THE MONTGOMERY FUNDS
- --------------------------------------------------------------------------------
Supplements dated February 9, 1996 to
Prospectus dated February 9, 1996
For Missouri Investors
Shares of the Small Cap Fund are an appropriate investment for prospectus
investors that are willing or able to assume the risk associated with the types
of investments made by this Fund. See "The Funds' Investment Objectives and
Policies" and "Risk Considerations."
While the Manager of the Small Cap Fund is obligated to reduce its fee to the
extent necessary to limit total annual operating expenses of this Fund to the
lesser of 1.40% or the maximum allowed by applicable state expense limitations,
any such reduction made by the Manager of its fees is subject to reimbursement
by this Fund within the following two years provided this Fund is able to effect
such reimbursement and remain in compliance with applicable expense limitations.
See "Fees and Expenses of the Funds" and "Management of the Funds."
The Small Cap Fund may lend up to 10% of its portfolio securities in order to
generate additional income. This fund may also enter into repurchase agreements
in order to earn additional income on available cash or as a temporary defensive
investment. See "Risk Factors" in the Statement of Additional Information for
more detailed information about these practices.
The Emerging Markets Fund, International Small Cap Fund, Opportunities Fund
and Communications Fund may invest in carefully selected "special situations"
that could enhance their capital appreciation potential but which may constitute
illiquid investments. These Funds may not invest more that 15% of their net
assets in illiquid investments, including special situations. See "Portfolio
Securities--Special Situtations" and "Risk Considerations."
The Growth, Opportunities, Income, International Small Cap, Allocation, Short
and Tax-Free Funds may leverage their portfolios to create an opportunity for
increased net income. Leverage also creates special risks. See "Other Investment
Practices -- Leverage."
The Select 50 Fund may invest more than 5% of its total assets in the markets of
"emerging market countries." See "Risk Considerations."
<PAGE>
For Arizona Investors
An investment in the Montgomery Emerging Markets Fund should be considered
speculative, because this Fund's investments will be made in emerging market
countries, as discussed elsewhere in this Prospectus.
For Texas Investors
Prospective investors should note that The Montgomery Funds reserve the right
upon 60 days' notice to shareholders to impose a redemption fee of up to 1.00%
on shares redeemed within 90 days of purchase.
A potential investor should consider that the Select 50 Fund's concentrated
investment in a limited number of issuers may involve greater risk than a fund
that invests in a more broadly diversified portfolio. See "Risk Considerations"
for more information.
Montgomery Small Cap Fund
Montgomery Small Cap Fund has been closed to new investors since March 6, 1992.
Shareholders who maintain open accounts with this Fund may make additional
investments. Once your account is closed, additional investments in this Fund
may not be possible. An account may be considered closed and subject to
redemption by this Fund if the value of the shares remaining after a transfer or
redemption falls below $1,000. This Fund may resume sales of shares to new
investors at some future date, but it has no present intention to do so
Montgomery California Tax-Free Intermediate Bond Fund
Montgomery California Tax-Free Money Fund
These Funds are available to California residents only.
Montgomery Micro Cap Fund
Montgomery Micro Cap Fund has been closed to new investors since August 15,
1995. Shareholders who maintain open accounts with this Fund may make additional
investments. This Fund may resume sales of shares to new investors at some
future date, but it has no present intentions to do so.
<PAGE>
THE MONTGOMERY FUNDS
- -------------------------------------------------------------------------------
Additional Supplements dated February 9, 1996 to
Prospectus dated February 9, 1996
For Maryland Investors
The Funds may engage in transactions in forward contracts, options, futures
contracts and options on futures (i.e., "hedging positions") in an effort to
reduce certain risks. However, such transactions themselves entail certain other
risks. Thus, while a Fund may benefit from the use of hedging positions,
unanticipated changes in interest rates or securities prices may result in a
poorer overall performance for a Fund than if had not entered into any hedging
positions. If the correlation between a hedging position and a portfolio
position which is intended to be protected is imperfect, the desired protection
may not be obtained, and the Fund may be exposed to risk of financial loss. See
"Hedging and Risk Management Practices."
Montgomery California Tax-Free Intermediate Bond Fund
Montgomery California Tax-Free Money Fund
William C. Stevens has accepted full responsibility for managing these Funds.
Information about Mr. Stevens, who has been the primary portfolio manager for
these Funds since their inception, is provided in the prospectus under
"Management of the Funds." Rhoda Rossman no longer serves as a portfolio manager
for these Funds.
Additional Supplements dated March 31, 1996 to
Prospectus dated February 9, 1996
Effective March 1, 1996, the name of the Montgomery Small Cap II Fund has been
changed to the Montgomery Small Cap Opportunities Fund.
Montgomery Funds Investors
From time to time, the Funds may publish or distribute information and reasons
supporting the Manager's belief that a particular Fund may be appropriate for
investors at a particular time. This information will be based on internally
generated estimates resulting from the Manager's research activities and
projections from independent sources. These sources may include, but are not
limited to, I/B/E/S Consensus Forecast, Worldscope and Reuters as well as both
local and international brokerage firms. For example, the Funds may suggest that
certain countries or areas may be particularly appealing to investors because of
interest rate movements, increasing exports and/or economic growth.
<PAGE>
The Montgomery Funds
600 Montgomery Street
San Francisco, California 94111
(800) 572-FUND
Prospectus
February 9, 1996
The following sixteen mutual funds (individually, a "Fund" and, collectively,
the "Funds") are offered in this Prospectus:
* Montgomery Growth Fund
* Montgomery Equity Income Fund
* Montgomery Small Cap Fund
* Montgomery Small Cap II Fund
* Montgomery Micro Cap Fund
* Montgomery Global Opportunities Fund
* Montgomery Global Communications Fund
* Montgomery International Small Cap Fund
* Montgomery International Growth Fund
* Montgomery Emerging Markets Fund
* Montgomery Select 50 Fund
* Montgomery Asset Allocation Fund
* Montgomery Short Government Bond Fund
* Montgomery Government Reserve Fund
* Montgomery California Tax-Free Intermediate Bond Fund
* Montgomery California Tax-Free Money Fund
Each Fund's shares offered in this Prospectus (the Class R shares) are sold at
net asset value with no sales load, no commissions, no Rule 12b-1 fees, and no
redemption or exchange fees. In general, the minimum initial investment in each
Fund is $1,000 ($5,000 for the Micro Cap Fund), and subsequent investments must
be at least $100 ($500 for the Micro Cap Fund). The Manager or the Distributor,
in either's discretion, 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 is the case for 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 February 9, 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
http://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 OR
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------
The Montgomery Funds 3
Fees and Expenses of the Funds 5
Financial Highlights 7
The Funds' Investment Objectives and Policies 14
Portfolio Securities 22
Other Investment Practices 26
Risk Considerations 29
Management of the Funds 32
How To Invest in the Funds 36
How To Redeem an Investment in the Funds 40
Exchange Privileges and Restrictions 42
How Net Asset Value is Determined 43
Dividends and Distributions 44
Taxation 44
General Information 45
Backup Withholding Instructions 46
2
<PAGE>
The Montgomery Funds
The Funds' investment objectives are summarized below. See "The Funds'
Investment Objectives and Policies" beginning on page 14, "Portfolio Securities"
beginning on page 22, "Other Investment Practices" beginning on page 26 and
"Risk Considerations" beginning on page 29 for more detailed information.
The Equity Funds
Montgomery Growth Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of domestic companies of all sizes and emphasizes companies
having market capitalizations of $500 million or more.
Montgomery Equity Income Fund
Seeks current income and capital appreciation by investing primarily in
income-producing equity securities of domestic companies, with the goal to
provide significantly greater yield than the average yield offered by the stocks
of the Standard and Poor's 500 Composite Price Index ("S&P 500") and a low level
of price volatility.
Montgomery Small Cap Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion.
Montgomery Small Cap II Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion.
Montgomery Micro Cap Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of domestic companies that have the potential for rapid growth
and are micro-capitalization companies, which the Fund currently considers to be
companies having total market capitalizations that would place them in the
smallest 10% of market capitalization for domestic companies as measured by the
Wilshire 5000 Index.
Montgomery Global Opportunities Fund
Seeks capital appreciation by investing primarily in equity securities of
companies of all sizes throughout the world but emphasizes companies having
market capitalizations of $1 billion or more, sound fundamental values and
potential for long-term growth at a reasonable price.
Montgomery Global Communications Fund
Seeks capital appreciation by investing primarily in equity securities of
communications companies (i.e., companies primarily engaged in developing,
manufacturing or selling communications equipment or services) throughout the
world having sound fundamental values and potential for long-term growth at a
reasonable price.
Montgomery International Small Cap Fund
Seeks capital appreciation by investing primarily in equity securities of
companies outside the U.S. having total market capitalizations of less than $1
billion, sound fundamental values and potential for long-term growth at a
reasonable price.
Montgomery International Growth Fund
Seeks capital appreciation by investing primarily in equity securities of
companies outside the United States having total market capitalizations over $1
billion, sound fundamental values and potential for long-term growth at a
reasonable price.
Montgomery Emerging Markets Fund
Seeks capital appreciation by investing primarily in equity securities of
companies in countries having economies and markets generally considered by the
World Bank or the United Nations to be emerging or developing.
The Multi-Strategy Funds
Montgomery Select 50 Fund
Seeks capital appreciation by investing primarily in at least 50 different
equity securities of companies of all sizes throughout the world. Each of the
Manager's five equity discipline management teams selects 10 equity securities
based on the potential for capital appreciation.
Montgomery Asset Allocation Fund
Seeks high total return, while also seeking to reduce risk, through a strategic
or active allocation of assets among domestic stocks, fixed-income securities
and cash or cash equivalents.
3
<PAGE>
The Fixed Income Funds
Montgomery Short Government Bond Fund
Seeks maximum total return consistent with preservation of capital and prudent
investment management by investing primarily in U.S. Treasury Bills, Notes,
Bonds and other obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government securities") and, to manage
interest rate risk, maintains an average portfolio effective duration comparable
to or less than three-year U.S. Treasury Notes. It targets higher yields than
money market funds generally with less fluctuation in the value of its shares
than long-term bond funds. This Fund does not maintain a stable net asset value
of $1.00.
Montgomery Government Reserve Fund
This money market fund seeks current income consistent with liquidity and
preservation of capital by investing exclusively in U.S. Government securities,
repurchase agreements for U.S. Government securities and other money market
funds investing exclusively in U.S. Government securities and such repurchase
agreements. It seeks to maintain a stable net asset value of $1.00.
Montgomery California Tax-Free Intermediate Bond Fund
Seeks maximum current income exempt from federal and California personal income
taxes consistent with preserving capital and prudent investment management. It
targets higher yields than tax-free money market funds but generally with less
fluctuation in the value of its shares than long-term tax-free bond funds. It
does not maintain a stable net asset value of $1.00.
Montgomery California Tax-Free Money Fund
Seeks maximum current income exempt from federal and California personal income
taxes consistent with liquidity and preservation of capital. It seeks to
maintain a stable net asset value of $1.00.
The Funds offer other classes of shares to investors eligible to purchase those
shares. The other classes of shares may have different fees and expenses than
the class of shares offered in this Prospectus, and those different fees and
expenses may affect performance. To obtain information concerning the other
classes of shares not offered in this Prospectus, call The Montgomery Funds at
(800) 572-FUND or contact sales representatives or financial intermediaries who
offer those classes.
4
<PAGE>
Fees And Expenses Of The Funds
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 on Purchases Imposed on Reinvested Dividends Deferred Sales Load Redemption Fees+ Exchange Fees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
<TABLE>
The Equity Funds
<CAPTION>
Montgomery Growth Montgomery Equity Montgomery Small Cap Montgomery Small Cap Montgomery Micro Cap
Fund Income Fund Fund II Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management Fee* 1.00% 0.60% 1.00% 1.20% 1.40%
- ---------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.50% 0.25% 0.37% 0.30% 0.35%
(after reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fund Operating
Expenses (after 1.50% 0.85% 1.37% 1.50% 1.75%
reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Montgomery Global Montgomery Montgomery Montgomery
Montgomery Global Communications International Small International Growth Emerging Markets
Opportunities Fund Fund Cap Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management Fee* 1.25% 1.25% 1.25% 1.10% 1.07%
- ---------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.65% 0.65% 0.65% 0.55% 0.73%
(after reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fund Operating Expenses (after 1.90% 1.90% 1.90% 1.65% 1.80%
reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
The Multi-Strategy and Fixed Income Funds
<CAPTION>
Montgomery Montgomery
Montgomery Short Montgomery California Tax-Free California Tax-Free
Montgomery Select Montgomery Asset Government Bond Government Reserve Intermediate Bond Money
50 Fund Allocation Fund Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management Fee* 1.25% 0.80% 0.50% 0.40% 0.50% 0.40%
- ---------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.55% 0.50% 0.20% 0.20% 0.20% 0.20%
(after reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fund Operating
Expenses (after 1.80% 1.30% 0.70% 0.60% 0.70% 0.60%
reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of each Fund. Operating expenses
are paid out of a Fund's assets and are factored into the Fund's share price.
