RULE 497(e):
33-34841;811-6011
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
Prospectus
November 12, 1996
The following ten mutual funds (the "Funds") are offered in this Prospectus:
o Montgomery Growth Fund
o Montgomery Equity Income Fund
o Montgomery Small Cap Opportunities Fund
o Montgomery International Growth Fund
o Montgomery International Small Cap Fund
o Montgomery Emerging Markets Fund
o Montgomery Asset Allocation Fund
o Montgomery Select 50 Fund
o Montgomery Short Government Bond Fund
o Montgomery Government Reserve Fund
Each Fund's shares offered in this Prospectus (the Class P shares) are sold only
through financial intermediaries and financial professionals at net asset value
with no sales load, no commissions, and no exchange fees. The Class P shares are
subject to a Rule 12b-1 distribution fee as described in this prospectus. The
minimum initial investment in each Fund is $1,000 and subsequent investments
must be at least $100. 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 12, 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
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 4
Financial Highlights 6
The Funds' Investment Objectives and Policies 9
Portfolio Securities 13
Other Investment Practices 16
Risk Considerations 18
Management of the Funds 19
How To Contact The Funds 24
How To Invest in the Funds 24
How To Redeem an Investment in the Funds 27
Exchange Privileges and Restrictions 29
How Net Asset Value is Determined 30
Dividends and Distributions 31
Taxation 32
General Information 32
Backup Withholding 34
2
<PAGE>
<TABLE>
<CAPTION>
The Montgomery Funds
The Funds' investment objectives are summarized below. See "The Funds'
Investment Objectives and Policies" beginning on page 9, "Portfolio Securities"
beginning on page 13, "Other Investment Practices" beginning on page 16 and
"Risk Considerations" beginning on page 18 for more detailed information.
The Equity Funds
<S> <C>
- ----------------------------------------------------------- --------------------------------------------------------
Montgomery Growth Fund Montgomery Equity Income Fund
Seeks capital appreciation by investing primarily in Seeks current income and capital appreciation by
equity securities, usually common stocks, of domestic investing primarily in income-producing equity
companies of all sizes and emphasizes companies having securities of domestic companies, with the goal to
market capitalizations of $1 billion or more. 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 Emerging Markets Fund Montgomery Small Cap Opportunities Fund
Seeks capital appreciation by investing primarily in Seeks capital appreciation by investing primarily in
equity securities of companies in countries having equity securities, usually common stocks, of small-
economies and markets generally considered by the capitalization domestic companies, which the Fund
World Bank or the United Nations to be emerging or currently considers to be companies having total
developing. market capitalizations of less than $1 billion.
- ----------------------------------------------------------- --------------------------------------------------------
- ----------------------------------------------------------- --------------------------------------------------------
Montgomery International Growth Fund Montgomery International Small Cap Fund
Seeks capital appreciation by investing primarily in Seeks capital appreciation by investing primarily in
equity securities of companies outside the United States equity securities of companies outside the U.S. having
having total market capitalizations over $1 billion, total market capitalizations of less than $1 billion,
sound fundamental values and potential for long-term sound fundamental values and potential for long-term
growth at a reasonable price. growth at a reasonable price.
- ----------------------------------------------------------- --------------------------------------------------------
The Multi-Strategy Funds
- ----------------------------------------------------------- --------------------------------------------------------
Montgomery Select 50 Fund Montgomery Asset Allocation Fund
Seeks capital appreciation by investing primarily in at Seeks high total return, while also seeking to reduce
least 50 different equity securities of companies of all risk, through a strategic or active allocation of assets
sizes throughout the world. Each of the Manager's five among domestic stocks, fixed-income securities and
equity discipline management teams selects 10 equity cash or cash equivalents.
securities based on the potential for capital appreciation.
- ----------------------------------------------------------- --------------------------------------------------------
The Fixed Income Funds
- ----------------------------------------------------------- --------------------------------------------------------
Montgomery Short Government Bond Fund Montgomery Government Reserve Fund
Seeks maximum total return consistent with preservation Seeks current income consistent with liquidity and
of capital and prudent investment management by preservation of capital by investing exclusively in
investing primarily in U.S. government securities and, to U.S. government securities, repurchase agreements
manage interest rate risk, maintains an average portfolio for U.S. government securities and other money
effective duration comparable to or less than three-year market funds investing exclusively in U.S.
