $11.79
- ------------------------------------------------------------------------------------------------------------------------------------
Total return** 6.11% 6.03% 1.65%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $13,948 $5,153 $11,556
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 4.34% 3.71% 3.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets, excluding interest 0.61% 0.56% 0.23%
expense
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 58.11% 37.93% 77.03%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $0.43 $0.34 $0.25
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.43% 1.41% 1.63%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The California Tax-Free Intermediate Bond Fund's Class R Shares commenced
operations on July 1, 1993.
(b) The Government Reserve Fund's Class R Shares commenced operations on
September 14, 1992.
(c) The California Tax-Free Money Fund's Class R Shares commenced operations on
September 30, 1994.
** Total return represents aggregate total return for the periods indicated.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
SELECT 50 ASSET ALLOCATION SHORT GOVERNMENT
FUND FUND BOND FUND
1996(b) 1996 1995 1994(c) 1996 1995 1994 1993(d)
$12.00 $16.33 $12.24 $12.00 $9.95 $9.80 $10.23 $10.00
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0.06 0.26 0.25 0.06 0.60 0.62 0.61 0.33
4.45 3.54 4.11 0.18 (0.04) 0.16 (0.34) 0.23
- --------------------------------------------------------------------------------------------------------------------------------
4.51 3.80 4.36 0.24 0.56 0.78 0.27 0.56
- --------------------------------------------------------------------------------------------------------------------------------
(0.04) (0.25) (0.17) -- (0.59) (0.62) (0.56) (0.33)
-- -- -- -- (0.00)# -- (0.07) --
-- (0.55) (0.10) -- -- -- -- --
(0.01) -- -- (0.07) --
-- -- -- -- -- (0.01) -- (0.00)#
- --------------------------------------------------------------------------------------------------------------------------------
(0.05) (0.80) (0.27) -- (0.59) (0.63) (0.70) (0.33)
- --------------------------------------------------------------------------------------------------------------------------------
$16.46 $19.33 $16.33 $12.24 $9.92 $9.95 $9.80 $10.23
- --------------------------------------------------------------------------------------------------------------------------------
37.75% 23.92% 35.99% 2.00% 5.74% 8.28% 2.49% 5.66%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
$77,955% $132,511 $60,234 $1,548 $22,681 $17,093 $21,937 $22,254
- --------------------------------------------------------------------------------------------------------------------------------
0.42%+ 1.85% 3.43% 2.54%+ 5.88% 6.41% 5.93% 6.02%+
- --------------------------------------------------------------------------------------------------------------------------------
1.80%+ 1.30% 1.30% 1.30%+ 0.60% 0.47% 0.25% 0.22%+
- --------------------------------------------------------------------------------------------------------------------------------
105.98% 225.91% 95.75% 190.94% 349.62% 284.23% 603.07% 213.22%
- --------------------------------------------------------------------------------------------------------------------------------
$0.0097 $0.0595 N/A N/A -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
$0.02 $0.24 $0.19 $(0.11) $0.52 $0.54 $0.51 $0.27
- --------------------------------------------------------------------------------------------------------------------------------
2.11%+ 1.55% 2.07% 9.00%+ 2.31% 2.23% 1.75% 2.07%+
- --------------------------------------------------------------------------------------------------------------------------------
-- 1.42% 1.31% 1.43%+ 1.55% 1.38% 0.71% --
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
++ Per shares numbers have been calculated using the average shares method,
which more appropriately represents the per share data for the period
since the use of the undistributed income method did not accord with the
results of operations.
# Amount represents less than $0.01 per share.
## The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
</FN>
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT RESERVE CALIFORNIA TAX-FREE
FUND MONEY FUND
1996 1995 1994 1993(b) 1996 1995(c)
<S> <C> <C> <C> <C> <C>
$1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------------------------
0.052 0.049 0.029 0.024 0.030 0.027
0.000## 0.000## 0.000## 0.000## 0.000## .000##
- -------------------------------------------------------------------------------------------------------------------------------
0.052 0.049 0.029 0.024 0.030 0.027
- -------------------------------------------------------------------------------------------------------------------------------
(0.052) (0.049) (0.029) (0.024) (0.030) (0.027)
-- -- -- -- -- (0.000)##
-- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
(0.052) (0.049) (0.029) (0.024) (0.030) (0.027)
- -------------------------------------------------------------------------------------------------------------------------------
$1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------------------------
5.28% 4.97% 2.96% 2.41% 3.03% 2.68%
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
$439,423 $258,956 $211,129 $124,795 $98,134 $64,780
- -------------------------------------------------------------------------------------------------------------------------------
5.17% 4.92% 2.99% 2.96%+ 2.99% 3.55%+
- -------------------------------------------------------------------------------------------------------------------------------
0.60% 0.60% 0.60% 0.38%+ 0.59% 0.33%+
- -------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
$0.050 $0.047 $0.028 $0.013 $0.028 $0.023
- -------------------------------------------------------------------------------------------------------------------------------
0.74% 0.79% 0.71% 0.77%+ 0.80% 0.86%+
- -------------------------------------------------------------------------------------------------------------------------------
-- 0.63% -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
+ Annualized.
# Amount represents less than $0.01 per share.
## Amount represents less than $0.001 per share.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
The Funds' Investment Objectives And Policies
The investment objective and general investment policies of each Fund are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities" beginning on page 18. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 21. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 23. Certain terms used in the Prospectus are
defined in the Glossary found at the end of this Prospectus. This Prospectus may
refer to groups of similar funds using the following defined terms:
SUMMARY COMPARISON OF FUNDS
Anticipated Maximum Typical Market
Equity Debt Capitalization of
Fund Name Exposure Exposure Focus Portfolio Companies
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Funds
Domestic Equity Funds
Montgomery Growth Fund 65-100% 35% Growth Over $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund 65-100% 35% Micro-Cap Less than $600 Million
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund 80-100% 35% Small-Cap Less than $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund 65-100% 35% Small-Cap Less than $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund 65-100% 35% Large-Cap Dividend Over $1 Billion
===================================================================================================================================
International Funds
Montgomery International Small Cap Fund 65-100% 35% Foreign Small-Cap Less than $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund 65-100% 35% Foreign Growth Over $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Asia Fund 65-100% 35% Asian Growth Any size
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund 65-100% 35% Emerging Growth Any size
===================================================================================================================================
Global Funds
Montgomery Global Opportunities Fund 65-100% 35% Worldwide Growth Over $1 Billion
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund 65-100% 35% Worldwide Any size
===================================================================================================================================
Multi-Strategy Funds
Montgomery Select 50 Fund 65-100% 35% Worldwide Growth Any size
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund 20-80% 20-80% Balanced Any size
===================================================================================================================================
Fixed-Income Funds
Montgomery Short Government Bond Fund 0% 100% Income N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund 0% 100% Income N/A
===================================================================================================================================
Tax-Free Funds
Montgomery Federal Tax-Free Money Fund 0% 100% Federal Tax-Free Income N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund 0% 100% California Tax-Free Income N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund 0% 100% California Tax-Free Income N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Montgomery Growth Fund (the "Growth Fund")
The investment objective of the Growth Fund is capital appreciation which, under
normal conditions it seeks by investing at least 65% of its total assets in
equity securities of domestic companies. Although such companies may be of any
size, the Fund targets companies having total market capitalizations of $1
billion or more. The Fund emphasizes investments in common stock but also
invests in other types of equity securities and equity derivative securities.
Current income from dividends, interest and other sources is only incidental.
The Fund also may invest up to 35% of its total assets in highly rated debt
securities. See "Portfolio Securities."
The Growth Fund seeks growth at a reasonable value, identifying companies with
sound fundamental value and potential for substantial growth. The Fund selects
its investments based on a combination of quantitative screening techniques and
fundamental analysis. The Fund initially identifies a universe of investment
candidates by screening companies based on changes in rates of growth and
valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
11
<PAGE>
Montgomery Micro Cap Fund (the "Micro Cap Fund")
The investment objective of the Micro Cap Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in equity securities of domestic companies that have potential for rapid growth
and are micro-capitalization companies, which the Fund currently considers to be
companies having market capitalizations that would place them in the smallest
10% of market capitalizations for domestic companies as measured by the Wilshire
5000 Index. Currently, these companies have market capitalizations of $600
million and less. Current income from dividends, interest and other sources is
only incidental. The Micro Cap Fund generally invests the remaining 35% of its
total assets in a similar manner but may invest those in other equity securities
and in debt instruments, including foreign securities. Any debt securities
purchased by this Fund must be highly rated debt securities. See "Portfolio
Securities."
The Micro Cap Fund seeks to identify potential rapid growth companies at the
early stages of the companies' developments, such as at the introduction of new
products, favorable management changes, new marketing opportunities or increased
market share for existing product lines. Early identification of potential
investments is a key to the Fund's investment style. Emphasis is placed on
in-house research, which includes discussions with company management.
The Micro Cap Fund is currently closed to new investors. The Manager may,
however, reopen and close the Micro Cap Fund to new investors from time to time
at its discretion. If this Fund is closed, shareholders who maintain open
accounts with the Fund may make additional investments in the Fund. Once a
shareholder's account is closed, additional investments in the Fund may not be
possible.
Montgomery Small Cap Fund (the "Small Cap Fund")
The investment objective of the Small Cap Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in equity securities of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion. The Small Cap Fund generally invests the remaining 35% of its
total assets in a similar manner but may invest those assets in companies having
total market capitalizations of $1 billion or more.
Generally, the Small Cap Fund invests at least 80% of its total assets in common
stock. It also may invest in other types of equity securities and equity
derivative securities but limits to 5% of its total assets any single other type
of security. Any debt securities purchased by this Fund must be highly rated
debt securities. See "Portfolio Securities." Current income from dividends,
interest and other sources is only incidental.
The Small Cap Fund seeks to identify potential growth companies at an early
stage or a transitional point of the companies' developments, such as the
introduction of new products, favorable management changes, new marketing
opportunities or increased market share for existing product lines. Using
fundamental research, the Fund targets businesses having positive internal
dynamics that can outweigh unpredictable macro-economic factors, such as
interest rates, commodity prices, foreign currency rates and overall stock
market volatility. The Fund searches for companies with potential to gain market
share within their respective industries; achieve and maintain high and
consistent profitability; produce increases in quarterly earnings; and provide
solutions to current or impending problems in their respective industries or
society at large. Early identification of potential investments is a key to the
Fund's investment style. Heavy emphasis is placed on in-house research, which
includes discussions with company management. The Fund also draws on the
expertise of brokerage firms, including Montgomery Securities and regional firms
that closely follow smaller capitalization companies within their geographic
regions.
The Small Cap Fund has been closed to new investors since March 6, 1992.
Shareholders who maintain open accounts with this Fund may make additional
investments. Once your account is closed, additional investments in this Fund
may not be possible. An Account may be considered closed and subject to
redemption by this Fund if the value of the shares remaining after a transfer or
redemption falls below $1,000. This Fund may resume sales of shares to new
investors at some future date, but it has no present intention to do so.
Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities Fund")
The investment objective of the Small Cap Opportunities Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of small-capitalization domestic
companies, which the Fund currently considers to be companies having total
market capitalizations of less than $1.5 billion. The Small Cap Opportunities
Fund generally invests the remaining 35% of its total assets in a similar manner
but may invest those assets in domestic and foreign companies having total
market capitalizations of $1.5 billion or more. This Fund invests primarily in
common stock. It also may invest in other types of equity securities and equity
derivative securities. Any debt securities purchased by the Fund must be highly
rated debt securities. See "Portfolio Securities." Current income from
dividends, interest and other sources is only incidental.
This Fund seeks to identify potential growth companies at an early stage or a
transitional point of their developments, such as the introduction of new
products, favorable management changes, new marketing opportunities or increased
12
<PAGE>
market share for existing product lines. Using fundamental research, the Fund
targets businesses having positive internal dynamics that can outweigh
unpredictable macro-economic factors, such as interest rates, commodity prices,
foreign currency rates and overall stock market volatility. The Fund searches
for companies with potential to gain market share within their respective
industries; achieve and maintain high and consistent profitability; produce
increases in quarterly earnings; and provide solutions to current or impending
problems in their respective industries or society at large. Early
identification of potential investments is a key to the Fund's investment style.
Heavy emphasis is placed on in-house research, which includes discussions with
company management. The Fund also draws on the expertise of brokerage firms,
including Montgomery Securities and regional firms that closely follow smaller
capitalization companies within their geographic regions.
Montgomery Equity Income Fund (the "Equity Income Fund")
The investment objective of the Equity Income Fund is to provide current income
and capital appreciation primarily through investments in equity securities of
domestic companies, with the goal that the Fund provide a significantly greater
yield than the average yield offered by the stocks of the S&P 500 and a low
level of price volatility. Under normal market conditions, the Equity Income
Fund will invest at least 65% of the value of its total assets in
income-producing equity securities of domestic companies, which include common
stocks, preferred stocks and other securities, and debt securities convertible
into common stocks.