Each Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year.
+ Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. The Montgomery Funds reserve the right upon 60
days' advance notice to shareholders to impose a redemption fee of up to 1%
on shares redeemed within 90 days of purchase. The Funds also reserve the
right to impose a $20 annual account maintenance fee on accounts that fall
below the minimum investment because of redemptions. See "How to Redeem an
Investment in the Funds."
</FN>
</TABLE>
5
<PAGE>
* Expenses for the Funds are based on actual expenses and expense limitations
for the fiscal year ended June 30, 1995. Expenses for the Montgomery
International Growth Fund and Montgomery Select 50 Fund are estimated. The
Manager will reduce its fees and may absorb or reimburse a Fund for certain
expenses to the extent necessary to limit total annual fund operating
expenses to the lesser of the amount indicated in the table for a Fund or
the maximum allowed by applicable state expense limitations. A Fund is
required to reimburse the Manager for any reductions in the Manager's fee
only during the two years (three years in the case of the Montgomery Asset
Allocation Fund) following that reduction and only if such reimbursement
can be achieved within the foregoing expense limits. The Manager generally
seeks reimbursement for the oldest reductions and waivers before payment
for fees and expenses for the current year. Absent reduction, actual total
Fund operating expenses for the period ended June 30, 1995 (annualized)
would have been as follows: Montgomery Equity Income Fund, 3.16% (2.56%
other expenses); Montgomery Micro Cap Fund, 2.07% (0.67% other expenses);
Montgomery Global Opportunities Fund, 2.99% (1.74% other expenses);
Montgomery Global Communications Fund, 2.08% (0.83% other expenses);
Montgomery International Small Cap Fund, 2.50% (1.25% other expenses);
Montgomery Asset Allocation Fund, 2.07% (1.27% other expenses); Montgomery
Short Government Bond Fund, 1.33% (0.83% other expenses); Montgomery
Government Reserve Fund, 0.79% (0.39% other expenses); Montgomery
California Tax-Free Intermediate Bond Fund, 1.41% (0.91% other expenses);
and Montgomery California Tax-Free Money Fund, 0.86% (0.46% other
expenses). Absent the reduction, actual total Fund operating expenses are
estimated to be as follows: Montgomery Small Cap II Fund, 3.10% (1.85%
other expenses), Montgomery International Growth Fund, 1.84% (0.74% other
expenses) and Montgomery Select 50 Fund, 2.40% (1.15% other expenses). The
Manager may terminate these voluntary reductions at any time. See
"Management of the Funds."
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>
Montgomery Growth Montgomery Equity Montgomery Small Cap Montgomery Small Cap Montgomery Micro Cap
Fund Income Fund Fund II Fund Fund
- -----------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
1 Year $15 $9 $14 $15 $18
- -----------------------------------------------------------------------------------------------------------------------------
3 Years $47 $27 $43 $47 $55
- -----------------------------------------------------------------------------------------------------------------------------
5 Years $82 N/A $75 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
10 Years $179 N/A $165 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Montgomery Montgomery
Montgomery Global Montgomery Global International Small International Growth Montgomery Emerging
Opportunities Fund Communications Fund Cap Fund Fund Markets Fund
- ------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
1 Year $19 $19 $19 $17 $18
- ------------------------------------------------------------------------------------------------------------------------------
3 Years $55 $60 $60 $52 $57
- ------------------------------------------------------------------------------------------------------------------------------
5 Years $95 $103 $103 N/A $97
- ------------------------------------------------------------------------------------------------------------------------------
10 Years $206 $222 $222 N/A $212
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Montgomery Montgomery
Montgomery Montgomery Short Montgomery California Tax-Free California
Montgomery Select Asset Allocation Government Bond Government Intermediate Bond Tax-Free Money
50 Fund Fund Fund Reserve Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
1 Year $18 $13 $7 $6 $7 $6
- ------------------------------------------------------------------------------------------------------------------------------
3 Years $57 $41 $22 $19 $22 $19
- ------------------------------------------------------------------------------------------------------------------------------
5 Years N/A $71 $39 $33 $39 N/A
- ------------------------------------------------------------------------------------------------------------------------------
10 Years N/A $157 $87 $75 $87 N/A
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
</FN>
</TABLE>
6
<PAGE>
Financial Highlights
Selected Per Share Data and Ratios
<TABLE>
The following financial information for the periods ended June 30, 1992 through
June 30, 1995 was audited by Deloitte & Touche LLP, whose report, dated August
11, 1995, appears in the 1995 Annual Report of the Funds.1
<CAPTION>
Montgomery Montgomery Equity
Growth Fund Income Fund
- ----------------------------------------------------------------------------------------------
Inception(2) Inception(11)
Year Ended through through
June 30, 1995 June 30, 1994 June 30, 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year.... $15.27 $12.00 12.00
- -----------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income (loss)........ 0.12 0.04 0.31
Net realized and unrealized gain
(loss) on investments............... 3.91 3.31* 1.38
---- ---- ----
Total from investment operations.... 4.03 3.35 1.69
- -----------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.07) (0.01) (0.31)
Distributions from net realized
capital gain .................... (0.07) -- --
Distribution in excess of net
realized capital gains........... -- (0.07) --
---- ---- ----
Total Distributions................. (0.14) (0.08) (0.31)
- -----------------------------------------------------------------------------------------------
Net asset value, end of year.......... $19.16 $15.27 $13.38
===============================================================================================
Total Return.......................... 26.53% 27.98% 14.26%
- -----------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)... $878,776 $149,103 $6,383
Ratio of net operating expense to
average net assets
Before expense reimbursement....... 1.50% 1.79%(3) 3.16%(3)
After expense reimbursement........ 1.50% 1.49%(3) 0.84%(3)
Ratio of net investment income (loss)
to average net assets............... 0.98% 1.09%(3) 4.06%(3)
Portfolio turnover rate............... 128.36% 110.65% 29.46%
- ----------------------------------------------------------------------------------------------
<FN>
* The amount may not accord with the change in the aggregate gains and losses in
portfolio securities because of the timing of purchases and redemptions.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Montgomery Small Cap Fund
Inception(1)(4)
Year Ended June 30, through
1995 1994 1993 1992 June 30, 1991
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.... $15.15 $16.83 $12.90 $13.24 $10.62
- ---------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income (loss)........ (0.10) (0.12) (0.11) (0.06) (0.07)
Net realized and unrealized gain
(loss) on investments............. 3.04 (0.47) 4.04 3.25 2.71
---- ------ ---- ---- ----
Total from investment operations.... 2.94 (0.59) 3.93 3.19 2.64
- ---------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- -- --
Distributions from net realized
capital gains (0.98) (1.09) -- (2.75) (0.02)
Distributions from capital.......... -- -- -- (0.78) --
---- ---- ---- ------ ---
Total Distributions................. (0.98) (1.09) -- (3.53) (0.02)
- ---------------------------------------------------------------------------------------------
Net asset value, end of year.......... $17.11 $15.15 $16.83 $12.90 $13.24
=============================================================================================
Total Return.......................... 20.12% (1.59%) 30.47% 27.69% 24.89%
- ---------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)... $202,399 $209,063 $219,968 $176,588 $27,181
Ratio of net operating expense to
average net assets
Before expense reimbursement....... 1.37% 1.35% 1.40% 1.50% 1.45%(3)
After expense reimbursement........ 1.37% 1.35% 1.40% 1.50% 1.45%(3)
Ratio of net investment income (loss)
to average net assets............... (0.57)% (0.68)% (0.69)% (0.44)% (0.45)%(3)
Portfolio turnover rate............... 85.07% 95.22% 130.37% 80.67% 188.16%
- ---------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Montgomery
Micro Cap Fund
- ----------------------------------------------------------------
Inception (12)
through
June 30, 1995*
- ----------------------------------------------------------------
Net asset value, beginning of year.......... $12.00
- ----------------------------------------------------------------
Income From Investment Operations:
Net investment income (loss).............. 0.09
Net realized and unrealized gain (loss) on
investments............................... 1.66
----
Total from investment operations.......... 1.75
- ----------------------------------------------------------------
Net asset value, end of year................ $13.75
================================================================
Total Return................................ 14.58%
- ----------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)......... $162,949
Ratio of net operating expense to average
net assets
Before expense reimbursement............. 2.07%(3)
After expense reimbursement.............. 1.75%(3)
Ratio of net investment income (loss) to
average net assets.......................... 1.40%(3)
Portfolio turnover rate..................... 36.81%
- ----------------------------------------------------------------
* Per share numbers have been calculated using the monthly average shares
method, which more appropriately represents per share data for the period
because the use of the undistributed income method did not accord with the
results of operations.
9
<PAGE>
<TABLE>
<CAPTION>
Montgomery Global Opportunities Montgomery Global Montgomery International
Fund Communications Fund Small Cap Fund
- --------------------------------------------------------------------------------------------------------------------------------
Inception(2) Inception(5) Year Ended Inception(2)
Year Ended through Year Ended June 30, through June 30, 1995 through
June 30, 1995 June 30, 1994 1995 1994 June 30, 1993 June 30, 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year................. $12.92 $12.00 $14.20 $12.45 $12.00 $12.02 $12.00
- --------------------------------------------------------------------------------------------------------------------------------
Income From Investment
Operations:
Net investment income
(loss)................ 0.13 0.01* (0.03) (0.05) 0.00 0.12 0.00+
Net realized and
unrealized gain (loss)
on investments........... 0.70 0.91 1.28 1.80*** 0.45 (0.39) 0.02
----- ------ ------ ----- ---- ------ -----
Total from investment
operations............ 0.83 0.92 1.25 1.75 0.45 (0.27) 0.02
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net
investment income..... -- -- -- -- -- (0.00)+ --
Distributions from net
realized capital gains (0.50) -- -- -- -- -- --
Distributions in excess of --
net realized capital gains -- -- (0.03) -- -- -- --
----- ---- ------ ---- -----
Total Distributions... (0.50) -- (0.03) -- -- (0.00)+ --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $13.25 $12.92 $15.42 $14.20 $12.45 $11.75 $12.02
================================================================================================================================
Total Return............ 6.43% 7.67% 8.83% 14.06% 3.75% (2.23)% 0.17%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year
(thousands)............. $13,677 $12,504 $209,644 $234,886 $4,670 $28,516 $34,555
Ratio of net operating
expense to average net
assets
Before expense
reimbursement........ 2.99% 1.11%(3) 2.08% 1.99% 8.96%(3) 2.50% 2.32%(3)
After expense
reimbursement........ 1.91%** 1.99%(3)** 1.91% ** 1.94%** 1.90%(3) 1.91%** 1.99%(3)**
Ratio of net investment
income (loss) to average
net assets........... 1.03% 0.02%(3) (0.10%) (0.46)% 0.05%(3) 0.95% 0.04%(3)
Portfolio turnover rate. 118.75% 67.22% 50.17% 29.20% 0.00% 156.13% 123.50%
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
* Net investment loss before deferral of fees by Manager was $(0.05).
** Annualized expense ratio excluding interest expense for the period or year
indicated was 1.90%.
*** The amount shown may not accord with the change in the aggregate gains and
losses in portfolio securities because of the timing of purchases and
redemptions.
+ Amount represents less than $0.01 per share.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Montgomery Emerging
Markets Fund
- --------------------------------------------------------------------------------------------------------------------------------
Inception(6)
Year Ended June 30, through
1995* 1994 1993 June 30, 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year.................................. $13.68 $11.07 $9.96 $10.00
- --------------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income (loss)...................................... 0.03 (0.03) 0.07* 0.03*
Net realized and unrealized gain (loss) on investments............ 0.25** 2.92 1.05 (0.07)
------ ------ ---- ------
Total from investment operations.................................. 0.28 2.89 1.12 (0.04)
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income.............................. -- -- (0.01) --
Distributions from net realized capital gains..................... (0.42) (0.28) -- --
Distributions in excess of net realized capital gains............. (0.37) -- -- --
------ ---- ---- ---
Total Distributions............................................... (0.79) (0.28) (0.01) --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year........................................ $13.17 $13.68 $11.07 $9.96
================================================================================================================================
Total Return........................................................ 1.40% 26.10% 11.27% (0.40%)
- --------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)................................. $998,083 $654,960 $206,617 $54,625
Ratio of net operating expense to average net assets
Before expense reimbursement..................................... 1.80% 1.85% 1.93% 2.80%(3)
After expense reimbursement...................................... 1.80% 1.85% 1.90% 1.90%(3)
Ratio of net investment income (loss) to average net assets......... 0.23% (0.14)% 0.66% 1.70%(3)
Portfolio turnover rate............................................. 92.09% 63.79% 21.40% 0.19%
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
* Per share 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.