U.S. Treasury notes. It targets higher yields than money government securities and such repurchase
market funds generally with less fluctuation in the value agreements. It seeks to maintain a stable net asset
of its shares than long-term bond funds. This Fund does value of $1.00 per share.
not 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.
</TABLE>
3
<PAGE>
Fees And Expenses Of The Funds
Shareholder Transaction Expenses
<TABLE>
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load Imposed
Imposed on Purchases 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
(after reimbursement (after reimbursement
The Equity Funds Management Fee* 12b-1 Fee unless noted)* unless noted)*
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Growth Fund 0.96% 0.25% 0.39%+ 1.60%+
- ----------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund 0.60% 0.25% 0.25% 1.10%
- ----------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund 1.20% 0.25% 0.30% 1.75%
- ----------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund 1.25% 0.25% 0.65% 2.15%
- ----------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund 1.10% 0.25% 0.55% 1.90%
- ----------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund 1.06% 0.25% 0.66%+ 1.97%+
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total Fund Operating
Other Expenses Expenses
(after reimbursement) (after reimbursement)
The Multi-Strategy and Fixed Income Funds Management Fee* 12b-1 Fee unless noted)* unless noted)*
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Select 50 Fund 1.25% 0.25% 0.55% 2.05%
- --------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund 0.80% 0.25% 0.50% 1.55%
- --------------------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund 0.50% 0.25% 0.10% 0.85%
- --------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund 0.38% 0.25% 0.22% 0.85%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
This table is 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. Because Rule 12b-1 distribution charges are accounted for
on a class-level basis (and not on an individual shareholders-level basis),
individual long-term investors in the Class P shares of the Fund may over time
pay more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. ("NASD"), even
though all shareholders of that Class in the aggregate will not. This is
recognized and permitted by the NASD.
+ These figures show actual expenses; no reimbursements or waivers applied.
+ 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. See "How to Redeem an
Investment in the Funds."
4
<PAGE>
* Expenses for the Funds are based on actual expenses and expense limitations
for the fiscal year ended June 30, 1996 for the Class P shares (or, if no
Class P shares were outstanding, for another class of shares (but adjusted
to include the Rule 12b-1 fee). 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 and including the Rule 12b-1 fee for the Class P Shares,
actual total Fund operating expenses for the period ended June 30, 1996
(annualized) would have been as follows: Montgomery Equity Income Fund,
1.70% (0.85% other expenses); Montgomery Small Cap Opportunities Fund, 2.41%
(0.96% other expenses); Montgomery International Growth Fund, 3.16% (1.81%
other expenses); Montgomery International Small Cap Fund, 3.01% (1.53% other
expenses); Montgomery Asset Allocation Fund, 1.80% (0.95% other expenses);
Montgomery Select 50 Fund, 2.36% (0.86% other expenses); Montgomery Short
Government Bond Fund, 2.50% (1.05% other expenses) and Montgomery Government
Reserve Fund, 0.99% (0.34% other expenses). The Manager may terminate these
voluntary reductions at any time. See "Management of the Funds."
</FN>
</TABLE>
Example of Expenses for the Funds
<TABLE>
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 $16 $50 $87 $190
- ----------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund $11 $35 $61 $134
- ----------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund $18 $55 $95 $206
- ----------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund $22 $67 $115 $248
- ----------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund $19 $60 $103 $222
- ----------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund $20 $62 $106 $230
- ----------------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund $21 $64 $110 $238
- ----------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund $16 $49 $84 $185
- ----------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund $9 $27 $47 $105
- ----------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund $9 $27 $47 $105
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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.
5
<PAGE>
Financial Highlights
Selected Per Share Data and Ratios
<TABLE>
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. This financial
information for periods indicated with the note "R" relate to another class of
shares of the Funds not subject to the Class P Rule 12b-1 fee because the Class
P shares were not offered during those periods.