The Fund's equity investments emphasize common stock of U.S. corporations that
regularly pay dividends. The Fund normally invests in companies having a total
market capitalization of more than $1 billion, targeting companies with
favorable long-term fundamental characteristics with current relative yields at
the upper end of their historical ranges. The Fund initially identifies a
universe of investment candidates by screening companies based on relative yield
and targeting companies with a minimum yield of 140% of the average yield of the
S&P 500. The Fund uses this relative yield strategy to assist in identifying
undervalued securities. The companies are usually in the maturing stages of
development or operating in slower growth areas of the economy, and have
conservative accounting, strong cash flows to maintain dividends, low financial
leverage and market leadership. The Fund usually holds companies for a period of
two to four years, resulting in relatively low turnover. The Fund will usually
begin to reduce its position in a company as the price moves up and yield drops
to the lower end of its historical range. In addition, the Fund will usually
reduce or sell its holdings in a company that reduces or eliminates its
dividend, or upon a significant fundamental change impairing a company's ability
to pay dividends. See "Portfolio Securities."
Although the Fund normally invests more than 65% of its assets in
income-producing equity securities as described above, under normal market
conditions it may invest up to 35% of its total assets in debt instruments,
emphasizing cash equivalents in an effort to provide income at money market
rates while minimizing the risk of decline in value. The Fund attempts to
achieve low price volatility through its investment in mature companies and by
investing in cash and cash equivalents. In addition, the Fund may invest up to
20% of its total assets in the equity or debt securities of foreign issuers. See
"Portfolio Securities."
Montgomery International Small Cap Fund (the "International Small Cap Fund")
The investment objective of the International Small Cap Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of less than $1 billion. The Fund generally
invests the remaining 35% of its total assets in a similar manner but may invest
those assets in companies having market capitalizations of $1 billion or more,
or in debt securities, including up to 5% of its total assets in debt securities
rated below investment grade. See "Portfolio Securities" and "Risk
Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research,
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. See "Risk Considerations."
Montgomery International Growth Fund (the "International Growth Fund")
The investment objective of the International Growth Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations over $1 billion. This Fund generally invests
the remaining 35% of its total assets in a similar manner but may invest those
assets in equity securities of U.S. companies, in lower-capitalization companies
or in debt securities,
13
<PAGE>
including up to 5% of its total assets in debt securities rated below investment
grade. See "Portfolio Securities" and "Risk Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth, return on
capital, balance sheet, financial and accounting policies, overall financial
strength, industry sector, competitive advantages and disadvantages, research,
product development and marketing, new technologies or services, pricing
flexibility, quality of management, and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will use a strategic allocation of assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
Montgomery Emerging Asia Fund (the "Emerging Asia Fund")
The investment objective of the Montgomery Emerging Asia Fund is long term
capital appreciation which, under normal conditions it seeks by investing at
least 65% of its total assets in equity securities of companies that have their
principal activities in emerging Asia. The Fund currently considers the
following to be emerging Asia countries: Bangladesh, China, Hong Kong, India,
Indonesia, Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka,
Taiwan and Thailand. The Fund, however, does not expect to invest in Japanese
securities. In the future, the Fund may invest in other countries in Asia when
their markets become sufficiently developed. Under normal conditions, the Fund
maintains investments in at least three emerging Asia countries at all times and
invests no more than one-third of its total assets in any one emerging Asia
country. As part of the remaining 35% of its total assets, the Fund may invest
in more developed Asian countries, such as Japan and Hong Kong, that may serve
defensive purposes in an Asian portfolio. Alternatively, companies in more
developed Asian markets may have significant operations in emerging Asian
countries.
The Fund considers a company to be an emerging Asian company if its securities
are principally traded in the capital market of an emerging Asia country; it
derives at least 50% of its total revenue from either goods produced or services
rendered in emerging Asia countries or from sales made in such emerging Asia
countries, regardless of where the securities of such company are primarily
traded; or it is organized under the laws of, and with a principal office in, an
emerging Asia country.
Emerging Asia countries are in various stages of economic development with most
being considered emerging markets. Each country has its unique risks. Most
emerging Asia countries are heavily dependent on international trade. Some have
prosperous economies, but are sensitive to world commodity prices. Others are
especially vulnerable to recession in other countries. Some emerging Asia
countries have experienced rapid growth, although many suffer from obsolete
financial systems, economic problems, or archaic legal systems. The return of
Hong Kong to Chinese dominion will affect the entire Pacific region. For
information on risks, see "Portfolio Securities," "Risk Considerations" and the
Statement of Additional Information.
The Fund invests primarily in common stock but also may invest in other types of
equity and equity derivative securities. It may invest up to 35% of its total
assets in high yield debt securities, including up to 5% in high yield debt
securities rated below investment grade (also known as "junk bonds"). See
"Portfolio Securities" and "Risk Considerations." During the two-to three-month
period following commencement of the Fund's operations, the Fund may have its
assets invested substantially in cash and cash equivalents.
The Fund may invest in certain debt securities issued by the governments of
emerging Asia countries that are, or may be eligible for, conversion into
investments in emerging Asian companies under debt conversion programs sponsored
by such governments. If such securities are convertible to equity investments,
the Fund deems them to be equity derivative securities.
See "Portfolio Securities."
Montgomery Emerging Markets Fund (the "Emerging Markets Fund")
The investment objective of the Emerging Markets Fund is capital appreciation
which, under normal conditions it seeks by investing at least 65% of its total
assets in equity securities of Emerging Market Companies. The Manager currently
regards the following to be emerging market countries: Latin America (Argentina,
Brazil, Chile, Colombia, Costa Rica, Jamaica, Mexico, Peru, Trinidad and Tobago,
Uruguay, Venezuela); Asia (Bangladesh, China, India, Indonesia, Korea,
Malaysia, Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, Thailand,
Vietnam); Southern and Eastern Europe (Czech Republic, Greece, Hungary, Poland,
Portugal, Russia, Turkey); Mid-East (Israel, Jordan); and Africa (Egypt, Ghana,
Ivory Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia, Zimbabwe). In the
future, the Fund may invest in other emerging market countries. Under normal
conditions, the Emerging Markets Fund maintains investments in at least six
emerging market countries at all times and invests no more than 35% of its total
assets in any one emerging market country.
This Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean-variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percent of assets to invest in each country to
maximize expected returns for a given risk level. The Fund's
14
<PAGE>
aims are to invest in those countries that are expected to have the highest
risk/reward trade-off when incorporated into a total portfolio context. This
"top-down" country selection is combined with "bottom-up" fundamental industry
analysis and stock selection based on original research and publicly available
information and company visits.
This Fund invests primarily in common stock but also may invest in other types
of equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
This Fund may invest in certain debt securities issued by the governments of
emerging market countries that are, or may be eligible for, conversion into
investments in Emerging Market Companies under debt conversion programs
sponsored by such governments. If such securities are convertible to equity
investments, the Fund deems them to be equity derivative securities. This Fund
may invest no more than 20% of its total assets in the equity securities of
companies constituting the EAFE Index. See "Portfolio Securities." These
companies typically have larger average market capitalizations than the Emerging
Market Companies in which this Fund generally invests. Accordingly, subject to
its investment objective, this Fund invests in EAFE Index companies for
temporary defensive strategies.
Montgomery Global Opportunities Fund (the "Opportunities Fund")
The investment objective of the Opportunities Fund is capital appreciation.
Under normal conditions, the Opportunities Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
companies, which may be of any size, throughout the world. While the
Opportunities Fund emphasizes common stocks of those companies having total
market capitalizations of more than $1 billion, it also may invest in other
types of equity securities and equity derivative securities.
The Opportunities Fund may invest up to 35% of its total assets in debt
securities, including up to 5% in debt securities rated below investment grade.
The Opportunities Fund invests in companies that, in the opinion of the Manager,
have potential for above-average, long-term growth in sales and earnings on a
sustained basis and that are reasonably priced. The Manager considers a number
of factors in evaluating potential investments, including a company's per-share
sales and earnings growth; return on capital; balance sheet; financial and
accounting policies; overall financial strength; industry sector; competitive
advantages and disadvantages; research, product development, and marketing;
development of new technologies; service; pricing flexibility; quality of
management; and general operating characteristics.
The Opportunities Fund may invest substantially in securities denominated in one
or more foreign currencies. Under normal conditions, the Opportunities Fund
invests in at least three different countries, which may include the U.S., but
no country, other than the U.S., may represent more than 40% of its assets. A
significant portion of the Opportunities Fund's assets are invested in the
securities of foreign issuers because many attractive investment opportunities
are outside the U.S. The Manager uses its financial expertise and research
capabilities in markets located throughout the world in attempting to identify
securities providing the greatest potential for long-term capital appreciation.
For information on risks, see "Portfolio Securities" and "Risk Considerations."
Montgomery Global Communications Fund (the "Communications Fund")
The investment objective of the Communications Fund is capital appreciation.
Under normal conditions, the Communications Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
communications companies, which may be of any size, throughout the world. For
this purpose, the Fund defines a "communications company" as a company engaged
in the development, manufacture or sale of communications equipment or services
that derived at least 50% of either its revenues or earnings from these
activities, or that devoted at least 50% of its assets to these activities,
based on the company's most recent fiscal year.
Communications companies range from companies concentrating on established
technologies to companies primarily engaged in creating or developing new
technologies. They include companies that develop, manufacture, sell or provide
communications equipment and services (including equipment and services for
data, voice and image transmission); broadcasting (including television and
radio, satellite, microwave and cable television and narrowcasting); mobile
communications and cellular phones and paging; electronic mail; local and wide
area networking and linkage of word and data processing systems; publishing and
information systems; electronic components and equipment; print media; computer
equipment; videotext and teletext; and new technologies combining television,
telephones and computer systems. Over time, communication products and services
change because the global communications industry is changing rapidly due to new
technology and other developments.
The Communications Fund's portfolio management believes that world-wide demand
for components, products, media and systems to collect, store, retrieve,
transmit, process, distribute, record, reproduce and use information will
continue to grow in the future. It also believes that the global trend appears
to be toward lower costs and higher efficiencies resulting from combining
communications systems with computers and, accordingly, the Fund may invest in
companies engaged in the development of methods for using new technologies to
communicate information as well as companies using established communications
technologies.
15
<PAGE>
The Communications Fund may invest up to 35% of its total assets in debt
securities, including up to 5% in debt securities rated below investment grade.
The Communication Fund invests in companies that, in the opinion of the Manager,
have potential for above-average, long-term growth in sales and earnings on a
sustained basis and that are reasonably priced. The Manager considers a number
of factors in evaluating potential investments, including a company's per-share
sales and earnings growth; return on capital; balance sheet; financial and
accounting policies; overall financial strength; industry sector; competitive
advantages and disadvantages; research, product development, and marketing;
development of new technologies; service; pricing flexibility; quality of
management; and general operating characteristics.
The Communications Fund may invest substantially in securities denominated in
one or more foreign currencies. Under normal conditions, the Communications Fund
invests in at least three different countries, which may include the U.S., but
no country, other than the U.S., may represent more than 40% of its assets. A
significant portion of the Communications Fund's assets are invested in the
securities of foreign issuers because many attractive investment opportunities,
including many of the world's communications companies, are outside the U.S. The
Manager uses its financial expertise and research capabilities in markets
located throughout the world in attempting to identify securities providing the
greatest potential for long-term capital appreciation. For information on risks,
see "Portfolio Securities" and "Risk Considerations."
Montgomery Select 50 Fund (the "Select 50 Fund")
The investment objective of the Select 50 Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in at least 50 different equity securities of companies of all sizes throughout
the world.
This Fund invests primarily in 10 equity securities from each of the Manager's
five different equity disciplines. These five disciplines, which may be adjusted
from time to time, include U.S. Growth Equity, U.S. Smaller Capitalization
Companies, U.S. Equity Income, International and Emerging Markets. See
"Management of the Funds." The Manager's equity teams select those securities
based on the potential for capital appreciation.
This Fund generally invests the remaining 35% of its total assets in equity
securities with the potential for capital appreciation but may invest those
assets in other equity securities or in debt securities, including up to 5% of
its total assets in debt securities rated below investment grade. See "Portfolio
Securities," "Risk Considerations" and the Appendix in the Statement of
Additional Information.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries which may include the U.S., but no country, other than the
U.S., may represent more than 40% of its total assets. The Manager uses its
financial expertise and research capabilities in markets throughout the world in
attempting to identify those countries, currencies and companies in which this
Fund may invest. See "Risk Considerations."
Montgomery Asset Allocation Fund (the "Asset Allocation Fund")
The investment objective of the Asset Allocation Fund is to seek high total
return, while also seeking to reduce risk, through a strategic or active
allocation of assets among domestic stocks, debt instruments and cash or cash
equivalents, coupled with active management of the individual investments in
each asset class. This Fund adjusts the proportion of its investments in each of
these categories as needed to respond to current market conditions, maintaining
from 20 to 80% of total assets in stocks, 20 to 80% of total assets in debt
instruments of any remaining maturity, and 0 to 50% of total assets in cash or
cash equivalents. The Manager will implement its allocation strategy with the
use of a quantitative risk model and computer optimization program. The Manager
may temporarily increase the Fund's cash allocation from its set strategy in
order to meet anticipated redemptions. The Manager seeks to reduce risk through
investment in high-grade debt instruments and cash or cash equivalents. Under
normal conditions, at least 65% of the Fund's total assets are invested in
securities issued by domestic issuers.