** The amount shown may not accord with the change in the aggregate gains and
losses in portfolio securities because of the timing of purchases and
redemptions.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Montgomery Asset Allocation
Fund Montgomery Short Government Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------
Inception(7) Inception(8)
Year Ended through Year Ended June 30, through
June 30, 1995 June 30, 1994 1995 1994 June 30, 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.............. $12.24 $12.00 $9.80 $10.23 $10.00
- ------------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income......................... 0.25 0.06 0.62 0.61 0.33
Net realized and unrealized gain (loss)
on investment ............................. 4.11 0.18 0.16 (0.34) 0.23
---- ----- ---- ------ -----
Total from investment operations.............. 4.36 0.24 0.78 0.27 0.56
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income.......... (0.17) -- (0.62) (0.56) (0.33)
Distributions from net realized capital gains. (0.10) -- -- (0.07) --
Distributions in excess of net realized
capital gains.............................. -- -- -- (0.07) --
Distributions from capital.................... -- -- (0.01) -- --
------ ------ ------ -------- -------
Total Distributions........................... (0.27) -- (0.63) (0.70) (0.33)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year.................... $16.33 $12.24 $9.95 $9.80 $10.23
==============================================================================================================================
Total Return.................................... 35.99% 2.00% 8.28% 2.49% 5.66%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)............. $60,234 $1,548 $17,093 $21,937 $22,254
Ratio of net operating expense to average
net assets
Before expense reimbursement................. 2.07% 8.86%(3) 1.33% 1.29% 2.07%(3)
After expense reimbursement.................. 1.31%* 1.43%(3)* 1.38%** 0.71%** 0.22%(3)
Ratio of net investment income to average
net assets ................................ 3.43% 2.54%(3) 6.41% 5.93% 6.02%(3)
Portfolio turnover rate......................... 95.75% 190.94% 284.23% 603.07% 213.22%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
* Annualized expense ratios excluding interest expense for the year ended June
30, 1995 and period ended June 30, 1994 were 1.30% and 1.30%, respectively.
** Annualized expense ratios excluding interest expense for the year ended June
30, 1995 and year ended June 30, 1994 were 0.47% and 0.25%, respectively.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Montgomery Government Montgomery California Tax-Free
Reserve Fund Intermediate Bond Fund
- ---------------------------------------------------------------------------------------------------------------------------------
Inception(9) Inception(10)
Year Ended June 30, through Year Ended through
1995 1994 June 30, 1993 June 30, 1995 June 30, 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year................... $1.00 $1.00 $1.00 $11.79 $12.00
- ---------------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income.............................. 0.049 0.029 0.024 0.44 0.41
Net realized and unrealized gain on investments.... 0.000+ 0.000+ 0.000+ 0.25 (0.21)
----- ----- ----- ------ -------
Total from investment operations................... 0.049 0.029 0.024 0.69 0.20
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income............... (0.049) (0.029) (0.024) (0.44) (0.41)
Distributions from net realized capital gains...... -- -- -- (0.00)+ --
----- ----- ----- ------ ------
Total Distributions................................ (0.049) (0.029) (0.024) (0.44) (0.41)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year......................... $1.00 $1.00 $1.00 $12.04 $11.79
=================================================================================================================================
Total Return......................................... 4.97% 2.96% 2.41% 6.03% 1.65%
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands).................. $258,956 $211,129 $124,795 $5,153 $11,556
Ratio of net operating expense to average net assets
Before expense reimbursement...................... 0.79% 0.71% 0.77%(3) 1.41% 1.63%(3)
After expense reimbursement....................... 0.63%* 0.60% 0.38%(3) 0.56% 0.23%(3)
Ratio of net investment income to average net assets 4.92% 2.99% 2.96%(3) 3.71% 3.44%(3)
Portfolio turnover rate.............................. N/A N/A N/A 37.93% 77.03%
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
* Annualized operating expense ratio excluding interest expense for the year
ended June 30, 1995 was 0.60%.
+ Amount represents less than $0.001 per share.
</FN>
</TABLE>
12
<PAGE>
Montgomery
California Tax-Free
Money Fund
- -------------------------------------------------------------------------------
Inception(11)
through
June 30, 1995
- -------------------------------------------------------------------------------
Net asset value, beginning of year.............. $1.00
- -------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income......................... 0.027
Net realized and unrealized gain on investments 0.000
-----
Total from investment operations.............. 0.027
- -------------------------------------------------------------------------------
Distributions:
Dividends from net investment income.......... (0.027)
Dividends in excess of net investment income.. (0.000)+
-----
Total Distributions........................... (0.027)
- -------------------------------------------------------------------------------
Net asset value, end of year.................... $1.00
===============================================================================
Total Return.................................... 2.68%
- -------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)............. $64,780
Ratio of net operating expense to average net assets
Before expense reimbursement................. 0.86%(3)
After expense reimbursement.................. 0.33%(3)
Ratio of net investment income to average net assets 3.55%(3)
Portfolio turnover rate......................... N/A
- -------------------------------------------------------------------------------
+ Amount represents less than $0.001 per share.
(1) The information for the fiscal period ended June 30, 1991 was audited by
other independent accountants whose report is not included herein.
(2) September 30, 1993
(3) Annualized
(4) July 13, 1990
(5) June 1, 1993
(6) March 1, 1992
(7) March 31, 1994
(8) December 18, 1992
(9) September 14, 1992
(10) July 1, 1993
(11) September 30, 1994
(12) December 30, 1994
13
<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 22. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 26. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 29.
The Domestic Equity Funds
* Montgomery Growth Fund
* Montgomery Micro Cap Fund
The investment objective of Montgomery Growth Fund (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 $500 million or more. The Fund emphasizes
investments in common stock but also invests in other types of equity and equity
derivative securities (including options on equity securities, warrants and
futures contracts on equity 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 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 "Portfolio
Securities." An Appendix discussing these debt ratings is included in the
Statement of Additional Information.
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.
The investment objective of Montgomery Micro Cap Fund (the "Micro Cap Fund") is
capital appreciation, which under normal conditions it seeks by investing at
least 65% of its total assets in equity securities of domestic companies that
have potential for rapid growth and are micro-capitalization companies, which
the Fund currently considers to be companies having market capitalizations that
would place them in the smallest 10% of market capitalizations for domestic
companies as measured by the Wilshire 5000 Index. Currently, these companies
have market capitalizations of $425 million and less. The Micro Cap Fund
generally invests the remaining 35% of its total assets in a similar manner but
may invest those in other equity securities and in debt instruments, including
foreign securities.
Any debt securities purchased by this Fund must be rated within the three
highest grades by S&P (AAA to A), Moody's (Aaa to A) or 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 "Portfolio Securities."
Current income from dividends, interest and other sources is only incidental.
The Micro Cap Fund seeks to identify potential rapid growth companies at the
early stages of the companies' developments, such as at the introduction of new
products, favorable management changes, new marketing opportunities or increased
market share for existing product lines. Early identification of potential
investments is a key to the Fund's investment style. Emphasis is placed on
in-house research, which includes discussions with company management.
The growth equity team is responsible for managing the Growth and Micro Cap
Funds' portfolios. Its key members are Roger W. Honour and Andrew Pratt. See
"Management of the Funds."
* Montgomery Equity Income Fund
The investment objective of Montgomery Equity Income Fund (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.
14
<PAGE>
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. 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. (See Appendix in the Statement of
Additional Information.) 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."
John H. Brown is responsible for managing the Equity Income Fund's portfolio.
See "Management of the Funds."
* Montgomery Small Cap Fund
The investment objective of Montgomery Small Cap Fund (the "Small Cap Fund") is
capital appreciation, which under normal conditions it seeks by investing at
least 65% of its total assets in equity securities of small-capitalization
domestic companies, which the Fund currently considers to be companies having
total market capitalizations of less than $1 billion. The Small Cap Fund
generally invests the remaining 35% of its total assets in a similar manner but
may invest those assets in companies having total market capitalizations of $1
billion or more.
Generally, the Small Cap Fund invests at least 80% of its total assets in common
stock. It also may invest in other types of equity and equity derivative
securities (including options on equity securities, warrants and futures
contracts on equity securities) but limits to 5% of its total assets any single
other type of security. Any debt securities purchased by this Fund must be rated
within the three highest grades by S&P (AAA to A), Moody's (Aaa to A) or 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 "Portfolio
Securities." Current income from dividends, interest and other sources is only
incidental.
The Small Cap Fund seeks to identify potential growth companies at an early
stage or a transitional point of the companies' developments, such as the
introduction of new products, favorable management changes, new marketing
opportunities or increased market share for existing product lines. Using
fundamental research, the Fund targets businesses having positive internal
dynamics that can outweigh unpredictable macro-economic factors, such as
interest rates, commodity prices, foreign currency rates and overall stock
market volatility. The Fund searches for companies with potential to gain market
share within their respective industries; achieve and maintain high and
consistent profitability; produce increases in quarterly earnings; and provide
solutions to current or impending problems in their respective industries or
society at large. Early identification of potential investments is a key to the
Fund's investment style. Heavy emphasis is placed on in-house research, which
includes discussions with company management. The Fund also draws on the
expertise of brokerage firms, including Montgomery Securities and regional firms
that closely follow smaller capitalization companies within their geographic
regions.
The Small Cap Fund was closed to new investors on March 6, 1992.
Stuart O. Roberts is responsible for managing the Small Cap Fund's portfolio.
See "Management of the Funds."
15
<PAGE>
* Montgomery Small Cap II Fund
The investment objective of Montgomery Small Cap II Fund (the "Small Cap II
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 II 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. During the two to
three-month period following commencement of the Fund's operations, the Fund may
have its assets invested substantially in cash and cash equivalents.
This Fund seeks to identify potential growth companies at an early stage or a
transitional point of the companies' developments, such as the introduction of
new products, favorable management changes, new marketing opportunities or
increased market share for existing product lines. Using fundamental research,
the Fund targets businesses having positive internal dynamics that can outweigh
unpredictable macro-economic factors, such as interest rates, commodity prices,
foreign currency rates and overall stock market volatility. The Fund searches
for companies with potential to gain market share within their respective
industries; achieve and maintain high and consistent profitability; produce
increases in quarterly earnings; and provide solutions to current or impending
problems in their respective industries or society at large. Early
identification of potential investments is a key to the Fund's investment style.
Heavy emphasis is placed on in-house research, which includes discussions with
company management. The Fund also draws on the expertise of brokerage firms,
including Montgomery Securities and regional firms that closely follow smaller
capitalization companies within their geographic regions.
This Fund invests primarily in common stock. It also may invest in other types
of equity and equity derivative securities (including options on equity
securities, warrants and futures contracts on equity securities). Any debt
securities purchased by the Fund must be rated within the three highest grades
by Standard & Poor's Corporation (AAA to A), Moody's Investors Services, Inc.
(Aaa to A) or Fitch Investor Services, Inc. (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 "Portfolio Securities." Current income
from dividends, interest and other sources is only incidental.
The Manager's Growth Equity Team is responsible for managing the Fund's
portfolio. See "Management of the Fund."
The Small Cap II, Small Cap, Equity Income, Micro Cap and Growth Funds together
are the "Domestic Equity Funds."
The International Funds
* Montgomery International Small Cap Fund
The investment objective of Montgomery International Small Cap Fund (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," "Risk Considerations" and
the Appendix in the Statement of Additional Information.
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."
Oscar A. Castro and John D. Boich are responsible for managing the International
Small Cap Fund's portfolio. See "Management of the Funds."
* Montgomery International Growth Fund
The investment objective of Montgomery International Growth Fund (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.
16
<PAGE>
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 generally invests the remaining 35% of its total assets in a similar
manner but may invest those assets in equity securities of U.S. companies, in
lower-capitalization companies or in debt securities, 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 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."
Oscar A. Castro and John D. Boich are responsible for managing the International
Growth Fund's portfolio. Dr. Brian L. Sudweeks will provide the quantitative
country allocation component of the investment strategy. See "Management of the
Funds."
* Montgomery Emerging Markets Fund
The investment objective of Montgomery Emerging Markets Fund (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 companies
in countries having emerging markets. For these purposes, this Fund defines an
emerging market country as having an economy and market that are or would be
considered by the World Bank or the United Nations to be emerging or developing.
This Fund currently limits its investments to the following emerging market
countries: Latin America (Argentina, Brazil, Chile, Colombia, Costa Rica,
Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay, Venezuela); Asia (China,
India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka,
Taiwan, Thailand, Vietnam); Southern and Eastern Europe (Czech Republic, Greece,
Hungary, Poland, Portugal, 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 considers a company 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.