<CAPTION>
GROWTH FUND SMALL CAP
OPPORTUNITIES FUND
Selected Per Share Data for the Year or Period Ended: 1996(a) 1995R 1994(a)R 1996(b)#R
<S> <C> <C> <C> <C>
Net asset value-- beginning of year $19.22 $15.27 $12.00 $12.00
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.03 0.12 0.04 0.02
Net realized and unrealized gain on investments 2.69 3.91 3.31++ 3.78++
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 2.72 4.03 3.35 3.80
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- (0.07) (0.01) --
Distributions from net realized capital gains -- (0.07) -- --
Distribution in excess of net realized capital gains -- -- (0.07) --
Distributions from capital -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.14) (0.08) --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $21.94 $19.16 $15.27 $15.80
- --------------------------------------------------------------------------------------------------------------------------------
Total return** 14.15% 26.53% 27.98% 31.67%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $ 82 $878,776 $149,103 $136,140
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 0.53%+ 0.98% 1.09%+ 0.23%+
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.60%+ 1.50% 1.49%+ 1.50%+
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 118.14% 128.36% 110.65% 81.29%
- --------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0596 N/A N/A $0.0578
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager -- -- $0.03 ($0.04)
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager -- -- 1.79%+ 2.16%+
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Growth Fund's Class R Shares and Class P Shares commenced operations
on September 30, 1993 and January 12, 1996, respectively.
(b) 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.
++ 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 represents the per share data for the period
since the use of the undistributed income method did not accord with the
results of operations.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME FUND INTERNATIONAL INTERNATIONAL
GROWTH SMALL CAP FUND
FUND
Selected Per Share Data for the Year or Period Ended: 1996(a) 1995(a)R 1996(b) 1996R 1995R 1994(c)R
<S> <C> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $15.66 $12.00 $13.66 11.75 $12.02 $12.00
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.08 0.31 0.00# 0.03 0.12 0.00#
Net realized and unrealized gain/(loss) on investments 0.35 1.38 1.65 3.10 (0.39) 0.02
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 0.43 1.69 1.65 3.13 (0.27) 0.02
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- (0.31) -- (0.02) (0.00)# --
Distributions from net realized capital gains -- -- -- -- -- --
Distribution in excess of net realized capital gains -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.31) -- (0.02) (0.00) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $16.09 $13.38 $15.31 14.86 $11.75 $12.02
- ----------------------------------------------------------------------------------------------------------------------------------
Total return** 2.75% 14.26% 12.08% 26.68% (2.23)% 0.17%
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $ 2 $6,383 $ 1 $41,640 $28,516 $34,555
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 2.78%+ 4.06%+ 0.01%+ 0.20% 0.95% 0.04%+
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets, excluding interest 1.10%+ 0.84%+ 1.90%+ 1.90% 1.90% 1.90%+
expense
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 89.77% 29.46% 238.91% 177.36% 156.13% 123.50%
- ----------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0423 N/A N/A $0.0123 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by $0.06 $0.13 $(0.05) ($0.08) $0.05 ($0.02)
Manager
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager, including interest expense 1.70%+ 3.16%+ 3.16%+ 2.76% 2.50% 2.32%+
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- -- -- 1.96% 1.91% 1.99%+
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Equity Income Fund's Class R Shares and Class P Shares commenced
operations on September 30, 1994 and March 12, 1996, respectively.
(b) The International Growth Fund's Class P Shares commenced operations on
March 12, 1996. (c) The International Small Cap Fund's Class R Shares
commenced operations on September 30, 1993.
** Total return represents aggregate total return for the periods indicated
+ Annualized.
# Amount represents less than $0.01 per share.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
EMERGING MARKETS
FUND
Selected Per Share Data for the Year or Period Ended: 1996(a) 1995++R 1994R 1993R 1992(a)R
<S> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $12.62 $13.68 $11.07 $9.96 $10.00
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.01 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss) on investments 1.56 0.25## 2.92 1.05 (0.07)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 1.57 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** 12.44% 1.40% 26.10% 11.27% (0.40)%
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $ 2 $998,083 $654,960 $206,617 $54,625
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.33%+ 0.23% (0.14)% 0.66% 1.70%+
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest 1.97%+ 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%+
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Emerging Markets Fund's Class R Shares and Class P Shares commenced
operations on March 1, 1992 and March 12, 1996, respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ 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.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
SELECT 50 ASSET ALLOCATION
FUND FUND
Selected Per Share Data for the Year or Period Ended: 1996(b)R 1996(c) 1995R 1994(c)R
<S> <C> <C> <C> <C>
Net asset value-- beginning of year $12.00 $17.86 $12.24 $12.00
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.06 0.09 0.25 0.06
Net realized and unrealized gain/(loss) on investments 4.45 1.38 4.11 0.18
- -------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 4.51 1.47 4.36 0.24
- -------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.04) -- (0.17) --
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- -- (0.10) --
Distributions in excess of net realized capital gains (0.01)
Distributions from capital -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.05) -- (0.27) --
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $16.46 $19.33 $16.33 $12.24
- -------------------------------------------------------------------------------------------------------------------------------
Total Return** 37.75% 8.23% 35.99% 2.00%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $77,955% $ 43 $60,234 $1,548
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.42%+ 1.60%+ 3.43% 2.54%+
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest expense 1.80%+ 1.55%+ 1.30% 1.30%+
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 105.98% 225.91% 95.75% 190.94%
- -------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0097 $0.0595 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager $0.02 $0.08 $0.19 $(0.11)
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense 2.11%+ 1.80%+ 2.07% 9.00%+
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- 1.67%+ 1.31% 1.43%+
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
(b) The Select 50 Fund's Class R Shares commenced operations on October 2,
1995.