The debt instruments in which this Fund invests include U.S. government
securities and other highly rated debt securities. This Fund expects that, under
normal circumstances, the dollar-weighted average maturity of its debt
instruments (or period until next interest rate reset date) may be longer than
three years (see "Duration" discussion below).
The equity securities in which this Fund may invest include common stocks that,
in the opinion of the Manager, have the potential for above-average capital
appreciation) as well as warrants, rights and options. The Manager selects
equity securities of issuers exhibiting positive trends in revenue and earnings
that, in the opinion of the Manager, are sustainable. Among the Fund's equity
investments, the Fund may invest up to 35% of its total assets in foreign equity
securities of various countries, primarily those listed on foreign exchanges.
Montgomery Short Government Bond Fund (the "Short Bond Fund")
The investment objective of the Short Bond Fund is to provide maximum total
return consistent with preservation of capital and prudent investment
management. Total return consists of interest and dividends from underlying
securities, capital appreciation realized from the purchase and sale of
securities, and income from futures and options. Under normal conditions,
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<PAGE>
the Fund seeks to achieve its objective by investing at least 65% of the value
of its total assets in U.S. government securities. The Fund seeks to maintain an
average portfolio effective duration comparable to or less than that of
three-year U.S. Treasury notes. Because the Manager seeks to manage interest
rate risk by limiting effective duration, the Fund may invest in securities of
any maturity.
This Fund is designed primarily for investors who seek higher yields than money
market funds generally offer and are willing to accept nominal fluctuation in
the value of the Fund's shares but who are not willing to accept the greater
fluctuations that long-term bond funds might entail. This Fund is not an
appropriate investment for investors whose primary investment objective is
absolute principal stability. Because the values of the securities in which this
Fund invests generally change with interest rates, the value of its shares will
fluctuate, unlike the value of the shares of a money market fund seeking to
maintain a stable net asset value per share of $1.00.
The Fund also may invest up to 35% of its total assets in cash, commercial paper
and high-grade liquid debt securities, including corporate debt instruments and
privately issued mortgage-related and asset-backed securities that are
considered highly rated debt securities. The Fund also may invest in other
investment companies investing primarily in U.S.
government securities of appropriate duration. See "Portfolio Securities."
Duration of the Asset Allocation Fund and the Short Bond Fund. The Short Bond
Fund and the Asset Allocation Fund expect that, under normal circumstances, the
dollar-weighted average maturity (or period until the next interest rate reset
date) of their portfolio securities may be longer than three years but the
maturity of individual securities may be up to 30 years. However, of these two
Funds, only the Short Bond Fund seeks to maintain an average portfolio effective
duration comparable to or less than that of three-year U.S. Treasury notes.
Montgomery Government Reserve Fund (the "Reserve Fund")
The investment objective of the Reserve Fund is current income consistent with
liquidity and preservation of capital, which under normal conditions it seeks by
investing exclusively in U.S. government securities, repurchase agreements for
U.S. government securities and other money market funds investing in U.S.
government securities and those repurchase agreements. This Fund seeks to
maintain a stable net asset value per share of $1.00 in compliance with Rule
2a-7 under the Investment Company Act, and pursuant to procedures adopted under
such Rule, the Reserve Fund limits its investments to those U.S. government
securities that the Board of Trustees determines present minimal credit risks
and have remaining maturities, as determined under the Rule, of 397 calendar
days or less. The Fund also maintains a dollar-weighted average maturity of the
securities in its portfolio of 90 days or less.
Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund")
Montgomery California Tax-Free Intermediate Bond Fund (the "California
Intermediate Bond Fund")
Montgomery California Tax-Free Money Fund (the "California Money Fund")
The investment objective of the Federal Money Fund is to maintain a stable net
asset value while maximizing current income exempt from federal income tax
consistent with liquidity and preservation of capital. The investment objective
of the California Intermediate Bond Fund is to provide maximum current income
exempt from federal income and California personal income taxes consistent with
preservation of capital and prudent investment management, and that of the
California Money Fund is to maintain a stable net asset value while maximizing
current income exempt from federal and California personal income taxes
consistent with liquidity and preservation of capital. Under normal conditions,
the Federal Money Fund seeks to achieve its objective by investing at least 80%
of its net assets in municipal securities, the interest from which is, in the
opinion of counsel to the issuer, exempt from federal income tax. Under normal
conditions, the California Money Fund seeks to achieve its objective by
investing at least 80% of its net assets in municipal securities and at least
65% of net assets in debt securities, the interest from which is, in the opinion
of counsel to the issuer, also exempt from California personal income taxes
("California municipal securities"). Under normal conditions, the California
Intermediate Bond Fund seeks to achieve its objective by investing at least 80%
of its net assets in California municipal securities.
The California Intermediate Bond Fund is designed primarily for investors who
seek higher yields than tax-free money market funds generally offer and are
willing to accept some fluctuation in this Fund's share value but who are not
willing to accept the greater fluctuations that long-term tax-free bond funds
might entail. This Fund is not an appropriate investment for investors whose
primary investment objective is absolute principal stability. Because the value
of the securities in which this Fund invests generally changes with interest
rates, the value of its shares will fluctuate unlike shares of a money market
fund, which seeks to maintain a stable net asset value per share of $1.00.
Consequently, this Fund seeks to reduce such fluctuations by managing the
effective duration, and thus the interest risk, of its portfolio. (Effective
duration is an indicator of a security's sensitivity to interest rate change.
See "Duration" above.) Under normal conditions, the average dollar-weighted
portfolio maturity of the California Intermediate Bond Fund is expected to stay
within a range of 5 to 10 years. However, this Fund may invest in securities of
any maturity. This Fund is not suitable for investors who cannot benefit from
the tax-exempt character of its dividends, such as IRAs, qualified retirement
plans or tax-exempt entities.
At least 80% of the value of the California Intermediate Bond Fund's net assets
must consist of California municipal securities that at the time of purchase are
rated within the four highest ratings of municipal securities (AAA to BBB)
assigned
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<PAGE>
by S&P, (Aaa to Baa) assigned by Moody's, or (AAA to BBB) assigned by Fitch; or
have S&P's short-term municipal rating of SP-2 or higher, or a municipal
commercial paper rating of A-2 or higher; Moody's short-term municipal
securities rating of MIG-2 or higher, or VMIG-2 or higher, or a municipal
commercial paper rating of P-2 or higher; or have Fitch's short-term municipal
securities rating of FIN-2 or higher, or a municipal commercial paper rating of
Fitch-2 or higher; or if unrated by S&P, Moody's or Fitch, are deemed by the
Manager to be of comparable quality, using guidelines approved by the Board (but
not to exceed 20% of this Fund's net assets). Debt securities rated in the
lowest category of investment grade debt may have speculative characteristics;
changes in economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than is the case with
higher grade bonds. However, there is no assurance that any municipal issuers
will make full payments of principal and interest or remain solvent. For a
description of the ratings, see the Appendix in the Statement of Additional
Information. See also "Risk Considerations."
Under normal conditions, the California Intermediate Bond Fund and the
California Money Fund seek to invest in California municipal securities to the
greatest extent practicable, but they may, however, invest in other municipal
securities if in such Fund's opinion, suitable California municipal securities
are not available. The California Intermediate Bond Fund may invest up to 20%,
and the Federal Money and California Money Funds may invest up to 35%, of their
respective total assets in cash, U.S. government securities, and obligations of
U.S. possessions, commercial paper and other debt securities, including
corporate debt instruments or instruments the interest from which is subject to
the federal alternative minimum tax for individuals. Additionally, the
California Intermediate Bond Fund may invest up to 20% and the California Money
Fund may invest 35%, of their respective total assets in municipal securities
other than California municipal securities. For the California Intermediate Bond
Fund, these other securities must be highly rated debt securities. From time to
time, the California Intermediate Bond and the California Money Funds may invest
more than 25% of their total assets in private activity bonds and industrial
development bonds of issuers located in California.
The Federal Money and California Money Funds seek to maintain a stable net asset
value per share of $1.00 in compliance with Rule 2a-7 under the Investment
Company Act and, pursuant to procedures adopted under such Rule, limit their
investments to those securities that the Board determines present minimal credit
risks and have remaining maturities, as determined under the Rule, of 397
calendar days or less. These Funds also maintain a dollar-weighted average
maturity of their portfolio securities of 90 days or less.
Portfolio Securities
Equity Securities
The Domestic Equity, Select 50, International and Global Funds emphasize
investments in common stock, and common stock may constitute up to 80% of the
Asset Allocation Fund's portfolio. These Funds may also invest in other types of
equity securities (such as preferred stocks or convertible securities) and
equity derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The Domestic Equity, Select 50, Asset Allocation, International and Global Funds
may invest in ADRs, EDRs and GDRs and convertible securities which the Manager
regards as a form of equity security. Each such Fund may also invest up to 5% of
its net assets in warrants, including up to 2% of net assets for those not
listed on a securities exchange.
Privatizations
The Select 50, International and Global Funds believe that foreign governmental
programs of selling interests in government-owned or controlled enterprises
("privatizations") may represent opportunities for significant capital
appreciation, and these Funds may invest in privatizations. The ability of U.S.
entities, such as these Funds, to participate in privatizations may be limited
by local law, or the terms for participation may be less advantageous than for
local investors. There can be no assurance that privatization programs will be
successful.
Special Situations
The Select 50, International and Global Funds believe that carefully selected
investments in joint ventures, cooperatives, partnerships, private placements,
unlisted securities and similar vehicles (collectively, "special situations")
could enhance their capital appreciation potential. These Funds also may invest
in certain types of vehicles or derivative securities that represent indirect
investments in foreign markets or securities in which it is impracticable for
the Funds to invest directly. Investments in special situations may be illiquid,
as determined by the Manager based on criteria reviewed by the Board. These
Funds do not invest more than 15% of their net assets in illiquid investments,
including special situations.
Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the International and Global Funds to invest in certain
18
<PAGE>
markets. Such investments may involve the payment of substantial premiums above
the net asset value of those investment companies' portfolio securities and are
subject to limitations under the Investment Company Act. The International and
Global Funds also may incur tax liability to the extent they invest in the stock
of a foreign issuer that is a "passive foreign investment company" regardless of
whether such "passive foreign investment company" makes distributions to the
Funds. See the Statement of Additional Information.
The Select 50, International, Global, Asset Allocation, Equity Income and Fixed
Income Funds do not intend to invest in other investment companies unless, in
the Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, these Funds bear their ratable share of
that investment company's expenses, including advisory and administration fees.
The Manager has agreed to waive its own management fee with respect to the
portion of these Funds' assets invested in other open-end (but not closed-end)
investment companies.
Debt Securities
The Select 50, International and Global Funds may purchase debt securities that
complement their objective of capital appreciation through anticipated favorable
changes in relative foreign exchange rates, in relative interest rate levels, or
in the creditworthiness of issuers. Debt securities may constitute up to 80% of
the Asset Allocation Fund's and 35% of the Equity Income Fund's total assets. In
selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy which may be changed by the Board, each of the
Select 50, Global and International Funds will not invest more than 5% of its
total assets in debt securities rated lower than investment grade, and the
Allocation and Equity Income Funds will not invest more than 5% of their total
assets in debt securities rated lower than highly rated debt securities. Subject
to this limitation, each of these Funds may invest in any debt security,
including securities in default. After its purchase by a Fund a debt security
may cease to be rated or its rating may be reduced below that required for
purchase by the Fund. A security downgraded below the minimum level may be
retained if determined by the Manager and the Board to be in the best interests
of the Fund. See "Risk Considerations."
In addition to traditional corporate, government and supranational debt
securities, each of the International, Global, Allocation and Equity Income
Funds may invest in external (i.e., to foreign lenders) debt obligations issued
by the governments, governmental entities and companies of emerging market
countries. The percentage distribution between equity and debt will vary from
country to country based on anticipated trends in inflation and interest rates;
expected rates of economic and corporate profits growth; changes in government
policy; stability, solvency and expected trends of government finances; and
conditions of the balance of payments and terms of trade.
U.S. government securities
All Funds may invest in fixed rate and floating or variable rate U.S. government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. Government. Other securities issued by U.S. Government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, while
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Funds' shares. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
Mortgage-Related Securities and Derivative Securities
The Reserve, Tax-Free, Short Bond and Asset Allocation Funds may invest in
mortgage-related securities. A mortgage-related security is an interest in a
pool of mortgage loans and is considered a derivative security. Most
mortgage-related securities are pass-through securities, which means that
investors receive payments consisting of a pro rata share of both principal and
interest (less servicing and other fees), as well as unscheduled prepayments, as
mortgages in the underlying mortgage pool are paid off by the borrowers. Certain
mortgage-related securities are subject to high volatility. These funds use
these derivative securities in an effort to enhance return and as a means to
make certain investments not otherwise available to the Funds. See "Hedging and
Risk-Management Practices" for a discussion of other reasons why these Funds
invest in derivative securities.
Agency Mortgage-Related Securities.