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 and to construct a portfolio of
emerging market investments approximating the risk level of an internationally
diversified portfolio of securities in developed markets. 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 Morgan Stanley Capital International Europe,
Australia, Far East Index (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.
17
<PAGE>
Josephine Jimenez, CFA, Bryan L. Sudweeks, Ph.D., CFA, Thomas R. Haslett, CFA,
and Angeline Ee are jointly responsible for managing the Emerging Markets Fund's
portfolio. See "Management of the Funds."
The Emerging Markets, International Small Cap and International Growth Funds
together are the "International Funds."
The Global Funds
* Montgomery Global Opportunities Fund
* Montgomery Global Communications Fund
The investment objective of both Montgomery Global Opportunities Fund (the
"Opportunities Fund") and Montgomery Global Communications Fund (the
"Communications Fund") is capital appreciation. Under normal conditions, the
Opportunities Fund seeks to achieve its investment objective by investing at
least 65% of its total assets in equity securities of companies, which may be of
any size, throughout the world. While the Opportunities Fund emphasizes common
stocks of those companies having total market capitalizations of more than $1
billion, it also may invest in other types of equity and equity derivative
securities (including options on equity securities, warrants and futures
contracts on equity securities).
Under normal conditions, the Communications Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
communications companies, which may be of any size, throughout the world. For
this purpose, the Fund defines a "communications company" as a company engaged
in the development, manufacture or sale of communications equipment or services
that derived at least 50% of either its revenues or earnings from these
activities, or that devoted at least 50% of its assets to these activities,
based on the company's most recent fiscal year.
Communications companies range from companies concentrating on established
technologies to companies primarily engaged in creating or developing new
technologies. They include companies that develop, manufacture, sell or provide
communications equipment and services (including equipment and services for
data, voice and image transmission); broadcasting (including television and
radio, satellite, microwave and cable television and narrowcasting); mobile
communications and cellular phones and paging; electronic mail; local and wide
area networking and linkage of word and data processing systems; publishing and
information systems; electronic components and equipment; print media; computer
equipment; videotext and teletext; and new technologies combining television,
telephones and computer systems. Over time, communication products and services
change because the global communications industry is changing rapidly due to new
technology and other developments.
The Communications Fund's portfolio management believes that world-wide demand
for components, products, media and systems to collect, store, retrieve,
transmit, process, distribute, record, reproduce and use information will
continue to grow in the future. It also believes that the global trend appears
to be toward lower costs and higher efficiencies resulting from combining
communications systems with computers and, accordingly, the Fund may invest in
companies engaged in the development of methods for using new technologies to
communicate information as well as companies using established communications
technologies.
Oscar A. Castro and John D. Boich are responsible for managing the Opportunities
and Communications Funds' portfolios. See "Management of the Funds."
The Opportunities and Communications Funds together are the "Global Funds."
Each Global Fund may invest up to 35% of its total assets in debt securities,
including up to 5% in debt securities rated below investment grade. The Global
Funds invest in companies that, in the opinion of the Manager, have potential
for above-average, long-term growth in sales and earnings on a sustained basis
and that are reasonably priced. The Manager considers a number of factors in
evaluating potential investments, including a company's per-share sales and
earnings growth; return on capital; balance sheet; financial and accounting
policies; overall financial strength; industry sector; competitive advantages
and disadvantages; research, product development, and marketing; development of
new technologies; service; pricing flexibility; quality of management; and
general operating characteristics.
Each Global Fund may invest substantially in securities denominated in one or
more foreign currencies. Under normal conditions, each Global Fund invests in at
least three different countries, which may include the U.S., but no country,
other than the U.S., may represent more than 40% of its assets.
A significant portion of each Global Fund's assets are invested in the
securities of foreign issuers because many attractive investment opportunities,
including many of the world's communications companies, are outside the U.S. The
Manager uses its financial expertise and research capabilities in markets
located throughout the world in attempting to identify securities providing the
greatest potential for long-term capital appreciation. For information on risks,
see "Portfolio Securities," "Risk Considerations" and the Statement of
Additional Information.
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The Multi-Strategy Funds
* Montgomery Select 50 Fund
The investment objective of the Montgomery Select 50 Fund (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. 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. During the two
to three-month period following commencement of the Fund's operations, the Fund
may have its assets invested substantially in cash or cash equivalents and in
fewer than 50 different equity securities. See "Portfolio Securities," "Risk
Considerations" and the Appendix in the Statement of Additional Information.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries which may include the U.S., but no country, other than the
U.S., may represent more than 40% of its total assets. The Manager uses its
financial expertise and research capabilities in markets throughout the world in
attempting to identify those countries, currencies and companies in which this
Fund may invest. See "Risk Considerations."
Kevin T. Hamilton is responsible for coordinating and implementing the
investment decisions of the Manager's equity teams. See "Management of the
Funds."
* Montgomery Asset Allocation Fund
The investment objective of Montgomery Asset Allocation Fund (the "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. Treasury Bills,
Notes, Bonds and other obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities ("U.S. Government securities") and other debt
instruments rated within the three highest grades by S&P (AAA to A), Moody's
(Aaa to A) or Fitch (AAA to A), or, if unrated, deemed to be of comparable
quality by the Manager using guidelines approved by the Board. An appendix
discussing these debt ratings is included in the Statement of Additional
Information. 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.
William C. Stevens is portfolio manager for the fixed-income and cash components
of the Fund's portfolio. The Manager's growth equity team manages the Fund's
equity component. The key members of that team are Roger W. Honour and Andrew
Pratt. That team and Mr. Stevens determine the strategic allocation of the
Fund's investments. See "Management of the Funds."
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The Fixed Income Funds
* Montgomery Short Government Bond Fund
The investment objective of Montgomery Short Government Bond Fund (the "Short
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. Consequently, this Fund
seeks to reduce such fluctuations by managing the effective duration, and thus
the interest rate risk, of its portfolio.
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, rated within the
three highest grades assigned by S&P (AAA, AA or A), Moody's (Aaa, Aa or A) or
Fitch (AAA, AA or A), or in unrated securities deemed by the Manager to be of
comparable quality using guidelines approved by the Board of Trustees. The Fund
also may invest in other investment companies investing primarily in U.S.
Government securities of appropriate duration. See "Portfolio Securities."
William C. Stevens is responsible for managing the portfolios for the Short
Fund. See "Management of the Funds."
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." Standard duration accounts for the
time intervals between the present and scheduled payments (for a callable bond,
when expected to be received) but it does not properly reflect certain types of
interest rate risk. For example, floating and variable rate debt securities may
have final maturities of 10 or more years, yet their interest rate risk
corresponds to the frequency of the coupon reset. Similarly, with mortgage
"pass-through" securities, the stated final maturity is generally 30 years, but
current prepayment rates are more important. In such situations, the Manager
uses more sophisticated analytical techniques to arrive at an "effective"
duration to reflect interest rate risk. With "effective duration," an interest
rate change of one percent would generally result in a variation of two percent
by a security having an effective duration of two, and a variation of three
percent by a security having an effective duration of three. These techniques
may involve the Manager's estimates of future economic parameters, which may
vary from actual future values. The Short and Allocation Funds 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 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 investment objective of Montgomery Government Reserve Fund (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. Treasury
Bills, Notes, Bonds and other 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.
William C. Stevens is responsible for managing the Reserve Fund's portfolio. See
"Management of the Funds."
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* Montgomery California Tax-Free Intermediate Bond Fund
* Montgomery California Tax-Free Money Fund
The investment objective of Montgomery California Tax-Free Intermediate Bond
Fund (the "California Intermediate Bond Fund") is to provide maximum current
income exempt from federal and California personal income taxes consistent with
preservation of capital and prudent investment management, and that of
Montgomery California Tax-Free Money Fund (the "California Money Fund") is to
maintain a stable net asset value while maximizing current income exempt from
federal and California personal income taxes consistent with liquidity and
preservation of capital. These Funds together are the "Tax-Free Funds." Under
normal conditions, the California Money Fund seeks to achieve its objective by
investing at least 80% of its net assets in debt securities, the interest from
which is, in the opinion of counsel to the issuer, exempt from federal personal
income tax ("Municipal Securities") and at least 65% of net assets in debt
securities, the interest from which is, in the opinion of counsel to the issuer,
also exempt from California personal income taxes ("California Municipal
Securities"). Under normal conditions, the California Intermediate Bond Fund
seeks to achieve its objective by investing at least 80% of its net assets in
California Municipal Securities. These investment policies are fundamental and
may not be changed without shareholder approval.
The California Intermediate Bond Fund is designed primarily for investors who
seek higher yields than tax-free money market funds generally offer and are
willing to accept some fluctuation in this Fund's share value but who are not
willing to accept the greater fluctuations that long-term tax-free bond funds
might entail. This Fund is not an appropriate investment for investors whose
primary investment objective is absolute principal stability. Because the value
of the securities in which this Fund invests generally change with interest
rates, the value of its shares will fluctuate unlike shares of a money market
fund, which seeks to maintain a stable net asset value per share of $1.00.
Consequently, this Fund seeks to reduce such fluctuations by managing the
effective duration, and thus the interest risk, of its portfolio. (Effective
duration is an indicator of a security's sensitivity to interest rate change.
See "Duration" above.) Under normal conditions, the average dollar-weighted
portfolio maturity of the California Intermediate Bond Fund is expected to stay
within a range of 5 to 10 years. However, this Fund may invest in securities of
any maturity. This Fund is also not suitable for investors who cannot benefit
from the tax-exempt character of its dividends, such as IRAs, qualified
retirement plans or tax-exempt entities.
At least 80% of the value of the California Intermediate Bond Fund's net assets
must consist of California Municipal Securities that at the time of purchase are
rated within the four highest ratings of municipal securities (AAA to BBB)
assigned by S&P, (Aaa to Baa) assigned by Moody's, or (AAA to BBB) assigned by
Fitch; or have S&P's short-term municipal rating of SP-2 or higher, or a
municipal commercial paper rating of A-2 or higher; Moody's short-term municipal
securities rating of MIG-2 or higher, or VMIG-2 or higher, or a municipal
commercial paper rating of P-2 or higher; or have Fitch's short-term municipal
securities rating of FIN-2 or higher, or a municipal commercial paper rating of
Fitch-2 or higher; or if unrated by S&P, Moody's or Fitch, are deemed by the
Manager to be of comparable quality, using guidelines approved by the Board (but
not to exceed 20% of this Fund's net assets). Debt securities rated in the
lowest category of investment grade debt may have speculative characteristics;
changes in economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than is the case with
higher grade bonds. However, there is no assurance that any municipal issuers
will make full payments of principal and interest or remain solvent. For a
description of the ratings, see the Appendix in the Statement of Additional
Information. See also "Risk Considerations."
Under normal conditions, the Tax-Free Funds seek to invest in California
Municipal Securities to the greatest extent practicable. Each of these Funds
may, however, invest in other Municipal Securities if in such Fund's opinion,
suitable California Municipal Securities are not available. See "Risk
Considerations," "Dividends and Distributions" and "Taxation." The California
Intermediate Bond Fund may invest up to 20%, and the California Money Fund may
invest 35%, of their respective total assets in cash, U.S. government
securities, and obligations of U.S. possessions, commercial paper, Municipal
Securities other than California Municipal Securities and other debt securities,
including corporate debt instruments or instruments the interest from which is
subject to the federal alternative minimum tax for individuals. For the
California Intermediate Bond Fund, these other securities may be rated within
the three highest grades assigned by S&P (AAA to A), Moody's (Aaa to A) or Fitch
(AAA to A), or, if unrated, deemed to be of comparable quality by the Manager
using guidelines approved by the Board.
Municipal Securities are obligations issued by, or on behalf of, states,
territories and possessions of the U.S. and the District of Columbia, and their
political subdivisions, agencies, authorities and instrumentalities, including
industrial development bonds, as well as obligations of certain agencies and
instrumentalities of the U.S. Government. Municipal Securities are classified as
general obligation bonds, revenue bonds and notes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds are payable from revenue
derived from a particular facility, class of facilities or the proceeds of a
special excise or other specific revenue source but not from the issuer's
general taxing power. Private activity bonds and industrial revenue bonds, in
most cases, are revenue bonds that do not carry the pledge of the credit of the
issuing municipality but generally are guaranteed by the corporate entity on
whose behalf they are issued. From time to time, these Funds may invest more
than 25% of their total assets in private activity bonds and industrial
development bonds of issuers located in California. Notes are short-term
instruments that are obligations of the issuing municipalities or agencies sold
in anticipation of a bond sale, collection of taxes or other receipt of
revenues.
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The California Money 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 Fund limits its investments
to those securities that the Board determines present minimal credit risks and
have remaining maturities, as determined under the Rule, of 397 calendar days or
less. The Fund also maintains a dollar-weighted average maturity of its
portfolio securities of 90 days or less. The California Money Fund and the
Reserve Fund together are the "Money Market Funds."