(c) The Asset Allocation Fund's Class R Shares and Class P Shares commenced
operations on March 31, 1994 and January 3, 1996, respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
SHORT GOVERNMENT
BOND FUND
Selected Per Share Data for the Year or Period Ended: 1996(a) 1995R 1994R 1993(a)R
<S> <C> <C> <C> <C>
Net asset value-- beginning of year $9.98 $9.80 $10.23 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income 0.16 0.62 0.61 0.33
Net realized and unrealized gain/(loss) on investments (0.05) 0.16 (0.34) 0.23
- ---------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 0.11 0.78 0.27 0.56
- ---------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.17) (0.62) (0.56) (0.33)
Distributions in excess of net investment income -- -- (0.07) --
Distributions from net realized capital gains -- -- -- --
Distributions in excess of net realized capital gains -- -- (0.07) --
Distributions from capital -- (0.01) -- (0.00)#
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (0.17) (0.63) (0.70) (0.33)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $9.92 $9.95 $9.80 $10.23
- ---------------------------------------------------------------------------------------------------------------------------
Total Return** 1.12% 8.28% 2.49% 5.66%
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $ 1 $17,093 $21,937 $22,254
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 5.63%+ 6.41% 5.93% 6.02%+
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest expense 0.85%+ 0.47% 0.25% 0.22%+
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 349.62% 284.23% 603.07% 213.22%
- ---------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager $0.14 $0.54 $0.51 $0.27
- ---------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense 2.56%+ 2.23% 1.75% 2.07%+
- ---------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense 1.80%+ 1.38% 0.71% --
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Short Government Bond Fund's Class R Shares and Class P Shares
commenced operations on December 18, 1992 and March 12, 1996,
respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 share.
</FN>
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT RESERVE
FUND
Selected Per Share Data for the Year or Period Ended: 1996(b) 1995R 1994R 1993(b)R
<S> <C> <C> <C> <C>
Net asset value-- beginning of year $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.014 0.049 0.029 0.024
Net realized and unrealized gain/(loss) on investments 0.000## 0.000## 0.000## 0.000##
- ------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 0.014 0.049 0.029 0.024
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.014) (0.049) (0.029) (0.024)
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.014) (0.049) (0.029) (0.024)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------------------
Total Return** 1.38% 4.97% 2.96% 2.41%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $ 1 $258,956 $211,129 $124,795
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 4.91%+ 4.92% 2.99% 2.96%+
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest expense 0.85%+ 0.60% 0.60% 0.38%+
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $0.013 $0.047 $0.028 $0.013
- ------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees
by Manager, including interest expense 0.99%+ 0.79% 0.71% 0.77%+
- ------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- 0.63% -- --
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(b) The Short Government Bond Fund's Class R Shares and Class P Shares
commenced operations on September 14, 1992 and March 12, 1996,
respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
## Amount represents less than $0.001 per share.
</FN>
</TABLE>
8
<PAGE>
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 13. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 16. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 18. CERTAIN TERMS USED IN THE PROSPECTUS ARE
DEFINED IN THE GLOSSARY FOUND AT THE END OF THIS PROSPECTUS.