Investors in the Reserve, Tax-Free, Short Bond and Asset Allocation Funds should
note that the dominant issuers or guarantors of mortgage-related securities
today are GNMA, FNMA and the FHLMC. GNMA creates pass-through securities from
pools of government guaranteed or insured (Federal Housing Authority or Veterans
Administration) mortgages. FNMA and FHLMC issue pass-through securities from
pools of conventional and federally insured and/or guaranteed residential
mortgages.
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The principal and interest on GNMA pass-through securities are guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. FNMA
guarantees full and timely payment of all interest and principal, and FHLMC
guarantees timely payment of interest and ultimate collection of principal of
its pass-through securities. Securities from FNMA and FHLMC are not backed by
the full faith and credit of the U.S. Government but are generally considered to
offer minimal credit risks. The yields provided by these mortgage-related
securities have historically exceeded the yields on other types of U.S.
government securities with comparable "lives" largely due to the risks
associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
The Fixed Income Funds consider GNMA, FNMA and FHLMC-issued pass-through
certificates, CMOs and other mortgage-related securities to be U.S. government
securities for purposes of their investment policies. However, the Money Market
Funds do not invest in stripped mortgage securities, and the Short Bond Fund
limits its stripped mortgage securities investments to 10% of total assets. The
liquidity of IOs and POs issued by the U.S. Government or its agencies and
instrumentalities and backed by fixed-rate mortgage-related securities will be
determined by the Manager under the direct supervision of the Trust's Pricing
Committee and reviewed by the Board, and all other IOs and POs will be deemed
illiquid for purposes of the Fixed Income Funds' limitation on illiquid
securities. The Allocation and Short Bond Funds may invest in derivative
securities known as "floaters" and "inverse floaters," the values of which vary
in response to interest rates. These securities may be illiquid and their values
may be very volatile.
Privately Issued Mortgage-Related Securities/Derivatives. The Short Bond Fund
and the Asset Allocation Fund may invest in mortgage-related securities offered
by private issuers, including pass-through securities for pools of conventional
residential mortgage loans; mortgage pay-through obligations and mortgage-backed
bonds, which are considered to be obligations of the institution issuing the
bonds and are collateralized by mortgage loans; and bonds and CMOs
collateralized by mortgage-related securities issued by GNMA, FNMA, FHLMC or by
pools of conventional mortgages, multi-family or commercial mortgage loans.
Private issuer mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than U.S. Government and
agency mortgage-related securities because they offer no direct or indirect
governmental guarantees. However, many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal. The Short Bond Fund may purchase some mortgage-related securities
through private placements that are restricted as to further sale. See "Illiquid
Securities." The value of these securities may be very volatile.
Structured Notes and Indexed Securities. The Funds may invest in structured
notes and indexed securities. Structured notes are debt securities, the interest
rate or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk. See "The Funds' Investment Objectives and
Policies - Duration."
Variable Rate Demand Notes
The Fixed Income and the Asset Allocation Funds may invest in variable rate
demand notes ("VRDNs").
Zero Coupon Bonds
The Fixed Income and Asset Allocation Funds may invest in zero coupon bonds.
Zero coupon bond prices are highly sensitive to changes in market interest
rates. The original issue discount on the zero coupon bonds must be included
ratably in the income of the Fixed Income and Asset Allocation Funds as the
income accrues even though payment has not been received. These Funds
nevertheless intend to distribute an amount of cash equal to the currently
accrued original issue discount, and this may require liquidating securities at
times they might not otherwise do so and may result in capital loss. See "Tax
Information" in the Statement of Additional Information.
Asset-Backed Securities, Custodial Receipts, Participation Interests and Tender
Option Bonds
Each Fund may invest up to 5% (25% in the case of the Allocation and Short Bond
Funds) of its total assets in asset-backed securities. Like mortgage-related
securities, these securities are subject to the risk of prepayment. See "Risk
Considerations." The California Intermediate Bond Fund may invest in custodial
receipts. The Tax-Free Funds may invest in participation interests and tender
option bonds.
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<TABLE>
Other Investment Practices
The table below and the following sections summarize certain investment
practices of the Funds, each of which may involve certain special risks. The
Glossary section at the end of this Prospectus briefly describes each of the
investment techniques summarized below. The Statement of Additional Information,
under the heading "Investment Objectives and Policies of the Funds," contains
more detailed information about certain of these practices, including
limitations designed to reduce risks.
<CAPTION>
Small International
Equity Small Cap Micro Global Global Small
Growth Income Cap Opportunities Cap Opportunities Communications Cap
Fund Fund Fund Fund Fund Fund Fund Fund
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Repurchase agreements (1) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse-dollar roll transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed 10% of
total fund assets x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third
of total fund assets x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Leverage x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
10% of total fund assets x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
30% of total fund assets x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued and forward
commitment securities x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts (9) x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and currencies (7) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
indices (7) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered call options (7) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered put options (7) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts (8) x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on
futures x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Equity swaps x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to
5% of fund's net assets) x/ (6) x/ (6) x/ (4) x/ (6) x/ (6) x/ (6) x/ (6) x/ (6)
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to
10% of fund's net assets)
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to
15% of fund's net assets) x/ x/ x/ x/ x/ x/ x/
====================================================================================================================================
California
Short Federal Tax-Free California
International Emerging Emerging Select Asset Government Government Tax-Free Intermediate Tax-Free
Growth Asia Markets 50 Allocation Bond Reserve Money Bond Money
Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase agreements (1) x/ x/ x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions x/ (1) x/ (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed 10% of
total fund assets x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third
of total fund assets x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement x/ x/ x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Leverage x/ x/ x/ x/ x/ (2) x/
- -----------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
10% of total fund assets x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed
30% of total fund assets x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued and forward
commitment securities x/ x/ x/ x/ x/ (3) x/ (3) x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts (9) x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
and currencies (7) x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities
indices (7) x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered call options (7) x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered put options (7) x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts(8)x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on
futures x/ x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Equity swaps x/ x/ x/ x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to
5% of the fund's net assets x/ (6) x/ (6) x/ (6) x/ (6) x/ (6) x/ (6) x/ (5) x/ (5) x/ (6) x/(5)
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to
10% of fund's net assets) x/ x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to
15% of fund's net assets) x/ x/ x/ x/ x/ x/ x/
====================================================================================================================================
1 Under the Investment Company Act, repurchase agreements and reverse dollar
roll transactions are considered to be loans by a Fund and must be fully
collateralized by collateral assets. If the seller defaults on its
obligations to repurchase the underlying security, a Fund may experience
delay
21
<PAGE>
or difficulty in exercising its rights to realize upon the security, may
incur a loss if the value of the security declines and may incur
disposition costs in liquidating the security.
2 The Manager will not use leverage for the Short Bond Fund if, as a result,
the Fund's portfolio duration would not be comparable to or less than that
of three-year U.S. Treasury notes.
3 The Fund also may enter into forward commitments to sell high-grade liquid
debt securities it does not own at the time of entering such commitments.
4 A Fund will not enter into any options on securities, securities indices
or currencies or related options (including options on futures) if the sum
of the initial margin deposits and premiums paid for any such option or
options would exceed 5% of its total assets, and it will not enter into
options with respect to more than 25% of its total assets.
5 A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indices and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
6 A Fund that may invest in forward currency contracts may not invest more
than one-third of its assets in such contracts.
</TABLE>
Borrowing
Subject to the limits set forth in the Prospectus, the Funds may pledge their
assets in connection with borrowings. A Fund will not purchase any securities
while any borrowings exceed 5% of its total assets (excluding, in the case of
the Short Bond Fund, fully collateralized reverse repurchase agreements and
dollar roll transactions), except that the Growth, Small Cap Opportunities,
International Growth, Select 50, Asset Allocation, Equity Income, International
Small Cap, Emerging Asia and Opportunities Funds may not purchase securities if
such borrowings exceed 10% of their total assets.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate to
further the Fund's investment objective or when it appears that a position of
the desired size cannot be accumulated. Portfolio turnover generally involves
some expense to a Fund, including brokerage commissions, dealer mark-ups and
other transaction costs, and may result in the recognition of capital gains that
may be distributed to shareholders. See "Financial Highlights" for portfolio
turnover information. The annual portfolio turnover rate for the Emerging Asia
Fund is expected to be approximately 125%. Even when portfolio turnover exceeds
100% for a Fund that Fund does not regard portfolio turnover as a limiting
factor. Portfolio turnover in excess of 100% is considered high, increases
brokerage costs incurred by a Fund and may cause recognition of gain by
shareholders.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds (except the
Money Funds) may employ certain risk management practices using certain
derivative securities and techniques (known as Derivatives). Markets in some
countries currently do not have instruments available for hedging transactions.
To the extent that such instruments do not exist, the Manager may not be able to
hedge its investment effectively in such countries. Furthermore, a Fund engages
in hedging activities only when the Manager deems it to be appropriate and does
not necessarily engage in hedging transactions with respect to each investment.
Hedging transactions involve certain risks. While a Fund may benefit from the
use of hedging positions, unanticipated changes in interest rates or securities
prices may result in poorer overall performance for a Fund than if it had not
entered into a hedging position. If the correlation between a hedging position
and a portfolio position is not properly protected, the desired protection may
not be obtained and the Fund may be exposed to risk of financial loss. In
addition, a Fund pays commissions and other costs in connection with such
investments.
22
<PAGE>
Investment Restrictions
The investment objective of each Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, each Fund's other
investment policies may be changed by its Trust's Board. If there is a change in
the investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The California Money, Federal Money, Equity Income, Select 50, Micro Cap and
Small Cap Opportunities Funds have reserved the right, if approved by the Board,
to convert in the future to a "feeder" fund that would invest all of its assets
in a "master" fund having substantially the same investment objective, policies
and restrictions. At least 30-days' prior written notice of any such action
would be given to all shareholders if and when such a proposal is approved,
although no such action has been proposed as of the date of this Prospectus.
Risk Considerations
Small Companies
The Small Cap, Small Cap Opportunities, Micro Cap and International Small Cap
Funds emphasize, and the Select 50, other International, Growth, Allocation and
Global Funds may make investments in, smaller companies that may benefit from
the development of new products and services. Such smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, more mature issuers. Such smaller companies may have limited product
lines, markets or financial resources, and their securities may trade less
frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.
Foreign Securities
The Domestic Equity, Select 50, Asset Allocation, International and Global Funds
have the right to purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks of loss inherent in domestic
investments. The Select 50, International and Global Funds, particularly the
Emerging Asia Fund and Emerging Markets Fund, may invest in securities of
companies domiciled in, and in markets of, so-called "emerging market
countries." These investments may be subject to higher risks than investments in
more developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts. Additional risk factors,
including use of domestic and foreign custodian banks and depositories, are
described elsewhere in the Prospectus and in the Statement of Additional
Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments in other countries are generally greater than in the U.S. Foreign
markets have different clearance and settlement procedures from those in the
U.S., and certain markets have experienced times when settlements did not keep
pace with the volume of securities transactions. The inability of a Fund to make
intended security purchases due to settlement difficulties could cause it to
miss attractive investment opportunities. Inability to sell a portfolio security
due to settlement problems could result in loss to the Fund if the value of the
portfolio security declined or result in claims against the Fund. In certain
countries, there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. The securities markets of many of the countries in which these Funds may
invest may also be smaller, less liquid, and subject to greater price volatility
than those in the U.S.
Because certain foreign securities may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions between currencies. A change in the value of a foreign currency
against the U.S. dollar results in a corresponding change in the U.S. dollar
value of a Fund's securities denominated in the currency. Such changes also
affect the Fund's income and distributions to shareholders. A Fund may be
affected either favorably or unfavorably by changes in the relative rates of
exchange between the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
23
<PAGE>
Some countries in which one of these Funds may invest also may have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Fund. The Fund may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Security Lending
The Funds may lend its securities to brokers, dealers and other financial
organizations. There is a risk of delay in receiving collateral or in recovering
the securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially.
Lower Quality Debt
The Select 50, International and Global Funds are authorized to invest in
medium-quality (rated or equivalent to BBB by S&P or Fitch's or Baa by Moody's)
and in limited amounts of high-risk debt securities below investment grade
quality. Medium quality debt securities have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than with higher
grade debt securities.
As an operating policy, which may be changed by the Board without shareholder
approval, these Funds do not invest more than 5% of their total assets in debt
securities below investment grade, also known as "junk bonds". The Board may
consider a change in this operating policy if, in its judgment, economic
conditions change such that a higher level of investment in high-risk, lower
quality debt securities would be consistent with the interests of these Funds
and their shareholders. Unrated debt securities are not necessarily of lower
quality than rated securities but may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Manager to determine, to the
extent reasonably possible, that the planned investment is sound. From time to
time, these Funds may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Diversification
Diversifying a fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less diversified
funds may be more sensitive to changes in the market value of a single issuer or
industry. The Select 50 Fund may present greater risk than is usually associated
with widely diversified mutual funds because it may invest in the securities of
as few as 50 issuers. Therefore, the Select 50 Fund is not appropriate as your
sole investment.