William C. Stevens and Rhoda Rossman are responsible for managing the Tax-Free
Funds' portfolios. See "Management of the Funds."
The Short, Reserve, California Intermediate Bond and California Money Funds
together are the "Fixed Income Funds."
Portfolio Securities
Equity Securities
In seeking their respective investment objectives, the Domestic Equity, Select
50, International and Global Funds emphasize investments in common stock, and
common stock may constitute up to 80% of the Allocation Fund's portfolio. These
Funds may also invest in other types of equity securities and equity derivative
securities such as preferred stocks, convertible securities, warrants, units,
rights, and options on securities and on securities indices.
Depositary Receipts
The Domestic Equity, Select 50, Allocation, International and Global Funds may
invest in both sponsored and unsponsored American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") and other similar global instruments. ADRs
typically are issued by a U.S. bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation. EDRs, sometimes called
Continental Depositary Receipts, are issued in Europe, typically by foreign
banks and trust companies, and evidence ownership of either foreign or domestic
underlying securities. Unsponsored ADR and EDR programs are organized without
the cooperation of the issuer of the underlying securities. As a result,
available information concerning the issuer may not be as current as for
sponsored ADRs and EDRs, and the prices of unsponsored ADRs and EDRs may be more
volatile.
Convertible Securities
The Domestic Equity, Select 50, Allocation, International and Global Funds may
invest in convertible securities. A convertible security is 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. Through their conversion feature, they
provide an opportunity to participate in capital appreciation resulting from a
market price advance in the underlying common stock. The price of a convertible
security is influenced by the market value of the underlying common stock and
tends to increase as the common stock's market value rises and decrease as the
common stock's market value declines. For purposes of allocating Fund
investments, the Manager regards convertible securities as a form of equity
security.
Securities Warrants
The Domestic Equity, Select 50, Allocation, International and Global Funds may
invest up to 5% of their net assets in warrants, including up to 2% of net
assets for those not listed on a securities exchange. 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. Stock index warrants entitle the holder to receive,
upon exercise, an amount in cash determined by reference to fluctuations in the
level of a specified stock index. A warrant not exercised or disposed of by its
expiration date expires worthless.
Privatizations
The Select 50, International and Global Funds believe that foreign government
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.
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Special Situations
The Select 50, International and Global Funds believe that carefully selected
investments in joint ventures, cooperatives, partnerships, private placements,
unlisted securities and similar vehicles (collectively, "special situations")
could enhance their capital appreciation potential. These Funds also may invest
in certain types of vehicles or derivative securities that represent indirect
investments in foreign markets or securities in which it is impracticable for
the Funds to invest directly. Investments in special situations may be illiquid,
as determined by the Manager based on criteria reviewed by the Board. These
Funds do not invest more than 15% of their net assets in illiquid investments,
including special situations.
Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the International and Global Funds to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment companies' portfolio securities and are subject to
limitations under the Investment Company Act. The International and Global Funds
also may incur tax liability to the extent they invest in the stock of a foreign
issuer that is a "passive foreign investment company" regardless of whether such
"passive foreign investment company" makes distributions to the Funds. See the
Statement of Additional Information.
The Select 50, International, Global, Allocation, Equity Income and Fixed Income
Funds listed above 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.
In accordance with applicable state regulatory provisions, the Manager has
agreed to waive its own management fee with respect to the portion of these
Funds' assets invested in other open-end (but not closed-end) investment
companies.
Debt Securities
The Select 50, International and Global Funds may purchase debt securities that
complement their objective of capital appreciation through anticipated favorable
changes in relative foreign exchange rates, in relative interest rate levels, or
in the creditworthiness of issuers. Debt securities may constitute up to 80% of
the Allocation Fund's and 35% of the Equity Income Fund's total assets. In
selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy which may be changed by the Board, each of the
Select 50, Global and International Funds will not invest more than 5% of its
total assets in debt securities rated lower than BBB by S&P, Baa by Moody's or
BBB by Fitch, or in unrated debt securities deemed to be of comparable quality
by the Manager using guidelines approved by their Board of Trustees, and the
Allocation and Equity Income Funds will not invest more than 5% of its total
assets in debt securities rated lower than A by S&P, A by Moody's and A by
Fitch, or in unrated securities deemed to be of comparable quality by the
Manager using guidelines approved by the Board. 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. Neither event would
require elimination of that security from the Fund's portfolio. However, a
security downgraded below the Fund's minimum credit levels generally would be
retained only if retention was determined by the Manager and subsequently by the
Board to be in the best interests of the Fund. See "Risk Considerations."
The debt instruments in which the Equity Income Fund invests are primarily cash
equivalents intended to provide income at money market rates while minimizing
risk of decline in value. 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 funds.
In addition to traditional corporate, government and supranational debt
securities, each of the International, Global, Allocation and Equity Income
Funds may invest in external (i.e., to foreign lenders) debt obligations issued
by the governments, governmental entities and companies of emerging market
countries.
The percentage distribution between equity and debt will vary from country to
country. The following factors, among others, will influence the proportion of
each of these Funds' assets to be invested in equity securities versus debt
securities: levels and anticipated trends in inflation and interest rates;
expected rates of economic growth and corporate profits growth; changes in
government policy, including regulations governing industry, trade, financial
markets, and foreign and domestic investment; stability, solvency and expected
trends of government finances; and conditions of the balance of payments and
changes in the terms of trade.
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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 Government National Mortgage
Association ("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 Federal
National Mortgage Association ("FNMA"), Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. Government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Funds' shares. With respect to U.S. Government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. Government securities may involve risk
of loss of principal and interest.
Mortgage-Related Securities and Derivative Securities
The Reserve, Tax-Free, Short and Allocation Funds may invest in mortgage-related
securities. A mortgage-related security is an interest in a pool of mortgage
loans and is considered a derivative security. Most mortgage-related securities
are pass-through securities, which means that investors receive payments
consisting of a pro rata share of both principal and interest (less servicing
and other fees), as well as unscheduled prepayments, as mortgages in the
underlying mortgage pool are paid off by the borrowers. Certain mortgage-related
securities are subject to high volatility. These funds use these derivative
securities in an effort to enhance return and as a means to make certain
investments not otherwise available to the Funds. See "Hedging and
Risk-Management Practices" for a discussion of other reasons why these Funds
invest in derivative securities.
Agency Mortgage-Related Securities. Investors in the Reserve, Tax-Free, Short
and Allocation Funds should note that the dominant issuers or guarantors of
mortgage-related securities today are GNMA, FNMA and the Federal Home Loan
Mortgage Corporation ("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.
Collateralized mortgage obligations ("CMOs") are 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.
The Fixed Income Funds consider GNMA, FNMA and FHLMC-issued pass-through
certificates, CMOs and other mortgage-related securities to be U.S. Government
securities for purposes of their investment policies. However, the Money Market
Funds do not invest in stripped mortgage securities, and the Short 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 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 and
Allocation Funds 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.
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Private issuer mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than U.S. Government and
agency mortgage-related securities because they offer no direct or indirect
governmental guarantees. However, many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal. The Short Fund may purchase some mortgage-related securities through
private placements without right to registration under the Securities Act of
1933. 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 either 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."
Zero Coupon Bonds
The Fixed Income and Allocation Funds may invest in zero coupon bonds, which 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. 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
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.
Variable Rate Demand Notes
The Fixed Income and the Allocation Funds may invest in variable rate demand
notes ("VRDNs"), which 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 at
an amount approximately equal to amortized cost or the principal amount plus
accrued interest. However, many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal. See "Illiquid Securities."
Asset-Backed Securities
Each of the Funds may invest up to 5% (25% in the case of the Allocation and
Short Funds) of its total assets in asset-backed securities, which represent a
direct or indirect participation in, or 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. Payments or distributions
of principal and interest on assetbacked securities may be supported by credit
enhancements, such as various forms of cash collateral accounts or letters of
credit. Like mortgage-related securities, these securities are subject to the
risk of prepayment. See "Risk Considerations."
Participation Interests
The Tax-Free Funds may invest in participation interests, which are issued by
financial institutions and represent undivided interests in Municipal
Securities. Participation interests may have fixed, floating or variable rates
of interest. Some participation interests permit these Funds to demand payment
upon specified notice for all or any part of their interest in the underlying
Municipal Security plus accrued interest. Some participation interests are
subject to a "nonappropriation" or "abatement" feature by which, under certain
conditions, the issuer of the underlying Municipal Security, without penalty,
may terminate its payment obligation. In such event, the Funds must look to the
underlying collateral, often a municipal facility leased and used by the issuer.
The liquidity and valuation of participation interests collateralized by such
facilities and subject to "nonappropriation" or "abatement" features are
determined by the Manager.
Custodial Receipts
The California Intermediate Bond Fund may invest in custodial receipts, which
represent rights to receive certain future principal and interest payments on
Municipal Securities deposited with a custodian. Typically, two classes of
receipts are issued in a private placement, and the ownership and interest rates
of such classes are adjusted periodically through an auction mechanism. The
interest rate of the first class is similar to that of the underlying Municipal
Security, and the interest rate of the second changes inversely to changes in
the interest rate of the first class because the aggregate interest paid to both
classes cannot exceed the interest paid from the underlying Municipal Security.
Consequently, the value of the second class may be quite volatile.
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Tender Option Bonds
The Tax-Free Funds may invest in tender option bonds, which are Municipal
Securities, usually held pursuant to a custodial arrangement, that have a
relatively long maturity and bear interest at a fixed rate substantially higher
than the prevailing short-term tax-exempt rates, coupled with an option to
tender the securities to a bank, broker-dealer or other financial institution at
periodic intervals and in order to receive the securities' face value. In
consideration of the option, the holder of the securities pays the financial
institution a fee in an amount that causes the Municipal Securities to trade at
face value when the option is issued. Effectively, the security bears the
short-term tax-exempt rate at the time the option was issued.
Other Investment Practices
The Funds also may engage in the investment practices described below, each of
which may involve certain special risks. 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.
Repurchase Agreements and Reverse Dollar Roll Transactions
The Funds may enter into repurchase agreements, and the Allocation and Short
Funds may also enter into reverse dollar roll transactions. Pursuant to a
repurchase agreement, a Fund acquires a U.S. Government security or other
high-grade liquid debt instrument (for the Money Market Funds, the instrument
must be rated in the highest grade) from a financial institution that
simultaneously agrees to repurchase the same security at a specified time and
price. The repurchase price reflects an agreed-upon rate of return not
determined by the coupon rate on the underlying security. When the Allocation or
Short 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. 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 cash,
letters of credit, U.S. Government securities or other high-grade liquid debt
securities (except that instruments collateralizing loans by the Money Market
Funds must be rated in the highest grade) ("Segregable Assets"), either placed
in a segregated account or separately identified and rendered unavailable for
investment. If the seller defaults on its obligation to repurchase the
underlying 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.
See the Statement of Additional Information for further information.
Borrowing
The Growth, Small Cap, Emerging Markets and Money Market Funds may borrow money
from banks, each in an aggregate amount not to exceed 10%, and the Select 50,
International Small Cap, International Growth, Global, Allocation, Equity
Income, Micro Cap, Short and California Intermediate Bond Funds may borrow money
from banks, each in an aggregate amount not to exceed one-third, of the value of
the Fund's total assets for temporary or emergency purposes, and the Funds may
pledge their assets in connection with such borrowings. A Fund will not purchase
any securities while any such borrowings exceed 5% of its total assets
(excluding, in the case of the Short Fund, fully collateralized reverse
repurchase agreements and dollar roll transactions), except that the Growth,
Select 50, Allocation, Equity Income, International Small Cap, and Opportunities
Funds may not purchase securities if such borrowings exceed 10% of their total
assets.
Reverse Repurchase Agreements and Dollar Roll Transactions
The Growth, Select 50, International, Global, Allocation, Equity Income, Micro
Cap, Short, Tax-Free and Reserve Funds may enter into reverse repurchase
agreements, and the Allocation and Short Funds may also enter into dollar roll
transactions. 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. A dollar roll transaction requires the Fund to
repurchase a similar rather than the same security. If a Fund fully
collateralizes a reverse repurchase agreement with Segregable Assets, it does
not aggregate that transaction with its bank borrowings in applying its
borrowing limit. See the Statement of Additional Information for further
information.
Leverage
The Growth, Select 50, International Small Cap, International Growth,
Opportunities, Allocation, Micro Cap, Short and California Intermediate Bond
Funds may leverage their portfolios in an effort to increase total return.
Although leverage creates an opportunity for increased income and gain, it also
creates special risk considerations. For example, leveraging may magnify changes
in the net asset values of a Fund's shares and in the yield on its portfolio.