----------------------------------------------
Domestic Equity International
Funds Funds Multi- Fixed-
----------------------------- Strategy Income
Equity Funds Funds Funds
----------------------------------------------
<TABLE>
SUMMARY COMPARISON OF FUNDS
<CAPTION>
Anticipated Maximum Typical Market
Equity Debt Capitalization of
Fund Name Exposure Exposure Focus Portfolio Companies
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Growth Fund 65-100% 35% Growth Over $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
============================================================================================================================
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 Markets Fund 65-100% 35% Foreign Emerging Growth Any size
============================================================================================================================
Montgomery Select 50 Fund 65-100% 35% Worldwide Growth Any size
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund 20-80% 20-80% Balanced Any size
============================================================================================================================
Montgomery Short Government Bond Fund 0% 100% Income N/A
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund 0% 100% 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.
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 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 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.
9
<PAGE>
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
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
10
<PAGE>
invest those assets in equity securities of U.S. companies, in
lower-capitalization companies 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. The Fund also will use a strategic allocation of assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
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 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 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
11
<PAGE>
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, 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.
12
<PAGE>
Portfolio Securities
Equity Securities
The Domestic Equity, Select 50 and International 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 and International 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 and International 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 and International 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 Funds to invest in certain 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 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, 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 and International 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 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, 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
13
<PAGE>
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, 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, 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. 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 Reserve Fund
does 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.
14
<PAGE>
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
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."
15
<PAGE>
Other Investment Practices
<TABLE>
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>
=========================================================
Growth Equity Income Small Cap Opportunities
International Small Cap International Growth
Emerging Markets Select 50 Asset Allocation
Short Government Bond Government Reserve
======================================================================---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Repurchase agreements1 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/
- -------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third of total fund assets x/ x/ 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/ x/ 2
- -------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed 10% of total fund assets x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed 30% of total fund assets x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
When-issued and forward commitment securities x/ x/ x/ x/ x/ x/ x/ x/ 3 x/ 3 x/
- -------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts 6 x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities and currencies 4 x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities indices 4 x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Write covered call options 4 x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Write covered put options 4 x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts5 x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on futures x/ x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Equity swaps x/ x/ x/ x/ x/ x/ x/ x/
- -------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to 10% of fund's net assets x/
- -------------------------------------------------------------------------------------------------------------------------------
Illiquid securities limited to 15% of fund's net assets x/ x/ x/ x/ x/ x/ x/ x/ x/
===============================================================================================================================
<FN>
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
16
<PAGE>
security, a Fund may experience delay 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.
</FN>
</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 and Equity Income 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. 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 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.
17
<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 Equity Income, Select 50 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 Opportunities and International Small Cap Funds emphasize, and the
Select 50, International Growth, Growth, and Asset Allocation 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 and International 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 and International Funds, particularly the 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.
18
<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.
Lower Quality Debt
The Select 50 and International 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.
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.
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.
19
<PAGE>
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 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 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 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 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.
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.
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 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 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, Mr.
Chiang and Ms. Ee, manages the Emerging Markets Fund.
20
<PAGE>
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 Small Cap Opportunities Fund and the equity component of the Asset
Allocation 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, Ms. Ee and Mr. Chiang, manages the Emerging Markets
Fund. 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 and the
Government Reserve 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 and
International 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 Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
- ------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
- ------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
Over $1 billion 0.90%
- ------------------------------------------------------------------------------------------------------
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%
======================================================================================================
</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
21
<PAGE>
at the following annual rates: each of the Growth, Equity Income 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 Opportunities, Select 50, Emerging Markets, International Small Cap and
International Growth 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 and Reserve 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.
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial shareholder of the Class P shares of each Fund
have approved, and each Fund has entered into, a Share Marketing Plan (the
"Plan") with the Manager, as the distribution coordinator, for the Class P
shares. Under the Plan, each Fund will pay distribution fees to the Manager at
an annual rate of 0.25% of the Fund's aggregate average daily net assets
attributable to its Class P shares, to reimburse the Manager for its
distribution costs with respect to that Class.
The Plan provides that the Manager may use the distribution fees received from
the Class to pay for the distribution expenses of that Class, including, but not
limited to (i) incentive compensation paid to the directors, officers and
employees of, agents for and consultants to, the Manager or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, statements of additional information
and reports of the Funds to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Funds and that Class; and (iv) costs involved obtaining whatever
information, analysis and reports with respect to marketing and promotional
activities that the Funds may, from time to time, deem advisable with respect to
the distribution of that Class. Distribution fees are accrued daily and paid
monthly, and are charged as expenses of the Class P shares as accrued.