Concentration in Communications Industry
The Communications Fund concentrates its investments in the global
communications industry. Consequently, the Fund's share value may be more
volatile than that of mutual funds not sharing this concentration. The value of
the Fund's shares may vary in response to factors affecting the global
communications industry, which may be subject to greater changes in governmental
policies and regulation than many other industries, and regulatory approval
requirements may materially affect the products and services. Because this Fund
must satisfy certain diversification requirements in order to maintain its
qualification as a regulated investment company within the meaning of the Code,
this Fund may not always be able to take full advantage of opportunities to
invest in certain communications companies.
Concentration in Securities of Emerging Asian Companies
The Emerging Asia Fund concentrates its investments in companies that have their
principal activities in emerging Asian countries. Consequently, the Fund's share
value may be more volatile than that of investment companies not sharing this
geographic concentration. The value of the Fund's shares may vary in response to
political and economic factors affecting issuers in emerging Asian countries.
Although the Fund normally does not expect to invest in Japanese companies, some
emerging Asian economies are directly affected by Japanese capital investment in
the region and by Japanese consumer demands. Many of the emerging Asian
countries are developing both economically and politically. Emerging Asia
countries may have relatively unstable governments, economies based on only a
few commodities or industries, and securities markets trading infrequently or in
low volumes. Some emerging Asian countries restrict the extent to which
foreigners may invest in their securities markets. Securities of issuers located
in some emerging Asian countries tend to have volatile prices and may offer
significant potential for loss as well as gain. Further, certain
24
<PAGE>
companies in emerging Asia may not have firmly established product markets, may
lack depth of management, or may be more vulnerable to political or economic
developments such as nationalization of their own industries.
Interest Rates
The market value of debt securities that are interest-rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate change. Changes in the ability
of an issuer to make payments of interest and principal and in the market's
perception of its creditworthiness also affect the market value of that issuer's
debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that the Fixed Income Funds, and the Asset Allocation
Fund, to the extent it retains the same percentage of debt securities, may have
to reinvest the proceeds of prepayments at lower interest rates than those of
their previous investments. If this occurs, a Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable duration, although they may have a comparable risk of
decline in market value in periods of rising interest rates. To the extent that
the Fixed Income Funds or the Asset Allocation Fund purchase mortgage-related
securities at a premium, unscheduled prepayments, which are made at par, result
in a loss equal to any unamortized premium. Duration is one of the fundamental
tools used by the Manager in managing interest rate risks including prepayment
risks. See "Duration" in the Glossary.
Tax-Free Funds
Investing in Municipal Securities. Because the California Intermediate Bond and
the California Money Funds invest primarily in California municipal securities,
their performance may be especially affected by factors pertaining to the
California economy and other factors specifically affecting the ability of
issuers of California municipal securities to meet their obligations. As a
result, the value of the Funds' shares may fluctuate more widely than the value
of shares of a portfolio investing in securities relating to a number of
different states. The Federal Money Fund also may invest a portion of its
portfolio in California municipal securities. Investors in the Federal Money
Fund should note that the types of risks of investing in California municipal
securities exist in varying degrees for municipal securities of other states.
Non-diversified Portfolio. The California Intermediate Bond Fund is a
"non-diversified" investment company under the Investment Company Act. This
means that, with respect to 50% of its total assets, it may not invest more than
5% of its total assets in the securities of any one issuer (other than the U.S.
Government). The balance of its assets may be invested in as few as two issuers.
Thus, up to 25% of the Fund's total assets may be invested in the securities of
any one issuer. For purposes of this limitation, a security is considered to be
issued by the governmental entity (or entities) the assets and revenues of which
back the security, or, with respect to an industrial development bond, that is
backed only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a guaranteed
security also may be considered to be an issuer in connection with such
guarantee. By investing in a portfolio of municipal securities, a shareholder in
the California Intermediate Bond Fund enjoys greater diversification than an
investor holding a single municipal security. However, the investment return on
a non-diversified portfolio typically is dependent upon the performance of a
smaller number of issuers relative to the number of issuers held in a
diversified portfolio. If the financial condition or market assessment of
certain issuers changes, this Fund's policy of acquiring large positions in the
obligations of a relatively small number of issuers may affect the value of its
portfolio to a greater extent than if its portfolio were fully diversified.
Management Of The Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees that establishes its Funds' policies and supervises and reviews
their management. Day-to-day operations of the Funds are administered by the
officers of the Trusts and by the Manager pursuant to the terms of an investment
management agreement with each Fund.
Montgomery Asset Management, L.P., is the Funds' Manager. The Manager, a
California limited partnership, was formed in 1990 as an investment adviser
registered as such with the SEC under the Investment Advisers Act of 1940, as
amended, and since then has advised private accounts as well as the Funds. Its
general partner is Montgomery Asset Management, Inc., and its sole limited
partner is Montgomery Securities, the Funds' Distributor. Under the Investment
Company Act, both Montgomery Asset Management, Inc. and Montgomery Securities
may be deemed control persons of the Manager. Although the operations and
management of the Manager are independent from those of Montgomery Securities,
the Manager may draw
25
<PAGE>
upon the research and administrative resources of Montgomery Securities in its
discretion and consistent with applicable regulations.
Portfolio Managers
John D. Boich is a managing director and senior portfolio manager. From 1990 to
1993, he was vice president and portfolio manager at The Boston Company
Institutional Investors Inc. From 1989 to 1990, he was the founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, Mr. Boich worked as a financial adviser with Prudential-Bache
Securities and E.F. Hutton & Company. Mr. Boich, together with Mr. Castro,
manages the Global Opportunities Fund, the Global Communications Fund, the
International Small Cap Fund and the International Growth Fund.
John H. Brown, CFA, is a managing director and senior portfolio manager.
Preceding his arrival at the Manager in May 1994, Mr. Brown was an analyst and
portfolio manager at Merus Capital Management in San Francisco, California from
June 1986. Mr. Brown manages the Equity Income Fund.
Michael Carmen, CFA, is a vice president and portfolio manager. From 1993 until
joining the Manager in 1996, he was a vice president and associate portfolio
manager with State Street Research and Management Company in Boston where he
assisted with the management of capital appreciation and growth portfolios.
Before then, he was a Senior Equity Analyst with State Street and, from 1991 to
1992, with Cigna Investments in Hartford. Mr. Carmen, as a key member of the
growth equity team (which includes also Mr. Honour and Mr. Pratt), manages the
Growth Fund, the Micro Cap Fund and the Small Cap Opportunities Fund and the
equity component of the Asset Allocation Fund.
Oscar A. Castro is a managing director and senior portfolio manager. Before
joining the Manager, he was vice president/portfolio manager at G.T. Capital
Management, Inc. from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, he was deputy portfolio manager/analyst at Templeton International. Mr.
Castro, together with Mr. Boich, manages the Global Opportunities Fund, the
Global Communications Fund, the International Small Cap Fund and the
International Growth Fund.
Frank Chiang is a vice president and portfolio manager. From 1993 until joining
the Manager in 1996, Mr. Chiang was managing director and portfolio manager at
TCW Asia Ltd. in Hong Kong. Mr. Chiang, together with Ms. Ee, Ms. Jimenez, Mr.
Sudweeks and Mr. Haslett, manages the Emerging Markets Fund and the Emerging
Asia Fund.
Angeline Ee is a vice president and portfolio manager. From 1990 until joining
the Manager in July 1994, Ms. Ee was an Investment Manager with AIG Investment
Corp. in Hong Kong. From June 1989 until September 1990, Ms. Ee was a co-
manager of a portfolio of Asian equities and bonds at Chase Manhattan Bank in
Singapore. Ms. Ee, together with Ms. Jimenez, Mr. Sudweeks, Mr. Haslett and Mr.
Chiang, manages the Emerging Markets Fund and the Emerging Asia Fund.
Kevin T. Hamilton, Chairman of the Manager's Investment Oversight Committee and
a managing director, is responsible for coordinating and implementing the
investment decisions of the Manager's equity teams for the Select 50 Fund. The
portfolio management teams responsible for the different disciplines used in the
Select 50 Fund are described throughout this "portfolio managers" section. From
1985 until joining the Manager in February 1991, Mr. Hamilton was a Senior vice
president responsible for investment oversight at Analytic Investment Management
in Irvine, California.
Thomas R. Haslett, CFA, is a managing director and senior portfolio manager.
From 1987 until joining the Manager in April 1992, Mr. Haslett was a portfolio
manager at Gannett, Welsh and Kotler in Boston, Massachusetts. Mr. Haslett,
together with Ms. Jimenez, Mr. Sudweeks, Ms. Ee and Mr. Chiang manages the
Emerging Asia Fund and the Emerging Markets Fund.
Roger W. Honour is a managing director and senior portfolio manager. Prior to
joining Montgomery Asset Management in June 1993, Mr. Honour spent one year as
vice president and portfolio manager at Twentieth Century Investors in Kansas
City, Missouri. From 1990 to 1992, he served as vice president and portfolio
manager at Alliance Capital Management. From 1978 to 1990, Mr. Honour was a vice
president with Merrill Lynch Capital Markets. Mr. Honour, as a key member of the
growth equity team (which includes also Mr. Pratt and Mr. Carmen), manages the
Growth Fund, the Micro Cap Fund and the Small Cap Opportunities Fund and the
equity component of the Asset Allocation Fund.
Josephine S. Jimenez, CFA, is a managing director and senior portfolio manager.
From 1988 through 1991, Ms. Jimenez worked at Emerging Markets Investors
Corporation/Emerging Markets Management in Washington, D.C. as senior analyst
and portfolio manager. Ms. Jimenez, together with Mr. Sudweeks, Mr. Haslett and
Ms. Ee and Mr. Chiang, manages the Emerging Asia and Emerging Markets Funds.
Bradford D. Kidwell is a vice president and portfolio manager. Mr. Kidwell
joined the Manager in 1991 from the position he held since 1989 as the sole
general partner and portfolio manager of Oasis Financial Partners, an affiliate
of the Distributor that invested in savings and loans. Before then, he covered
the savings and loan industry for Dean Witter Reynolds from 1987 to 1989. Mr.
Kidwell, together with Mr. Roberts and Mr. Philpott, manages the Small Cap Fund.
26
<PAGE>
Jerome C. (Cam) Philpott, CFA, is a vice president and portfolio manager. Before
joining the Manager, Mr. Philpott was a securities analyst with Boettcher &
Company in Denver from 1988 to 1991. Mr. Philpott, together with Mr. Roberts and
Mr. Kidwell, manages the Small Cap Fund.
Andrew Pratt, CFA, is a vice president and portfolio manager. He joined
Montgomery Asset Management from Hewlett-Packard Company, where he was an equity
analyst, managed a portfolio of small capitalization technology companies, and
researched private placement and venture capital investments. From 1983 through
1988, he worked in the Capital Markets Group at Fidelity Investments in Boston,
Massachusetts. Mr. Pratt, as a key member of the growth equity team (which
includes also Mr. Honour and Mr. Carmen), manages the Growth Fund, the Micro Cap
Fund and the Small Cap Opportunities Fund and the equity component of the Asset
Allocation Fund.
Stuart O. Roberts is a managing director and senior portfolio manager. For the
five years preceding this Fund's inception in 1990, Mr. Roberts was a portfolio
manager and analyst at Founders Asset Management in Denver, Colorado, where he
managed three public mutual funds. Mr. Roberts, together with Mr. Philpott and
Mr. Kidwell, manages the Small Cap Fund.
Bryan L. Sudweeks, Ph.D., CFA, is a managing director and senior portfolio
manager. Before joining the Manager, he was a senior analyst and portfolio
manager at Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, he was a Professor of International Finance and
Investments at George Washington University and served as Adjunct Professor of
International Investments from 1988 until May 1991. Mr. Sudweeks, together with
Ms. Jimenez, Mr. Haslett and Ms. Ee and Mr. Chiang manages the Emerging Asia and
Emerging Markets Funds. Mr. Sudweeks is also a Portfolio Strategist for the
International Growth Fund.
William C. Stevens is a managing director and a senior portfolio manager. At
Barclays de Zoete Wedd Securities from 1991 to 1992, he started its CMO and
asset-backed securities trading. Mr. Stevens traded stripped mortgage securities
and mortgage-related interest rate swaps for the First Boston Corporation from
1990 to 1991, and while with Drexel Burnham Lambert from 1984 to 1990 was
responsible for the origination and trading of all derivative mortgage-related
securities. Mr. Stevens manages the Short Government Bond Fund, the Government
Reserve Fund, the Federal Tax-Free Money Fund, the California Tax-Free
Intermediate Bond Fund and the California Tax-Free Money Fund. Mr. Stevens is
also the portfolio manager for the fixed-income and cash components of the Asset
Allocation Fund.
Management Fees and Other Expenses
The Manager provides the Funds with advice on buying and selling securities,
manages the Funds' investments, including the placement of orders for portfolio
transactions, furnishes the Funds with office space and certain administrative
services, and provides personnel needed by the Funds with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with each Fund. The Manager also compensates the members of the Trusts' Boards
of Trustees who are interested persons of the Manager, and assumes the cost of
printing prospectuses and shareholder reports for dissemination to prospective
investors. As compensation, each Fund pays the Manager a management fee (accrued
daily but paid when requested by the Manager) based upon the value of the
average daily net assets of that Fund, according to the following table.