Although the principal of such borrowings will be fixed, a Fund's assets may
change in value while the borrowing is outstanding. Leveraging creates interest
expenses that can exceed the income from the assets retained. To the extent
income derived from securities purchased with borrowed funds exceeds the
interest owed, a Fund's net income will be greater than if leveraging were not
used and, to the extent such income is less, a Fund's net income will be less
than if leveraging were not used. The Manager will not use
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leverage for the Short 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.
Securities Lending
The Funds may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 10% of the value of a Fund's total
assets (30% of the Select 50, Global, International Growth, Allocation, Equity
Income, California or Short Funds' total assets). Each securities loan is
collateralized with Segregable Assets in an amount at least equal to the current
market value of the loaned securities, plus accrued interest. See Statement of
Additional Information for further information.
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, normally 7
to 15 days or, in the case of certain CMO issues, 45 to 60 days later.
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, as
the case may be. 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. If a Fund disposes of the right to acquire a when-issued security prior
to its acquisition or disposes of its right to deliver or receive against a
forward commitment, it may incur a gain or loss.
At the time a Fund enters into a transaction on a when-issued or forward
commitment basis, it causes its custodian to segregate Segregable Assets equal
to the value of the when-issued or forward commitment securities and causes the
Segregable 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.
The Allocation and Short Funds also may enter into forward commitments to sell
high-grade liquid debt securities they do not own at the time of entering such
commitments. Although such forward commitments effectively constitute a form of
short sale, these Funds maintain the Segregable Assets as mentioned above. If a
Fund does not have cash available to purchase a security it has committed to
sell, i.e. when it has difficulty liquidating normally highly liquid securities
used as collateral, it may be required to liquidate other securities or borrow
cash under a reverse repurchase or other short-term arrangement. There is a risk
that the market price will increase for the security it must purchase.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds (except the
Money Market Funds) may employ certain risk management practices using the
following derivative securities and techniques (known as "derivatives"): forward
currency exchange contracts, stock options, currency options, and stock and
stock index options, futures contracts, swaps and options on futures contracts
on U.S. Government and foreign government securities and currencies. The Board
has adopted derivative guidelines that require the Board to review each new type
of derivative that may be used by these Funds. Markets in some countries
currently do not have instruments available for hedging transactions relating to
currencies or to securities denominated in such currencies or to securities of
issuers domiciled or principally engaged in business in such countries. To the
extent that such markets 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. See
the Statement of Additional Information for further information on related risks
and other special considerations.
Forward Currency Contracts. A forward currency contract is 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. A Fund (except the Money Market Funds) normally conducts
its foreign currency exchange transactions either on a spot (i.e., cash) basis
at the spot rate in the foreign currency exchange market at the time of the
transaction, or through entering into forward contracts to purchase or sell
foreign currencies at a future date. These Funds generally do not enter into
forward contracts with terms greater than one year.
A Fund generally enters into forward contracts only under two circumstances.
First, if a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security by entering into a forward contract to buy the amount of a
foreign currency needed to settle the transaction. Second, if the Manager
believes that the currency of a particular foreign country will substantially
rise or fall against the U.S. dollar, it may enter into a forward contract to
buy or sell the currency approximating the value of some or all of a Fund's
portfolio securities denominated in such currency. A Fund will not enter into a
forward contract if, as a result, it would have more than one-third of total
assets committed to such contracts (unless it owns the currency that it is
obligated to deliver or has caused its custodian to segregate Segregable Assets
having a value sufficient to cover its obligations). Although forward contracts
are used
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primarily to protect a Fund from adverse currency movements, they involve the
risk that currency movements will not be accurately predicted.
Options on Securities, Securities Indices and Currencies. The Funds (except the
Money Market Funds) may purchase put and call options on securities and
currencies traded on U.S. exchanges and, to the extent permitted by law, foreign
exchanges. 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). Put options allow a Fund to protect unrealized gain in an appreciated
security that it owns without selling that security. 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.
The Domestic Equity, Select 50, Allocation, International and Global Funds also
may purchase put and call options on stock indices in order to hedge against
risks of stock market or industry-wide stock price fluctuations. A Fund may
purchase options on currencies in order to hedge its positions in a manner
similar to its use of forward foreign exchange contracts and futures contracts
on currencies.
The Domestic Equity, Select 50, Allocation, Short and California Intermediate
Bond Funds may seek to enhance income or hedge against a decrease in their
portfolio value by writing (i.e., selling) covered call options. A call option
is "covered" if the Fund owns the optioned securities or has the right to
acquire such securities without additional consideration, a Fund causes its
custodian to segregate Segregable Assets having a value sufficient to meet its
obligations under the option, or a Fund owns an offsetting call option.
Each of the Allocation, Short and California Intermediate Bond Funds may write
covered put options in an attempt to realize enhanced income when it is willing
to purchase the underlying security at the exercise price. A put option is
"covered" if the Fund causes its custodian to segregate Segregable Assets with a
value not less than the exercise price of the option or holds a put option on
the underlying security. These Funds also may purchase call options for the
purpose of acquiring the underlying securities for their portfolios or purchase
put options for hedging purposes. These Funds 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 their total assets, and they
will not enter into options with respect to more than 25% of their total assets.
Futures and Options on Futures. To protect against the effect of adverse changes
in interest rates, a Fund (except the Money Market Funds) may purchase and sell
interest rate futures contracts. 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. 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. Conversely, a Fund
may purchase an interest rate futures contract (i.e., enter into a futures
contract to purchase an underlying security) to hedge against interest rate
decreases and corresponding increases in the value of debt securities it
anticipates purchasing. In addition, a Fund may purchase and sell put and call
options on interest rate futures contracts in lieu of entering into the
underlying interest rate futures contracts. Each Fund segregates Segregable
Assets equal to the purchase price of the portfolio securities represented by
the underlying interest rate futures contracts it has an obligation to purchase.
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.
Hedging Considerations. There can be no assurance that hedging transactions by
the Funds will be successful, and a Fund may be exposed to risk if it is unable
to close out its futures or options positions due to an illiquid secondary
market. Futures, options and options on futures have effective durations that,
in general, are closely related to the effective duration of their underlying
securities. Holding purchased futures or call option positions (backed by
Segregable Assets) lengthens the effective duration of a Fund's portfolio. While
the utilization of options, futures contracts and related options and similar
instruments may be advantageous to a Fund, its performance will be impaired if
the Manager is unsuccessful in employing such instruments or in predicting
market changes. In addition, a Fund pays commissions and other costs in
connection with such investments. Further discussion of the possible risks is
contained in the Statement of Additional Information.
Illiquid Securities
No Fund may invest more than 15% (10% for the Money Market Funds and 5% for the
Small Cap Fund) of its net assets in illiquid securities. The Funds treat any
securities subject to restrictions on repatriation for more than seven days and
securities
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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. State
securities laws may impose further limitations on the amount of illiquid or
restricted securities a Fund may purchase.
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,
regardless of how long the securities have been held. The Manager therefore
changes a Fund's investments whenever it believes doing so will 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. Portfolio turnover in excess of 100% is
considered high and increases such costs. For the fiscal year ended June 30,
1995, the portfolio turnover for the Growth Fund was 128% (111% for 1994);
Equity Income Fund, 29%; Small Cap Fund, 85% (95% for 1994); Micro Cap Fund,
37%; Opportunities Fund, 119% (67% for 1994); Communications Fund, 50% (29% for
1994); International Small Cap Fund, 156% (124% for 1994); Emerging Markets
Fund, 92% (64% for 1994); Allocation Fund, 96% (191% for 1994); Short Fund, 284%
(603% for 1994); and California Intermediate Bond Fund, 38% (77% for 1994). The
annual portfolio turnover for the International Growth and Select 50 Funds is
expected to be less than 100%. The annual portfolio turnover for the Small Cap
II Fund is expected to be approximately 100%. However, even when portfolio
turnover exceeds 100% for a Fund that Fund does not regard portfolio turnover as
a limiting factor.
Investment Restrictions
The investment objective of each Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, each Fund's other
investment policies may be changed by its Trust's Board. If there is a change in
the investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The California Money, Equity Income, Select 50, Micro Cap and Small Cap II Funds
have reserved the right, if approved by the Board, to convert in the future to a
"feeder" fund that would invest all of its assets in a "master" fund having
substantially the same investment objective, policies and restrictions. At least
30 days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this Prospectus.
Risk Considerations
Small Companies
The Small Cap, Small Cap II, Micro Cap and International Small Cap Funds
emphasize, and the Select 50, other International, Growth, Allocation and Global
Funds may make investments in smaller companies that may benefit from the
development of new products and services. Such smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, 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
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Funds. The
Domestic Equity, Select 50, Allocation, International and Global Funds have the
right to purchase securities in foreign countries. Accordingly, shareholders
should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, which are in
addition to the usual risks inherent
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in domestic investments. The Select 50, International and Global 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 by the Domestic Equity, Select 50, Allocation, International and
Global Funds 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 and resulted in settlement
difficulty. 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 if it had entered into a contract to sell
the security. 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 the securities owned by the Domestic Equity, Select 50, Allocation,
International or Global Funds 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.
Some countries in which one of these Funds may invest may also 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.
Lower Quality Debt
The Select 50, International and Global Funds are authorized to invest in
medium-quality (rated or equivalent to BBB by S&P or Fitch's or Baa by Moody's)
and in limited amounts of high-risk, lower quality debt securities (i.e.,
securities rated below BBB or Baa) or, if unrated, deemed to be of equivalent
investment quality as determined by the Manager. 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 rated lower than BBB by S&P or Baa by Moody's or, if unrated, deemed
to be of comparable quality as determined by the Manager using guidelines
approved by the Board. 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.
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Diversification
Diversifying a fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less diversified
funds may be more sensitive to changes in the market value of a single issuer or
industry. The Select 50 Fund may present greater risk than is usually associated
with widely diversified mutual funds because it may invest in the securities of
as few as 50 issuers. Therefore, the Select 50 Fund is not appropriate as your
sole investment.
Concentration in Communications Industry
The Communications Fund concentrates its investments in the global
communications industry. Consequently, the Fund's share value may be more
volatile than that of mutual funds not sharing this concentration. The value of
the Fund's shares may vary in response to factors affecting the global
communications industry, which may be subject to greater changes in governmental
policies and regulation than many other industries, and regulatory approval
requirements may materially affect the products and services. For example,
telephone operating companies in the U.S. are subject to federal and state
regulation affecting permitted rates of return and determining the services that
may be offered. Competition for market share affects many sectors of the global
communications industry. Because this Fund must satisfy certain diversification
requirements in order to maintain its qualification as a regulated investment
company within the meaning of the Code, this Fund may not always be able to take
full advantage of opportunities to invest in certain communications companies.
Interest Rates
The market value of debt securities that are sensitive to prevailing interest
rates is inversely related to actual 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.
Reinvestment of prepayments may occur at higher or lower interest rates than the
original investment, affecting a Fund's yield. Because prepayments of principal
generally occur when interest rates are declining, it is likely that the Fixed
Income Funds, and the 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 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. Fixed-income securities with
effective durations of three years are more responsive to interest rate
fluctuations than those with effective durations of one year. If interest rates
rise by 1%, the value of securities having an effective duration of three years
will decrease by 3%. See "The Funds' Investment Objectives and Policies."
Tax-Free Funds
Investing in California Municipal Securities. Because the Tax-Free Funds invest
primarily in California Municipal Securities, their performance may be
especially affected by factors pertaining to the California economy and other
factors specifically affecting the ability of issuers of California Municipal
Securities to meet their obligations. As a result, the value of the Tax-Free
Fund's shares may fluctuate more widely than the value of shares of a portfolio
investing in securities relating to a number of different states.
The ability of California state, county or local governments to meet their
obligations will depend primarily on the availability of tax and other revenues
to those governments and on their fiscal conditions generally. The amount of tax
and other revenues available to governmental issuers of California Municipal
Securities may be affected from time to time by economic, political, geographic
and demographic conditions. For example, in December 1994, Orange County filed
for bankruptcy protection. In addition, constitutional amendments, legislative
measures, executive orders, administrative regulations and voter initiatives may
limit a government's power to raise revenues or increase taxes and thus could
adversely affect the ability to meet financial obligations. The current State of
California general obligation bond ratings are S&P: A; Moody's: A1; and Fitch:
A; which reflects a downward change from ratings in prior years. Such ratings
and any further reductions may adversely affect the value
31
<PAGE>
of such obligations. The availability of federal, state and local aid to issuers
of California Municipal Securities also may affect their ability to meet their
obligations.