In adopting the Plan, the Board of Trustees determined that there was a
reasonable likelihood that the Plan would benefit the Funds and the shareholders
of Class P shares. Information with respect to distribution revenues and
expenses is presented to the Board of Trustees quarterly for their consideration
in connection with their deliberations as to the continuance of the Plan. In
their review of the Plan, the Board of Trustees are asked to take into
consideration expenses incurred in connection with the separate distribution of
the Class P shares. The Class P shares are not obligated under the Plan to pay
any distribution expenses in excess of the distribution fee. Thus, if the Plan
was terminated or otherwise not continued, no amounts (other than current
amounts accrued but not yet paid) would be owed by the Class to the Manager.
The distribution fee attributable to the Class P shares is designed to permit an
investor to purchase Class P shares through financial planners, retirement and
pension plan administrators, broker-dealers and other financial intermediaries
without the assessment of a front-end sales charge and at the same time to
permit the Manager to compensate those persons on an ongoing basis in connection
with the sale of the Class P shares.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Trustees of the Trusts, including a majority of
the Trustees who are not "interested persons" of the Trusts (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class P
shares.
All distribution fees paid by the Funds under the Plan will be paid in
accordance with Rule 2830 of the NASD Rules of Conduct.
22
<PAGE>
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 (before Rule 12b-1 fees): 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 Opportunities
Fund, one and five-tenths of one percent (1.50%); 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 and
International Small Cap Funds, one and nine-tenths of one percent (1.90%); the
Asset Allocation Fund, one and three-tenths of one percent (1.30%); the Short
Government Bond Fund, seven-tenths of one percent (0.70%); and the Government
Reserve Fund, 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.
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").
23
<PAGE>
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 only through financial intermediaries and
financial professionals, 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 Government
Reserve Fund 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 (including IRAs) and $100
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.
Initial Investments
Minimum Initial Investment (including IRAs): $1,000
- --------------------------------------------------------------------------------
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 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.
24
<PAGE>
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
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 Government Reserve Fund 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.
25
<PAGE>
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.
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.
26
<PAGE>
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.
- --------------------------------------------------------------------------------
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 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 (e.g. the Short Government Bond Fund).
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.
27
<PAGE>
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.
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. 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.
28
<PAGE>
Exchange Privileges And Restrictions
You may exchange shares from another Class P 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.
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. 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. 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.
29
<PAGE>
Brokers and Other Intermediaries
Investing through Montgomery Securities Brokerage Account (Government Reserve
Fund Only) Investors with Montgomery Securities brokerage accounts may instruct
Montgomery Securities automatically to purchase shares of the Government Reserve
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 Government Reserve Fund 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 Government Reserve Fund, 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 Government Reserve Fund), New York
time, on days that the Fund issues shares. Orders received after 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
(Government Reserve Fund Only)
If a shareholder wishes, the Transfer Agent will redeem shares of the Government
Reserve 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 Government Reserve 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 Government Reserve Fund), 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 Government Reserve Fund), 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
30
<PAGE>
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.
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:
<TABLE>
<CAPTION>
==========================================================================================================================
<S> <C> <C>
Income Dividends Capital Gains
- --------------------------------------------------------------------------------------------------------------------------
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
31
<PAGE>
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 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 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.
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 P 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. Except
as set forth herein, all classes of shares issued by a Fund shall have identical
voting, dividend, liquidation and other rights, preferences, and terms and
conditions. The only differences among the various classes of shares relate
solely to the following: (a) each class may be subject to different class
expenses; (b) each class may bear a different identifying designation; (c) each
class may have exclusive voting rights with respect to matters solely affecting
such class; (d) each class may have different exchange privileges; and (e) each
class may provide for the automatic conversion
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of that class into another class. 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. Performance data may be quoted separately for the
Class P shares as for other classes. 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 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. 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.
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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 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.
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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 Reserve Fund 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 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.
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.
A 1
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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 collateral assets 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 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 Repurchase agreement. With a repurchase agreement, a Fund acquires a U.S.
Government security or other high-grade liquid debt instrument (for the
Reserve Fund, 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 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.
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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.
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.
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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