<TABLE>
The management fees for the Domestic Equity, Select 50, Asset Allocation,
International and Global Funds are higher than for most mutual funds.
<CAPTION>
Average Daily Net Assets Management Fee
(Annual Rate)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Opportunities Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund First $250 million 1.25%
Over $250 million 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
27
<PAGE>
Average Daily Net Assets Management Fee
(Annual Rate)
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
Over $1 billion 0.90%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund First $500 million 0.80%
Over $500 million 0.65%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund First $500 million 0.50%
Over $500 million 0.40%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
Over $500 million 0.20%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund First $500 million 0.50%
Over $500 million 0.40%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Manager also serves as the Funds' Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, the Funds pay the Administrator a
monthly fee at the following annual rates: each of the Growth, Equity Income,
Opportunities, Emerging Asia and Allocation Funds pays seven one-hundredths of
one percent (0.07%) of average daily net assets (0.06% of average daily net
assets over $500 million); each of the Small Cap, Small Cap Opportunities,
Select 50, Micro Cap, Emerging Markets, International Small Cap, International
Growth and Communications Funds pays seven one-hundredths of one percent (0.07%)
of average daily net assets (0.06% of daily net assets over $250 million); each
of the Short, Reserve and Tax-Free Funds pays five one-hundredths of one percent
(0.05%) of average daily net assets (0.04% of average daily net assets over $500
million and the Reserve Fund over $250 million).
Each Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to that Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
For certain Funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses at or below the lesser of the
maximum allowable by applicable state expense limitations or the following
percentages of each Fund's average net assets: the Growth Fund, one and
five-tenths of one percent (1.50%); the Equity Income Fund, eighty-five
one-hundredths of one percent (0.85%); the Small Cap Fund, one and four-tenths
of one percent (1.40%); the Small Cap Opportunities Fund, one and five-tenths of
one percent (1.50%); the Micro Cap Fund, one and seventy-five one-hundredths of
one percent (1.75%); the International Growth Fund, one and sixty-five
one-hundredths of one percent (1.65%); the Select 50 Fund, one and eight-tenths
of one percent (1.80%); the Emerging Markets, International Small Cap,
Communications and Opportunities Funds, one and nine-tenths of one percent
(1.90%); the Asset Allocation Fund, one and three-tenths of one percent (1.30%);
the Bond Funds, seven-tenths of one percent (0.70%); and the Money Market Funds,
six-tenths of one percent (0.60%). The Manager also may voluntarily reduce
additional amounts to increase the return to a Fund's investors. The Manager may
terminate these voluntary reductions at any time. Any reductions made by the
Manager in its fees are subject to reimbursement by that Fund within the
following two years (three years for the Asset Allocation Fund), provided that
the Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations. The Manager generally seeks reimbursement for
the oldest reductions and waivers before payment by the Funds for fees and
expenses for the current year.
28
<PAGE>
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay to increase the return to that Fund's investors. If the Manager
performs a service or assumes an operating expense for which a Fund is obligated
to pay and the performance of such service or payment of such expense is not an
obligation of the Manager under the Investment Management Agreement, the Manager
is entitled to seek reimbursement from that Fund for the Manager's costs
incurred in rendering such service or assuming such expense. The Manager also
may compensate broker-dealers and other intermediaries that distribute a Fund's
shares as well as other service providers of shareholder and administrative
services. The Manager may also sponsor seminars and educational programs on the
Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to, reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Funds receive prompt execution at competitive prices, the Manager also may
consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. It is anticipated that Montgomery Securities
may act as one of the Funds' brokers in the purchase and sale of portfolio
securities and, in that capacity, will receive brokerage commissions from the
Funds. The Funds will use Montgomery Securities as its broker only when, in the
judgment of the Manager and pursuant to review by the Boards, Montgomery
Securities will obtain a price and execution at least as favorable as that
available from other qualified brokers. See "Execution of Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How To Contact The Funds
For information on the Funds or your account, call a Montgomery Shareholder
Service Representative at:
(800) 572-3863
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
Regular Mail Express Mail or Overnight Service
The Montgomery Funds The Montgomery Funds
c/o DST Systems, Inc. c/o DST Systems, Inc.
P.O. Box 419073 1004 Baltimore St.
Kansas City, MO 64141-6073 Kansas City, MO 64105
Visit the Montgomery World Wide Web Site at:
www.xperts.montgomery.com/1
How To Invest In The Funds
The Funds' shares are offered directly to the public, with no sales load, at
their next-determined net asset value after receipt of an order with payment.
The Funds' shares are offered for sale by Montgomery Securities, the Funds'
Distributor, 600 Montgomery Street, San Francisco, California 94111, (800)
572-3863, and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, Montgomery Securities or certain administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders and payment for the Money Funds
must be received by 12:00 noon, New York time. Orders for Fund shares received
after the Funds' cutoff times will be purchased at the next-determined net asset
value after receipt of the order. Shares of the Fixed Income Funds will not be
priced on a national bank holiday.
The minimum initial investment in each Fund is $1,000 ($5,000 for the Micro Cap
Fund) (including IRAs) and $100 ($500 for the Micro Cap Fund) for subsequent
investments. The Manager or the Distributor, in its discretion, may waive these
minimums. The Funds do not accept third party checks or cash investments. Checks
must be in U.S. dollars and, to avoid fees and delays, drawn only on banks
located in the U.S. Purchases may also be made in certain circumstances by
payment of securities. See the Statement of Additional Information for further
details.
29
<PAGE>
Initial Investments
Minimum Initial Investment (including IRAs): $1,000
Minimum Initial Investment for the Micro Cap Fund (including IRAs): $5,000
- --------------------------------------------------------------------------------
Initial Investments by Check
- --------------------------------------------------------------------------------
o Complete the Account Application. Tell us in which Fund(s)
you want to invest and make your check payable to The
Montgomery Funds.
o We do not accept third party checks or cash investments.
Checks must be in U.S. dollars and, to avoid fees and
delays, drawn only on banks located in the U.S.
o A charge may be imposed on checks that do not clear.
Initial Investments by Wire
o Call the Transfer Agent to tell them you intend to make
your initial investment by wire. Provide the Transfer Agent
with your name, dollar amount to be invested and Fund(s) in
which you want to invest. They will provide you with
further instructions to complete your purchase. Complete
information regarding your account must be included in all
wire instructions to ensure accurate handling of your
investment.
o Request your bank to transmit immediately available funds
by wire for purchase of shares in your name to the
following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For Credit to: (shareholder(s) name)
Shareholder Account Number: (shareholder(s)
account number)
Name of Fund: (Montgomery Fund name)
o Your bank may charge a fee for any wire transfers.
o The Funds and the Distributor each reserve the right to
reject any purchase order in whole or in part.
Subsequent Investments
Minimum Subsequent Investment (including IRAs): $100
Minimum Subsequent Investment for the Micro Cap Fund (including IRAs): $500
- --------------------------------------------------------------------------------
Subsequent Investments by Check
- --------------------------------------------------------------------------------
o Make your check payable to The Montgomery Funds. Enclose an
investment stub with your check. If you do not have an
investment stub, mail your check with written instructions
indicating the Fund name and account number to which your
investment should be credited.
o A charge may be imposed on checks that do not clear.
30
<PAGE>
- --------------------------------------------------------------------------------
Subsequent Investments by Wire
- --------------------------------------------------------------------------------
o You do not need to contact the Transfer Agent prior to
making subsequent investments by wire. Instruct your bank
to wire funds to the Transfer Agent's affiliated bank by
using the bank wire information under "Initial Investments
by Wire."
- --------------------------------------------------------------------------------
Subsequent Investments by Telephone
- --------------------------------------------------------------------------------
o Shareholders are automatically eligible to make telephone
purchases. To make a purchase, call the Transfer Agent at
(800) 572-3863 before the Fund cutoff time.
o Shares of the Money Funds and shares for IRAs may not be
purchased by phone.
o The maximum telephone purchase is an amount up to five
times your account value on the previous day.
o Payments for shares purchased must be received by the
Transfer Agent within three business days after the
purchase request. Write your confirmed purchase number on
your check or include it in your wire instructions.
o You should do one of the following to ensure payment is
received in time:
o Transfer funds directly from your bank
account by sending a letter and a voided
check or deposit slip (for a savings
account) to the Transfer Agent.
o Send a check by overnight or 2nd day
courier service.
o Instruct your bank to wire funds to the
Transfer Agent's affiliated bank by using
the bank wire information under the
section titled "Initial Investments by
Wire."
- --------------------------------------------------------------------------------
Automatic Account Builder ("AAB")
- --------------------------------------------------------------------------------
o AAB will be established on existing accounts only. You may
not use an AAB investment to open a new account. The
minimum automatic investment amount is each Fund's
subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account)
or preprinted deposit slip (savings account) from your bank
account to your Montgomery account application or your
letter of instruction. Investments will automatically be
transferred into your Montgomery account from your checking
or savings account.
o Investments may be transferred either monthly or quarterly
on or up to two business days before the 5th or 20th day of
the month. If no day is specified on your account
application or your letter of instruction, the 20th of each
month will be selected.
o You should allow 20 business days for this service to
become effective.
31
<PAGE>
o You may cancel your AAB at any time by sending a letter to
the Transfer Agent. Your request will be processed upon
receipt.
Telephone Transactions
You agree to reimburse the Funds for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Funds upon 30- days' written notice or at any time by you by written
notice to the Funds. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next-determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by a Fund. The Funds and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Funds employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording
certain telephone calls, sending a confirmation and requiring the caller to give
a special authorization number or other personal information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Retirement Plans
Except for the Tax-Free Funds, shares of the Funds are available for purchase by
any retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and IRAs.
Certain of the Funds are available for purchase through administrators for
retirement plans. Investors who purchase shares as part of a retirement plan
should address inquiries and seek investment servicing from their plan
administrators. Plan administrators may receive compensation from the Funds for
performing shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How To Redeem An Investment In The Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the Fixed Income Funds). The
redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, Montgomery Securities or
other securities dealers. Payment of redemption proceeds is made promptly
regardless of when redemption occurs and normally within three days after
receipt of all documents in proper form, including a written redemption order
with appropriate signature guarantee. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instructions. The Funds may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. Shares tendered
for redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. Procedures for
requesting a redemption are set forth below.
32
<PAGE>
- --------------------------------------------------------------------------------
Redeeming by Written Instruction
- --------------------------------------------------------------------------------
o Write a letter giving your name, account number, the name
of the Fund from which you wish to redeem and the dollar
amount or number of shares you wish to redeem.
o Signature guarantee your letter if you want the redemption
proceeds to go to a party other than the account owner(s),
your predesignated bank account or if the dollar amount of
the redemption exceeds $50,000. Signature guarantees may be
provided by an eligible guarantor institution such as a
commercial bank, an NASD member firm such as a stock
broker, a savings association or national securities
exchange. Contact the Transfer Agent for more information.
o If you do not have a predesignated bank account and want to
wire your redemption proceeds, include a voided check or
deposit slip with your letter. The minimum amount that may
be wired is $500 (wire charges, if any, will be deducted
from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees in the Manager's
discretion.
- --------------------------------------------------------------------------------
Redeeming by Check
- --------------------------------------------------------------------------------
o Checkwriting is available on the Government Reserve,
Federal Money, California Money, California Intermediate
Tax-Free Bond and Short Government Bond Funds.
o The minimum amount per check is $250. A check for less may
be returned to you.
o All checks will require only one signature unless otherwise
indicated.
o Checks should not be used to close accounts with
fluctuating net asset values (California Intermediate
Tax-Free Bond and Short Government Bond Funds).
o Checks will be returned to you at the end of each month.
o Checkwriting privileges may not be available for Montgomery
Securities brokerage accounts.
o A charge may be imposed for any stop payments requested.
- --------------------------------------------------------------------------------
Redeeming By Telephone
- --------------------------------------------------------------------------------
o Unless you have declined telephone redemption privileges on
your account application, you may redeem shares up to
$50,000 by calling the Transfer Agent before the Fund
cutoff time.
o If you included bank wire information on your account
application or made subsequent arrangements to accommodate
bank wire redemptions, you may request that the Transfer
Agent wire your redemption proceeds to your bank account.
Allow at least two business days for redemption proceeds to
be credited to your bank account. If you want to wire your
redemption proceeds to arrive at your bank on the same
business day (subject to bank cutoff times), there is a $10
fee.
33
<PAGE>
o Telephone redemption privileges will be suspended 30 days
after an address change. All redemption requests during
this period must be in writing with a guaranteed signature.
o Telephone redemption privileges may be cancelled after an
account is opened by instructing the Transfer Agent in
writing. Your request will be processed upon receipt. This
service is not available for IRA accounts.
- --------------------------------------------------------------------------------
By establishing telephone redemption privileges, a shareholder authorizes the
Funds and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization. When a shareholder appoints a designee on the
Account Application or by other written authorization, the shareholder agrees to
be bound by the telephone redemption instructions given by the shareholder's
designee. The Funds may change, modify or terminate these privileges at any time
upon 60-days' notice to shareholders. The Funds will not be responsible for any
loss, damage, cost or expense arising out of any transaction that appears on the
shareholder's confirmation after 30 days following mailing of such confirmation.