Payments of principal and interest on limited obligation securities will depend
on the economic condition of the facility or specific revenue source from whose
revenues the payments will be made, which in turn could be affected by economic,
political and demographic conditions in California. Any reduction in the actual
or perceived ability of an issuer of California Municipal Securities to meet its
obligations (including a reduction in the rating of its outstanding securities)
would likely affect adversely the market value and marketability of its
obligations and could affect adversely the values of California Municipal
Securities as well. In recent years, "Proposition 13" and similar California
constitutional and statutory amendments and initiatives have restricted the
ability of California taxing entities to increase real property and other tax
revenues. Other initiative measures approved by California voters, through
limiting various other taxes, have resulted in a substantial reduction in state
revenues. Decreased state revenues may result in reductions in allocations of
state revenues to local governments. It is not possible to determine the impact
of these measures on the ability of California issuers to pay interest or repay
principal. In addition, from time to time, federal legislative proposals have
threatened the tax-exempt status or use of municipal securities.
Non-diversified Portfolio. The Tax-Free Funds are "non-diversified" investment
companies under the Investment Company Act. This means that, with respect to 50%
of their total assets, they may not invest more than 5% of their total assets in
the securities of any one issuer (other than the U.S. Government). The balance
of their assets may be invested in as few as two issuers. Thus, up to 25% of
each of these Fund's total assets may be invested in the securities of any one
issuer. For purposes of this limitation, a security is considered to be issued
by the governmental entity (or entities) the assets and revenues of which back
the security, or, with respect to an industrial development bond, that is backed
only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a guaranteed
security also may be considered to be an issuer in connection with such
guarantee. By investing in a portfolio of Municipal Securities, a shareholder in
the Tax-Free Funds enjoys greater diversification than an investor holding a
single Municipal Security. However, the investment return on a non-diversified
portfolio typically is dependent upon the performance of a smaller number of
issuers relative to the number of issuers held in a diversified portfolio. If
the financial condition or market assessment of certain issuers changes, these
Funds' policies of acquiring large positions in the obligations of a relatively
small number of issuers may affect the value of their portfolios to a greater
extent than if their portfolios were fully diversified.
Similar Projects. Although the Tax-Free Funds do not presently intend to do so
on a regular basis, they may invest more than 25% of their assets in California
Municipal Securities, the interest on which is paid solely from revenues on
similar projects, if such investment is deemed necessary or appropriate by the
Manager. To the extent that these Funds' assets are concentrated in California
Municipal Securities payable from revenues on similar projects, they will be
subject to the particular risks presented by such projects to a greater extent
than it would be if their assets were not so concentrated.
Ratings Change. After its purchase by one of these Funds, an issue of Municipal
Securities may cease to be rated or its rating may be reduced below that
required for purchase. Neither event would require the elimination of such an
obligation from these Funds' investment portfolio. However, the obligation
generally would be retained only if such retention were determined by the Board
to be in the best interests of these Funds.
Callable Securities. Callable Municipal Securities are Municipal Securities that
contain a provision in their indentures permitting the issuer to redeem such
securities prior to their maturity dates at a specific price that typically
reflects a premium over the securities' original issue price. These securities
generally have a call-protection (that is, a period of time during which the
securities may not be called), which usually lasts for 7 to 10 years, after
which time such securities may be called away. An issuer generally may be
expected to call securities during periods of declining interest rates, when
borrowings may be replaced at lower rates than those obtained in prior years.
Management Of The Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees that establishes its Funds' policies and supervises and reviews
their management. Day-to-day operations of the Funds are administered by the
officers of the Trusts and by the Manager pursuant to the terms of an investment
management agreement with each Fund.
Montgomery Asset Management, L.P., is the Funds' Manager. The Manager, a
California limited partnership, was formed in 1990 as an investment adviser
registered as such with the SEC under the Investment Advisers Act of 1940, as
amended, and since then has advised private accounts as well as the Funds. Its
general partner is Montgomery Asset Management, Inc., and its sole limited
partner is Montgomery Securities, the Funds' Distributor. Under the Investment
Company Act, both Montgomery Asset Management, Inc. and Montgomery Securities
may be deemed control persons of the Manager. Although the operations and
management of the Manager are independent from those of Montgomery Securities,
the Manager may draw upon the research and administrative resources of
Montgomery Securities in its discretion and consistent with applicable
regulations.
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<PAGE>
Founded in 1969, Montgomery Securities is a fully integrated and highly focused
investment banking partnership specializing in emerging growth companies. The
firm's areas of expertise include research, corporate finance, sales and
trading, and venture capital. Its research department is one of the largest,
most experienced groups headquartered outside the East Coast. Through its
corporate finance department, Montgomery Securities is a well recognized
underwriter of public offerings and provides broad distribution of securities
through its sales and trading organization.
Portfolio Managers
Montgomery Growth Fund
Montgomery Micro Cap Fund
The Growth and Micro Cap Funds are managed by the growth equity team, whose key
members are Roger W. Honour and Andrew Pratt.
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 is the subject of a
settled SEC administrative proceeding (by Order dated September 29, 1995)
arising out of personal trading activities that created undisclosed conflicts of
interest. These activities occurred prior to Mr. Honour's joining Montgomery
Asset Management.
Andrew Pratt, CFA, is Senior Portfolio Analyst. 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.
Montgomery Equity Income 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.
Montgomery Small Cap Fund
Stuart O. Roberts is a Managing Director and Senior Portfolio Manager. For the
five years preceding this Fund's inception in 1990, Mr. Roberts was a portfolio
manager and analyst at Founders Asset Management in Denver, Colorado, where he
managed three public mutual funds.
Montgomery Small Cap II Fund
The Manager's Growth Equity Team, which consists of many experienced investment
professionals working as an investment committee, is responsible for managing
the Fund's portfolio. In the future, the Manager may focus responsibility for
managing the Fund on one or two portfolio managers, but will notify Fund
shareholders in advance of that development.
Montgomery Global Opportunities Fund
Montgomery Global Communications Fund
Montgomery International Small Cap Fund
Montgomery International Growth Fund
Oscar A. Castro is a Managing Director and 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.
John D. Boich is a Managing Director and 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.
For the background and business experience of Dr. Bryan L. Sudweeks, who is a
Portfolio Strategist for the International Growth Fund, see the discussion under
the Emerging Markets Fund.
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<PAGE>
Montgomery Emerging Markets Fund
Josephine S. Jimenez, CFA, is a Managing Director and 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.
Bryan L. Sudweeks, Ph.D., CFA, is a Managing Director and 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.
Thomas R. Haslett, CFA, is a Vice President and 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.
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.
Montgomery Select 50 Fund
The Manager currently divides its equity portfolio management into a number of
specific disciplines. Five of those disciplines are represented in the Select 50
Fund. 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. Except for the U.S. Small Cap discipline,
the portfolio management teams responsible for these disciplines are described
throughout this "Portfolio Managers" section.
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. 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.
Montgomery Asset Allocation Fund
William C. Stevens is the portfolio manager for the fixed-income and cash
components of the Fund's portfolio. The Manager's growth equity team manages the
equity component of the Fund's portfolio, whose current key members are Roger W.
Honour and Andrew Pratt. That team and Mr. Stevens determine the Fund's
strategic allocations. For the background and business experience of Roger W.
Honour and Andrew Pratt, see the discussion under the Growth Fund (above), and
for William C. Stevens, see the discussion under the Fixed Income Funds (below).
Montgomery Short Government Bond Fund
Montgomery Government Reserve Fund
Montgomery California Tax-Free Intermediate Bond Fund
Montgomery California Tax-Free Money Fund
William C. Stevens is a Portfolio Manager and a Managing Director. 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.
Rhoda Rossman is a Portfolio Manager and Managing Director. From 1993 until
joining the Manager in April 1995, Ms. Rossman was a Senior Portfolio Manager at
Wells Fargo Bank specializing in tax-exempt investments. From 1987 to 1993, she
served as an Investment Counselor at Rosenberg Capital Management in San
Francisco.
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.
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<PAGE>
<TABLE>
The management fees for the Domestic Equity, Select 50, Allocation,
International and Global Funds are higher than for most mutual funds.
<CAPTION>
Average Daily Net Assets Annual Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap II Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Global Opportunities Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund First $250 million 1.25%
Over $250 million 1.00%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
- ----------------------------------------------------------------------------------------------------------------------------
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%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund First $500 million 0.50%
Over $500 million 0.40%
- ----------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Manager also serves as the Funds' Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, the Funds pay the Administrator a
monthly fee at the following annual rates: each of the Growth, Equity Income,
Opportunities and Allocation Funds pays seven one-hundredths of one percent
(0.07%) of average daily net assets (0.06% of average daily net assets over $500
million); each of the Small Cap, Small Cap II, Select 50, Micro Cap, Emerging
Markets, International Small Cap, International Growth and Communications Funds
pays seven one-hundredths of one percent (0.07%) of average daily net assets
(0.06% of daily net assets over $250 million); each of the Short, Reserve and
Tax-Free Funds pays five one-hundredths of one percent (0.05%) of average daily
net assets (0.04% of average daily net assets over $500 million and the Reserve
Fund over $250 million).
Each Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to that Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
For certain Funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses at or below the lesser of the
maximum allowable by applicable state expense limitations or the following
percentages of each
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<PAGE>
Fund's average net assets: the Growth Fund, one and five-tenths of one percent
(1.50%); the Equity Income Fund, eighty-five one-hundredths of one percent
(0.85%); the Small Cap Fund, one and four-tenths of one percent (1.40%); the
Small Cap II Fund, one and five-tenths of one percent (1.50%); the Micro Cap
Fund, one and seventy-five one-hundredths of one percent (1.75%); the
International Growth Fund, one and sixty-five one-hundredths of one percent
(1.65%); the Select 50 Fund, one and eight-tenths of one percent (1.80%); the
Emerging Markets, International Small Cap, Communications and Opportunities
Funds, one and nine-tenths of one percent (1.90%); the Allocation Fund, one and
three-tenths of one percent (1.30%); the Short and California Funds,
seven-tenths of one percent (0.70%); and the Money Market Funds, six-tenths of
one percent (0.60%). The Manager also may voluntarily reduce additional amounts
to increase the return to a Fund's investors. The Manager may terminate these
voluntary reductions at any time. Any reductions made by the Manager in its fees
are subject to reimbursement by that Fund within the following two years (three
years for the 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 in order to increase the return to that Fund's investors. To
the extent 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, out of its own funds, 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. In addition, the
Manager, out of its own funds, may sponsor seminars and educational programs on
the Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to, reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Funds receive prompt execution at competitive prices, the Manager also may
consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. It is anticipated that Montgomery Securities
may act as one of the Funds' brokers in the purchase and sale of portfolio
securities and, in that capacity, will receive brokerage commissions from the
Funds. The Funds will use Montgomery Securities as its broker only when, in the
judgment of the Manager and pursuant to review by the Boards, Montgomery
Securities will obtain a price and execution at least as favorable as that
available from other qualified brokers. See "Execution of Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How To Invest In The Funds
The Funds' shares are offered directly to the public, with no sales load, at
their next-determined net asset value after receipt of an order with payment.
The Funds' shares are offered for sale by Montgomery Securities, the Funds'
Distributor, 600 Montgomery Street, San Francisco, California 94111, (800)
572-3863, and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, Montgomery Securities or certain administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders and payment for the Money Market
Funds must be received by 12:00 noon, New York time. Orders for Fund shares
received after 4:00 p.m., New York time, and for the Money Market Funds, after
12:00 noon, New York time, 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 other than the Micro Cap Fund is
$1,000 (including IRAs) and $100 for subsequent investments. The minimum initial
investment for the Micro Cap Fund is $5,000 (including IRAs) and $500 for
subsequent investments. Keogh plans, 401(k) plans and other retirement plans may
also be opened for $1,000 ($5,000 for the Micro Cap Fund), although the Funds do
not act as custodians for those accounts. For the Money Market Funds, the
minimum initial investment through an investor's brokerage account with
Montgomery Securities is $100. The Manager or the Distributor, in its
discretion, may waive these minimums. Purchases may also be made in certain
circumstances by payment of securities. See the Statement of Additional
Information for further details.
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<PAGE>
Complete information regarding your account must be included in all wire
instructions in order to facilitate the prompt and accurate handling of
investments. Investors may obtain further information from their own banks about
wire transfers and any fees that may be imposed. The Funds and the Distributor
each reserve the right to reject any purchase order in whole or in part.
The Manager may close and reopen the Micro Cap Fund to new investors from time
to time at its discretion. If this Fund is closed, shareholders who maintain
open accounts with the Fund may make additional investments in the Fund. Once a
shareholder's account is closed, additional investments in the Fund may not be
possible. An account may be considered closed and subject to redemption by this
Fund if the value of the shares remaining after a transfer or redemption falls
below $5,000.
Initial Investments
Minimum Initial Investment (including IRAs): $1,000
Minimum Initial Investment for the Micro Cap Fund (including IRAs): $5,000
Mail your completed application and any checks to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
Initial Investments by Check
o Complete the Account Application.
o Tell us in which Funds you want to invest and make your
check payable to The Montgomery Funds.
o We do not accept third party checks or cash investments.
Checks must be in U.S. dollars and, to avoid fees and
delays, drawn only on banks located in the U.S.
o A charge may be imposed on checks that do not clear.