See discussion of Fund telephone procedures and liability under "Telephone
Transactions."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, each Fund will
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000
($5,000 for the Micro Cap Fund). If a Fund decides to make an involuntary
redemption, the shareholder will first be notified that the value of the
shareholder's account is less than the minimum level and will be allowed 30 days
to make an additional investment to bring the value of that account at least to
the minimum investment required to open an account before the Fund takes any
action.
Exchange Privileges And Restrictions
You may exchange shares from another Fund with the same registration, taxpayer
identification number and address. An exchange may result in a recognized gain
or loss for income tax purposes. See the discussion of Fund telephone procedures
and limitations of liability under "Telephone Transactions."
- --------------------------------------------------------------------------------
Purchasing and Redeeming Shares by Exchange
- --------------------------------------------------------------------------------
o You are automatically eligible to make telephone exchanges with your
Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange
fee) after your request is received. Your request is subject to the
Funds' cut-off times.
o Exchange purchases must meet the minimum investment requirements of
the Fund you intend to purchase.
34
<PAGE>
o You may exchange for shares of a Fund only in states where that
Fund's shares are qualified for sale and only for Funds offered by
this prospectus.
o You may not exchange for shares of a Fund that is not open to new
shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make
more than four exchanges out of any one fund during a twelve-month
period. The Fund may also refuse an exchange into a Fund from which
you have redeemed shares within the previous 90 days (accounts under
common control and accounts with the same taxpayer identification
number will be counted together). Exchanges out of the Fixed Income
Funds are exempt. A shareholder's exchanges may be restricted or
refused if a Fund receives, or the Manager anticipates, simultaneous
orders affecting significant portions of that Fund's assets and, in
particular, a pattern of exchanges coinciding with a "market timing"
strategy. The Trusts reserve the right to refuse exchanges by any
person or group if, in the Manager's judgment, a Fund would be unable
to effectively invest the money in accordance with its investment
objective and policies, or would otherwise be potentially adversely
affected. Although the Trusts attempt to provide prior notice to
affected shareholders when it is reasonable to do so, they may impose
these restrictions at any time. The exchange limit may be modified
for accounts in certain institutional retirement plans to conform to
plan exchange limits and U.S. Department of Labor regulations (for
those limits, see plan materials). The Trusts reserve the right to
terminate or modify the exchange privileges of Fund shareholders in
the future.
- --------------------------------------------------------------------------------
Automatic Transfer Service ("ATS")
You may elect systematic exchanges out of the Fixed Income Funds into any other
Fund. The minimum exchange is $100 ($500 for the Micro Cap Fund). Periodically
investing a set dollar amount into a Fund is also referred to as dollar-cost
averaging because the number of shares purchased will vary depending on the
price per share. Your account with the recipient Fund must meet the applicable
minimum of $1,000 or $5,000 for the Micro Cap Fund. Exchanges out of the Fixed
Income Funds are exempt from the four exchanges limit policy.
Directed Dividend Service
If you own shares of the Fixed Income Funds, you may elect to use your monthly
dividends to automatically purchase additional shares of another Fund. Your
account with the recipient Fund must meet the applicable minimum of $1,000 or
$5,000 for the Micro Cap Fund.
Brokers and Other Intermediaries
Investing through Montgomery Securities Brokerage Account (Money Funds Only)
Investors with Montgomery Securities brokerage accounts may instruct Montgomery
Securities automatically to purchase shares of a Money Fund when the free credit
balance in the investor's brokerage account (including deposits, proceeds of
sales of securities, and miscellaneous cash dividends and interest, but not
amounts held by Montgomery Securities as collateral for margin obligations to
Montgomery Securities) exceeds $100 on each day the NYSE is open for trading
other than national bank holidays. Upon request, a free credit balance in a
Montgomery Securities brokerage account also may be invested in shares of the
Money Funds following receipt by the Transfer Agent of investor instructions. If
such instructions are received after 12:00 noon, New York time, Fund shares will
be purchased at the next-determined asset value. Checkwriting privileges may not
be available for Montgomery Securities brokerage accounts. For the Money Market
Funds, the minimum initial investment through an investor's brokerage account
with Montgomery Securities is $100.
Investing through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from other selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged by these agents. Purchase orders through securities brokers,
dealers and other financial intermediaries are effected at the next-determined
net asset value after receipt of the order by such agent, provided the agent
transmits such order on a timely basis to the Transfer Agent so that it is
received by 4:00 p.m. (1:00 p.m. for the Money Funds), New York time, on days
that the Fund issues shares. Orders received after
35
<PAGE>
that time will be purchased at the next-determined net asset value. To the
extent that these agents perform shareholder servicing activities for the Fund,
they may receive fees from the Fund for such services.
Automatic Redemption into Montgomery Securities Brokerage Account (Money Funds
Only)
If a shareholder wishes, the Transfer Agent will redeem shares of the selected
Money Fund automatically to satisfy debit balances in a shareholder's Montgomery
Securities brokerage account or to provide necessary cash collateral for a
shareholder's margin obligation to Montgomery Securities. Redemptions also may
be effected automatically to settle securities transactions with Montgomery
Securities if a shareholder's free credit balance on the day before settlement
is insufficient to settle the transactions. Each Montgomery Securities brokerage
account will, as of the close of business each day the NYSE is open for trading
and is not a national bank holiday, automatically be scanned for debits and
pending securities settlements, and, after application of any free credit
balances in the account to such debits and pending securities settlements, a
sufficient number of shares of the selected Money Fund, not to exceed the number
of shares in the shareholder's account, will be redeemed on the next day the
NYSE is open for trading to satisfy any remaining debits or amounts needed for
pending securities settlements.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
Montgomery Securities or selected securities brokers or dealers. Shareholders
should contact their securities broker or dealer for appropriate instructions
and for information concerning any transaction or service fee that may be
imposed by the broker or dealer. Shareholders are entitled to the net asset
value next determined after receipt of a redemption order by such broker-dealer,
provided the broker-dealer transmits such order on a timely basis to the
Transfer Agent so that it is received by 4:00 p.m., New York time (12:00 noon
for the Money Funds), on a day that the Fund redeems shares. Orders received
after that time are entitled to the net asset value next determined after
receipt.
How Net Asset Value Is Determined
The net asset value of each Fund is determined once daily as of 4:00 p.m. (12:00
noon for the Money Funds), New York time, on each day that the NYSE is open for
trading (except for bank holidays for the Fixed Income Funds). Per-share net
asset value is calculated by dividing the value of each Fund's total net assets
by the total number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the Manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Funds calculate their
net asset values may not be reflected unless the Manager, under supervision of
the Board, determines that a particular event would materially affect a Fund's
net asset value.
<TABLE>
Dividends And Distributions
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Funds intend to distribute according to the following schedule:
36
<PAGE>
<CAPTION>
==========================================================================================================================
Income Dividends Capital Gains
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity Funds (except Equity Declared and paid in November Declared and paid in November
Income Fund) or December each year* or December each year*
- --------------------------------------------------------------------------------------------------------------------------
Equity Income Fund Declared and paid on or about the Declared and paid in November
last business day of each quarter. or December each year*
- --------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds Declared and paid in November Declared and paid in November
or December each year* or December each year*
- --------------------------------------------------------------------------------------------------------------------------
Fixed-Income Funds Declared daily and paid monthly Declared and paid in November
on or about the last business day or December each year*
of each month
==========================================================================================================================
<FN>
* Additional distributions, if necessary, may be made following each Fund's
fiscal year end (June 30) in order to avoid the imposition of tax on a Fund.
</FN>
</TABLE>
Unless investors request cash distributions in writing at least seven business
days before a distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional shares of the
applicable Fund and credited to the shareholder's account at the closing net
asset value on the reinvestment date.
Distributions Affect a Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of a Fund,
regardless of how long you have held the shares. Dividends and capital gains
awaiting distribution are included in each Fund's daily net asset value. The
share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Growth Fund declared a dividend in the amount of $0.50 per share. If the Growth
Fund's share price was $10.00 on December 30, the Fund's share price on December
31 would be $9.50, barring market fluctuations.
"Buying a Dividend"
If you buy shares of a Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
Except for the newer Funds that intend to elect and qualify as soon as possible,
each of the Funds has elected and intends to continue to qualify to be treated
as a regulated investment company under Subchapter M of the Code, by
distributing substantially all of its net investment income and net capital
gains to its shareholders and meeting other requirements of the Code relating to
the sources of its income and diversification of assets. Accordingly, the Funds
generally will not be liable for federal income tax or excise tax based on net
income except to the extent their earnings are not distributed or are
distributed in a manner that does not satisfy the requirements of the Code. If a
Fund is unable to meet certain Code requirements, it may be subject to taxation
as a corporation. Funds investing in foreign securities also may incur tax
liability to the extent they invest in "passive foreign investment companies."
See "Portfolio Securities" and the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income (except income consisting of tax-exempt interest for the Tax-Free Funds)
and any excess of net short-term capital gain over net long-term capital loss
that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time
37
<PAGE>
the Fund's shares have been owned. Distributions of income and capital gains are
taxed in the manner described above, whether they are taken in cash or are
reinvested in additional shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
The Federal Money Fund intends, and the California Money and California
Intermediate Bond Funds intend to continue, to qualify to pay "exempt-interest
dividends" to their shareholders by maintaining, as of the close of each quarter
of its taxable year, at least 50% of the value of its total assets in municipal
securities. If these Funds satisfy this requirement, distributions from net
investment income to shareholders will be exempt from federal income taxation to
the extent net investment income is represented by interest on municipal
securities. Distributions from other net investment income, such as market
discount on municipal securities, and from certain other investment practices,
such as certain transactions in options, will be ordinary income. Shareholders
generally will not incur any federal income tax on the amount of exempt-interest
dividends received by them from these Funds, whether taken in cash or reinvested
in additional shares. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's Social Security or railroad
retirement benefits are subject to federal income tax.
General Information
The Trusts
All of the Funds with the exception of the Asset Allocation Fund are series of
The Montgomery Funds, a Massachusetts business trust organized on May 10, 1990.
The Asset Allocation Fund is a series of The Montgomery Funds II, a Delaware
business trust organized on September 10, 1993. The Agreement and Declarations
of Trust of both Trusts permit their Boards to issue an unlimited number of full
and fractional shares of beneficial interest, $.01 par value, in any number of
series. The assets and liabilities of each series within either of the two
Trusts are separate and distinct from each other series.
This Prospectus relates only to the Class R shares of the Funds. The Funds offer
other classes of shares to eligible investors and may in the future designate
other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of its Trust,
votes separately on matters affecting only that Fund (e.g., approval of the
Investment Management Agreement); all series of each Trust vote as a single
class on matters affecting all series of that Trust jointly or that Trust as a
whole (e.g., election or removal of Trustees). Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in any election of
Trustees can, if they so choose, elect all of the Trustees of that Trust. While
the Trusts are not required and do not intend to hold annual meetings of
shareholders, such meetings may be called by each Trust's Board at its
discretion, or upon demand by the holders of 10% or more of the outstanding
shares of the Trust for the purpose of electing or removing Trustees.
Shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of Trustees pursuant to the provisions
of Section 16(c) of the Investment Company Act.
Performance Information
From time to time, the Funds may publish their total return, and, in the case of
certain Funds, current yield and tax equivalent yield in advertisements and
communications to investors. Total return information generally will include a
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations. A
Fund may also advertise aggregate and average total return information over
different periods of time. Each Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 investment that includes
capital appreciation and depreciation for the stated period according to a
specific formula. Aggregate total return is calculated
38
<PAGE>
in a similar manner, except that the results are not annualized. Total return
figures will reflect all recurring charges against each Fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate that
reflects the change in value of a hypothetical account based on the income
received from the Fund during a 30-day period. It is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. In the case of the
California Money and California Intermediate Bond Funds, tax equivalent yield is
the yield that a taxable investment must generate in order to equal (after
applicable taxes are deducted) either Fund's yield for an investor in stated
federal income and California personal income tax brackets. For the Federal
Money Fund, tax equivalent yield is the yield that a taxable investment must
generate in order to equal (after applicable taxes are deducted) the Fund's
yield for an investor in stated federal income tax brackets. See "Performance
Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered as a representation of what an investor's total return or current
yield may be in any future period. The Funds' Annual Report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND.
Legal Opinion
The validity of shares offered by this Prospectus will be passed on by Heller,
Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California 94104.
Shareholder Reports and Inquiries
During the year, the Funds will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and pre-authorized automatic investment, exchange and redemption services
(quarterly).
o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semi-annual reports are mailed approximately 60 days after
June 30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o Annual updated prospectus is mailed to existing shareholders in October
or November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-3863 or (800) 572-FUND.
Backup Withholding
Tax identification number (TIN)
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors
39
<PAGE>
Act, the TIN of the minor should be furnished. If a shareholder has been
notified by the IRS that he or she is subject to backup withholding because he
or she failed to report all interest and dividend income on his or her tax
return and the shareholder has not been notified by the IRS that such
withholding will cease, the shareholder should cross out the appropriate item in
the Account Application. Dividends paid to a foreign shareholder's account by a
Fund may be subject to up to 30% withholding instead of backup withholding.
A shareholder that is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.
---------------------------------
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus, the Statement of Additional Information, or
in the Funds' official sales literature.
40
<PAGE>
Glossary
o Asset backed securities. Asset backed securities are secured by and
payable from, pools of assets, such as motor vehicle installment sales
contracts, installment loan contracts, leases of various types of real
and personal property and receivables from revolving credit (e.g.,
credit card) agreements.
o Cash Equivalents. Cash equivalents are short-term, interest bearing
instruments or deposits and may include, for example, commercial paper,
certificates of deposit, repurchase agreements, bankers' acceptances,
U.S. Treasury bills, bank money market deposit accounts, master demand
notes and money market mutual funds. These consist of high-quality debt
obligations, certificates of deposit and bankers' acceptances rated at
least A-1 by S&P or Prime-1 by Moody's, or the issuer has an
outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
o Collateral assets include cash, letters of credit, U.S. government
securities or other high-grade liquid debt or equity securities (except
that instruments collateralizing loans by the Money Market Funds must
be debt securities rated in the highest grade). Collateral assets are
separately identified and rendered unavailable for investment or sale.
o Collateralized Mortgage Obligations (CMOs). Derivative mortgage-related
securities that separate the cash flows of mortgage pools into
different classes or tranches. Stripped mortgage securities are CMOs
that allocate different proportions of interest and principal payments
on a pool of mortgages. One class may receive all of the interest (the
interest only or "IO" class) while another may receive all of the
principal (principal only or "PO" class). The yield to maturity on any
IO or PO class is extremely sensitive not only to changes in interest
rates but also to the rate of principal payments and prepayments on
underlying mortgages. In the most extreme cases, an IO class may become
worthless.
o Convertible security. A fixed-income security (a bond or preferred
stock) that may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible securities are senior to common
stock in a corporation's capital structure but are usually subordinated
to similar non-convertible securities. The price of a convertible
security is influenced by the market value of the underlying common
stock.
o Covered call option. A call option is "covered" if the Fund owns the
underlying securities, has the right to acquire such securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option, or owns an offsetting call option.
o Covered put option. A put option is "covered" if the Fund has
collateral assets with a value not less than the exercise price of the
option or holds a put option on the underlying security.
o Custodial receipts. Custodial receipts represent rights to receive
certain future principal and interest payments on municipal securities
deposited with a custodian. Typically, two classes of receipts are
issued in a private placement. The interest rate of the first class is
similar to that of the underlying Municipal Security. The value of the
second class may be quite volatile.
o Depositary receipts include American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs") and other similar instruments. Depositary receipts are
receipts typically issued in connection with a U.S. or foreign bank or
trust company and evidence ownership of underlying securities issued by
a foreign corporation.
o Derivatives include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts,
swaps and options on futures contracts on U.S. Government and foreign
government securities and currencies.
o Dollar roll transaction. A dollar roll transaction is similar to a
reverse repurchase agreement except it requires a Fund to repurchase a
similar rather than the same security.
o Duration. Traditionally, a debt security's "term to maturity"
characterizes a security's sensitivity to changes in interest rates.
However, "term to maturity" measures only the time until a debt
security provides its final payment, taking no account of pre-maturity
payments. Most debt securities provide interest ("coupon") payments in
addition to a final ("par") payment at maturity, and some securities
have call provisions allowing the issuer to repay the instrument in
full before maturity date, each of which affect the security's response
to interest rate changes. "Duration" is considered a more precise
measure of interest rate risk than "term to maturity." Determining
duration may involve the Manager's estimates of future economic
parameters, which may vary from actual future values. Fixed-income
securities with effective durations of three years are more responsive
to interest rate fluctuations than those with effective durations of
one year. For example, if interest rates rise by 1%, the value of
securities having an effective duration of three years will generally
decrease by approximately 3%.
o EAFE Index. The Morgan Stanley Capital International Europe, Australia,
Far East Index.
<PAGE>
o Emerging Market Companies. A company is considered to be an Emerging
Market Company if its securities are principally traded in the capital
market of an emerging market country; it derives at least 50% of its
total revenue from either goods produced or services rendered in
emerging market countries or from sales made in such emerging market
countries, regardless of where the securities of such companies are
principally traded; or it is organized under the laws of, and with a
principal office in, an emerging market country. An emerging market
country is one having an economy and market that are or would be
considered by the World Bank or the United Nations to be emerging or
developing.
o Equity derivative securities include, among other things, options on
equity securities, warrants and future contracts on equity securities.
o Equity swaps. Equity swaps allow the parties to exchange the dividend
income or other components of return on an equity investment (e.g., a
group of equity securities or an index) for a component of return on
another non-equity or equity investment. Equity swaps transitions may
be volatile and may present the Fund with counterparty risks.
o FHLMC. The Federal Home Loan Mortgage Corporation.
o FNMA. The Federal National Mortgage Association.
o Forward currency contracts. A forward currency contract is a contract
individually negotiated and privately traded by currency traders and
their customers and creates an obligation to purchase or sell a
specific currency for an agreed-upon price at a future date. The Funds
generally do not enter into forward contracts with terms greater than
one year. A Fund generally enters into forward contracts only under two
circumstances. First, if a Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security by entering into a
forward contract to buy the amount of a foreign currency needed to
settle the transaction. Second, if the Manager believes that the
currency of a particular foreign country will substantially rise or
fall against the U.S. dollar, it may enter into a forward contract to
buy or sell the currency approximating the value of some or all of a
Fund's portfolio securities denominated in such currency. A Fund will
not enter into a forward contract if, as a result, it would have more
than one-third of total assets committed to such contracts (unless it
owns the currency that it is obligated to deliver or has caused its
custodian to segregate Segregable Assets having a value sufficient to
cover its obligations). Although forward contracts are used primarily
to protect a Fund from adverse currency movements, they involve the
risk that currency movements will not be accurately predicted.
o Futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a Fund may sell
interest rate futures contracts (i.e., enter into a futures contract to
sell the underlying debt security) in an attempt to hedge against an
anticipated increase in interest rates and a corresponding decline in
debt securities it owns. Each Fund will have collateral assets equal to
the purchase price of the portfolio securities represented by the
underlying interest rate futures contracts it has an obligation to
purchase.
o GNMA. The Government National Mortgage Association.
o Highly rated debt securities. Debt securities rated within the three
highest grades by Standard & Poor's Corporation ("S&P") (AAA to A),
Moody's Investors Services, Inc. ("Moody's") (Aaa to A) or Fitch
Investor Services, Inc. ("Fitch") (AAA to A), or in unrated debt
securities deemed to be of comparable quality by the Manager using
guidelines approved by the Board of Trustees. See the Appendix to the
Statement of Additional Information for a description of these ratings.
o Illiquid securities. The Funds treat any securities subject to
restrictions on repatriation for more than seven days and securities
issued in connection with foreign debt conversion programs that are
restricted as to remittance of invested capital or profit as illiquid.
The Funds also treat repurchase agreements with maturities in excess of
seven days as illiquid. Illiquid securities do not include securities
that are restricted from trading on formal markets for some period of
time but for which an active informal market exists, or securities that
meet the requirements of Rule 144A under the Securities Act of 1933 and
that, subject to the review by the Board and guidelines adopted by the
Board, the Manager has determined to be liquid.
o Investment grade. Investment grade debt securities are those rated
within the four highest grades by S&P (at least BBB), Moody's (at least
Baa) or Fitch (at least Baa) or in unrated debt securities deemed to be
of comparable quality by the Manager using guidelines approved by the
Board of Trustees.
o Leverage. Some Funds may use leverage in an effort to increase return.
Although leverage creates an opportunity for increased income and gain,
it also creates special risk considerations. Leveraging also creates
interest expenses that can exceed the income from the assets retained.
o Municipal securities. Municipal securities are obligations issued by,
or on behalf of, states, territories and possessions of the U.S. and
the District of Columbia, and their political subdivisions, agencies,
authorities and instrumentalities, including industrial development
bonds, as well as obligations of certain agencies and instrumentalities
of the U.S. Government. Municipal securities are classified as general
obligation bonds, revenue bonds and notes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power
for the payment of principal and interest. Revenue bonds are payable
from revenue derived from a particular facility, class of facilities or
the proceeds of a special excise or other specific revenue source but
not from the issuer's
<PAGE>
general taxing power. Private activity bonds and industrial revenue
bonds, in most cases, are revenue bonds that do not carry the pledge of
the credit of the issuing municipality but generally are guaranteed by
the corporate entity on whose behalf they are issued. Notes are
short-term instruments that are obligations of the issuing
municipalities or agencies sold in anticipation of a bond sale,
collection of taxes or other receipt of revenues.
o Options on securities, securities indices and currencies. A Fund may
purchase call options on securities which it intends to purchase (or on
currencies in which those securities are denominated) in order to limit
the risk of a substantial increase in the market price of such security
(or an adverse movement in the applicable currency). A Fund may
purchase put options on particular securities (or on currencies in
which those securities are denominated) in order to protect against a
decline in the market value of the underlying security below the
exercise price less the premium paid for the option (or an adverse
movement in the applicable currency relative to the U.S. dollar). Prior
to expiration, most options are expected to be sold in a closing sale
transaction. Profit or loss from the sale depends upon whether the
amount received is more or less than the premium paid plus transaction
costs. A Fund may purchase put and call options on stock indices in
order to hedge against risks of stock market or industry-wide stock
price fluctuations.
o Participation interests. Participation interests are issued by
financial institutions and represent undivided interests in municipal
securities. Participation interests may have fixed, floating or
variable rates of interest. Some participation interests are subject to
a "nonappropriation" or "abatement" feature by which, under certain
conditions, the issuer of the underlying Municipal Security, without
penalty, may terminate its payment obligation. In such event, the Funds
must look to the underlying collateral.
o Repurchase agreement. With a repurchase agreement, a Fund acquires a
U.S. Government security or other high-grade liquid debt instrument
(for the Money Market Funds, the instrument must be rated in the
highest grade) from a financial institution that simultaneously agrees
to repurchase the same security at a specified time and price.
o Reverse dollar roll transactions. When a Fund engages in a reverse
dollar roll, it purchases a security from a financial institution and
concurrently agrees to resell a similar security to that institution at
a later date at an agreed-upon price.
o Reverse repurchase agreement. In a reverse repurchase agreement, a Fund
sells to a financial institution a security that it holds and agrees to
repurchase the same security at an agreed-upon price and date.
o S&P 500. Standard & Poor's 500 Composite Price Index.
o Securities lending. A fund may lend securities to brokers, dealers and
other financial organizations. Each securities loan is collateralized
with collateral assets in an amount at least equal to the current
market value of the loaned securities, plus accrued interest. There is
a risk of delay in receiving collateral or in recovering the securities
loaned or even a loss of rights in collateral should the borrower fail
financially.
o Tender option bonds. Tender option bonds are municipal securities that
have a relatively long maturity and bear interest at a fixed rate
substantially higher than the prevailing short-term tax-exempt rates,
coupled with an option to tender the securities at periodic intervals
and in order to receive the securities' face value. In return for the
option, the holder of the securities pays a fee in an amount that
causes the municipal securities to trade at face value when the option
is issued. Effectively, the security bears the short-term tax-exempt
rate at the time the option was issued.
o U.S. government securities include U.S. Treasury bills, notes, bonds
and other obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
o Variable rate demand notes. Variable rate demand notes ("VRDNs") are
instruments with rates of interest adjusted periodically or which
"float" continuously according to specific formulae and often have a
demand feature entitling the purchaser to resell the securities.
o A warrant typically is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common
stock at a specified exercise price by a particular expiration date. A
warrant not exercised or disposed of by its expiration date expires
worthless.
o When-issued and forward commitment securities. The Funds may purchase
U.S. Government or other securities on a "when- issued" basis and may
purchase or sell securities on a "forward commitment" or "delayed
delivery" basis. The price is fixed at the time the commitment is made,
but delivery and payment for the securities take place at a later date.
When-issued securities and forward commitments may be sold prior to the
settlement date, but a Fund will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering
the securities. No income accrues on securities that have been
purchased pursuant to a forward commitment or on a when-issued basis
prior to delivery to a Fund. At the time a Fund enters into a
transaction on a when-issued or forward commitment basis, it supports
its obligation with collateral assets equal to the value of the
when-issued or forward commitment securities and causes the collateral
assets to be marked to market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
<PAGE>
o Zero coupon bonds. Zero coupon bonds are debt obligations that do not
pay current interest and are consequently issued at a significant
discount from face value. The discount approximates the total interest
the bonds will accrue and compound over the period to maturity or the
first interest-payment date at a rate of interest reflecting the market
rate of interest at the time of issuance.
<PAGE>
Investment Manager
Montgomery Asset Management, L.P.
101 California Street
San Francisco, California 94111
1-800-572-FUND
Distributor
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
1-415-627-2485
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-572-3863
Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