Initial Investments by Wire
o Notify the Transfer Agent at (800) 572-3863 that 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.
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.
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<PAGE>
Subsequent Investments
Minimum Subsequent Investment (including IRAs): $100
Minimum Subsequent Investment for the Micro Cap Fund (including IRAs): $500
Mail any checks and investment instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds.
o Enclose an investment stub from your confirmation
statement.
o 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 We do not accept third party checks or cash investments.
Checks must be made in U.S. dollars and, to avoid fees and
delays, drawn only on banks located in the U.S.
o A charge may be imposed on checks that do not clear.
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."
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<PAGE>
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone
purchases by calling the Transfer Agent at (800) 572-3863
before the Fund cutoff time.
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.
o Shares of the Money Market Funds and shares for IRAs are
not eligible for telephone purchases.
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.
Address courier packages to The Montgomery Funds, c/o
DST Systems, Inc., 1004 Baltimore St., Kansas City, MO
64105.
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
Under the Automatic Account Builder plan, a shareholder may arrange to make
additional purchases (minimum $100) ($500 for the Micro Cap Fund) of shares
automatically on a monthly or quarterly basis by electronic funds transfer from
a checking or savings account, if the bank at which the account is maintained is
a member of the Automated Clearing House, or by preauthorized checks drawn on
the shareholder's bank account. A shareholder may terminate the program at any
time with seven business days' notice by delivering a written instruction to the
Transfer Agent. The Account Application contains the requirements for this
program. An initial investment in check form of at least $1,000 ($5,000 for the
Micro Cap Fund) must be submitted to the Transfer Agent to initiate this
program.
Telephone Transactions
You agree to reimburse the Funds for any expenses or losses that they may incur
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.
Write your confirmed purchase number on any check. 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
employ reasonable procedures in an effort to confirm the authenticity of
telephone instructions, such as requiring the caller to give a special
authorization number. Provided these procedures are followed, the Funds and the
Transfer Agent shall not be responsible for any loss, expense or cost arising
out of any telephone instruction.
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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.
None of the Funds or the Manager administers retirement account plans. Certain
of the Funds are available for purchase through administrators for retirement
plans. Investors who purchase shares as part of a retirement plan should address
inquiries and seek investment servicing from their plan administrators. Plan
administrators may receive compensation from the Funds for performing
shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How To Redeem An Investment In The Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the Fixed Income Funds). The
redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, Montgomery Securities or
other securities dealers. Payment of redemption proceeds is made promptly
regardless of when redemption occurs and normally within three days after
receipt of all documents in proper form, including a written redemption order
with appropriate signature guarantee. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instructions. The Funds may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. Shares tendered
for redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. Procedures for
requesting a redemption are set forth below. Shareholders should note that the
Funds reserve the right upon 60 days' advance notice to shareholders to impose a
redemption fee of up to 1.00% on shares redeemed within 90 days of purchase.
Redeeming by Written Instruction
o Write a letter indicating 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 if
you need 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.
o Mail your instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141
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Redeeming by Check
o Checkwriting is available on the Government
Reserve, California Money, California Intermediate
Tax-Free Bond and Short Government Bond Funds.
o The minimum amount per check is $250.
o Checks should not be used to close accounts with
fluctuating net assets values (California
Intermediate Tax-Free Bond and Short Government
Bond Funds).
o Checkwriting privileges may not be available for
Montgomery Securities brokerage accounts.
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.
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. Telephone redemption privileges will be suspended for 30 days after
any address change. All redemption requests during this period must be submitted
in writing with the signature guaranteed. 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 decline telephone redemption privileges after an account is
opened by instructing the Transfer Agent in writing. Your request will be
processed upon receipt.
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) of $100 or more from the shareholder's account in
that Fund on a monthly or quarterly basis. 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. Dividends and distributions on shares held in a Systematic Withdrawal
Plan account will be reinvested in additional shares of that Fund at net asset
value.
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Small Accounts/Annual Account Maintenance Fee
Due to the relatively high cost of maintaining smaller accounts, each Fund
reserves the right to redeem shares or to impose a $20 annual account
maintenance fee for any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000
($5,000 for the Micro Cap Fund). If a Fund decides to make an involuntary
redemption, the shareholder will first be notified that the value of the
shareholder's account is less than the minimum level and will be allowed 30 days
to make an additional investment to bring the value of that account at least to
the minimum investment required to open an account before the Fund takes any
action. The Money Market Funds are not subject to the account maintenance fee.
Exchange Privileges And Restrictions
You may exchange shares from another Fund with the same registration, taxpayer
identification number and address. You should note that an exchange may result
in recognition of a 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, either temporarily or permanently,
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 the
Domestic Equity, International, Global and MultiStrategy Funds. The minimum
exchange is $100 ($500 for the Micro Cap Fund). Periodically investing a set
dollar amount into a Fund is also referred to dollar-cost averaging because the
number of shares purchased will vary depending on the price
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<PAGE>
per share. Your account with the recipient Fund must meet the applicable minimum
of $1,000 or $5,000 for the Micro Cap Fund. Exchanges out of the Fixed Income
Funds are exempt from the exchange 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 a Domestic Equity,
International, Global or Multi-Strategy Fund. Your account with the recipient
Fund must meet the applicable minimum of $1,000 or $5,000 for the Micro Cap
Fund.
Brokers and Other Intermediaries
Investing through Montgomery Securities Brokerage Account (Money Market Funds
Only)
Investors with Montgomery Securities brokerage accounts may instruct Montgomery
Securities automatically to purchase shares of a Money Market 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 either
Money Market Funds following receipt by the Transfer Agent of investor
instructions. If such instructions are received after 12:00 noon, New York time,
Fund shares will be purchased at the next-determined asset value. Checkwriting
privileges may not be available for Montgomery Securities brokerage accounts.
Investing through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from other selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged by these agents. Purchase orders through securities brokers,
dealers and other financial intermediaries are effected at the next-determined
net asset value after receipt of the order by such agent, provided the agent
transmits such order on a timely basis to the Transfer Agent so that it is
received by 4:00 p.m. (1:00 p.m. for the Money Market Funds), 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 (Money Market
Funds Only)
If a shareholder wishes, the Transfer Agent will redeem shares of either of the
Money Market Funds automatically to satisfy debit balances in a shareholder's
Montgomery Securities brokerage account or to provide necessary cash collateral
for a shareholder's margin obligation to Montgomery Securities. Redemptions also
may be effected automatically to settle securities transactions with Montgomery
Securities if a shareholder's free credit balance on the day before settlement
is insufficient to settle the transactions. Each Montgomery Securities brokerage
account will, as of the close of business each day the NYSE is open for trading
and is not a national bank holiday, automatically be scanned for debits and
pending securities settlements, and, after application of any free credit
balances in the account to such debits and pending securities settlements, a
sufficient number of shares of the selected Money Market 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.
Repurchase 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 repurchase order by such broker-dealer,
provided the broker-dealer transmits such order on a timely basis to the
Transfer Agent so that it is received by 4:00 p.m., New York time (12:00 noon
for the Money Market Funds), on a day that the Fund redeems shares. Orders
received after that time are entitled to the net asset value next determined
after receipt.
How Net Asset Value Is Determined
The net asset value of each Fund is determined once daily as of 4:00 p.m. (12:00
noon for the Money Market Funds), New York time, on each day that the NYSE is
open for trading (except for bank holidays for the Fixed Income Funds).
Per-share
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<PAGE>
net asset value is calculated by dividing the value of each Fund's total net
assets by the total number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
if there has not been any change in the foreign-currency denominated values of
such securities.
Because foreign securities markets may close prior to the time 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 value may not be reflected in the Funds'
calculation of net asset values 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. Currently the Fixed Income Funds
declare income dividends daily and pay them monthly on or about the last
business day of each month. The Equity Income Fund declares and pays dividends
on or about the last business day of each quarter. Each Fund currently intends
to make one or, if necessary to avoid the imposition of tax on a Fund, more
distributions during each calendar year. A distribution may be made between
November 1 and December 31 of each year with respect to any undistributed
capital gains earned during the one-year period ended October 31 of such
calendar year. Another distribution of any undistributed capital gains may also
be made following each Fund's fiscal year end (June 30). The amount and
frequency of Fund distributions are not guaranteed and are at the discretion of
the Board.
Unless investors request cash distributions in writing at least seven business
days prior to the 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.
Taxation
Except for the newer Funds that intend to qualify and elect as soon as possible,
each of the Funds has qualified and elected and intends to continue to qualify
and elect 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 pertaining to the timing of distributions. If a Fund is
unable to meet certain Code requirements, it may be subject to taxation as a
corporation. The International, Global, Equity Income and Allocation Funds may
also incur tax liability to the extent they invest in "passive foreign
investment companies." See "Portfolio Securities" and the Statement of
Additional Information.
For federal income tax purposes, any dividends derived from net investment
income (except income consisting of tax-exempt interest for the Tax-Free Funds)
and any excess of net short-term capital gain over net long-term capital loss
that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time
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<PAGE>
the Fund's shares have been owned. Distributions of income and capital gains are
taxed in the manner described above, whether they are taken in cash or are
reinvested in additional shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
The California Money Fund intends, and the California Intermediate Bond Fund
intends to continue, to qualify to pay "exemptinterest dividends" to their
shareholders by maintaining, as of the close of each quarter of its taxable
year, at least 50% of the value of its total assets in tax-exempt securities. If
these Funds satisfy this requirement, distributions from net investment income
to shareholders will be exempt from federal income taxation to the extent net
investment income is represented by interest on tax-exempt securities.
Distributions from other net investment income, such as market discount on
municipal securities, and from certain other investment practices, such as
transactions in options, will be ordinary income. Shareholders generally will
not incur any federal income tax on the amount of exempt-interest dividends
received by them from these Funds, whether taken in cash or reinvested in
additional shares. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's Social Security benefits are
subject to federal income tax.
General Information
The Trusts
All of the Funds with the exception of the Allocation Fund are series of The
Montgomery Funds, a Massachusetts business trust organized on May 10, 1990. The
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.
As of August 24, 1995, all of the previously outstanding shares of each Fund
were redesignated as Class R shares. That redesignation did not affect the
rights of holders of those shares. Other classes of shares were designated
simultaneously. This Prospectus relates only to the Class R shares of those
Funds. The Funds may in the future designate other classes of shares for
specific purposes.
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of its Trust,
votes separately on matters affecting only that Fund (e.g., approval of the
Investment Management Agreement); all series of each Trust vote as a single
class on matters affecting all series of that Trust jointly or that Trust as a
whole (e.g., election or removal of Trustees). Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in any election of
Trustees can, if they so choose, elect all of the Trustees of that Trust. While
the Trusts are not required and do not intend to hold annual meetings of
shareholders, such meetings may be called by each Trust's Board at its
discretion, or upon demand by the holders of 10% or more of the outstanding
shares of the Trust for the purpose of electing or removing Trustees.
Shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of Trustees pursuant to the provisions
of Section 16(c) of the Investment Company Act.
Performance Information
From time to time, the Funds may publish their total return, and, in the case of
certain Funds, current yield and tax equivalent yield in advertisements and
communications to investors. Total return information generally will include a
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations. A
Fund may also advertise aggregate and average total return information over
different periods of time. Each Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 investment that includes
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<PAGE>
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. In the case of the
Tax-Free Funds, tax equivalent yield is the yield that a taxable investment must
generate in order to equal (after applicable taxes are deducted) either Fund's
yield for an investor in stated federal income and California tax brackets.
See "Performance Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered as a representation of what an investor's total return or current
yield may be in any future period. The Funds' Annual Report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND.
Legal Opinion
The validity of shares offered by this Prospectus will be passed on by Heller,
Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California 94104.
Shareholder Reports and Inquiries
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. A confirmation statement
will be mailed to your record address each time you request a transaction except
for most money market transactions (monthly) and pre-authorized automatic
investment and redemption services (quarterly). All transactions are recorded on
quarterly account statements which you will receive at the end of each calendar
quarter. Your fourth-quarter account statement will be a year-end statement,
listing all transaction activity for the entire year. Retain this statement for
your tax records.
In general, shareholders who redeemed shares from a qualifying Montgomery
account should expect to receive an Average Cost Statement in February of the
following year. Your statement will calculate your average cost using the
average cost single-category method.
Any questions should be directed to The Montgomery Funds at 800-572-FUND
(800-572-3863).
Backup Withholding Instructions
Shareholders are required by law to provide the Funds with their correct Social
Security or other Taxpayer Identification Number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN or to check the appropriate boxes in the
Account Application and to sign the shareholder's name could result in backup
withholding by the Funds of an amount of income tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account. Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.
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
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<PAGE>
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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Investment Manager
Montgomery Asset Management, L.P.
600 Montgomery 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
