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COMBINED PROSPECTUS FOR CLASS R SHARES
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<PAGE>
[LOGO]
Rule 497(e)
33-34841 and 811-6011
Prospectus
October 15, 1997
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Invest wiselySM
TABLE OF CONTENTS
The Montgomery Funds 1
Fees and Expenses of the Funds 4
Financial Highlights 7
The Funds' Investment Objectives and Policies 16
Portfolio Securities 25
Other Investment Practices 29
Risk Considerations 31
Management of the Funds 35
How to Contact the Funds 40
How to Invest in the Funds 40
How to Redeem an Investment in the Funds 43
Exchange Privileges and Restrictions 45
Brokers and Other Intermediaries 45
How Net Asset Value Is Determined 46
Dividends and Distributions 46
Taxation 47
General Information 48
Backup Withholding 49
Glossary 50
Each Fund's shares offered in this prospectus (the Class R shares) are sold at
net asset value (NAV) with no sales load, no commissions, no Rule 12b-1 fees and
no redemption or exchange fees. The minimum initial investment in each Fund is
$1,000 ($5,000 for the Micro Cap Fund), and subsequent investments must be at
least $100 ($500 for the Micro Cap Fund). The Manager or the Distributor may
waive these minimums. See "How to Invest in the Funds."
Each Fund is a separate series of either The Montgomery Funds or The Montgomery
Funds II, both open-end management investment companies, managed by Montgomery
Asset Management LLC (the "Manager"), an affiliate of Commerzbank AG. Funds
Distributor, Inc., which is not affiliated with the Manager, is the distributor
of the funds (the "Distributor"). Each Fund has its own investment objective and
policies designed to meet different investment goals. As with all mutual funds,
attainment of each Fund's investment objective cannot be assured.
This prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing. Please read it and retain it
for future reference. A Statement of Additional Information dated October 15,
1997, 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 (3863). If you are viewing the electronic version of this
prospectus through an online computer service, you may request a printed version
free of charge by calling (800) 572-FUND (3863).
The Internet World Wide Web site for The Montgomery Funds is
www.montgomeryfunds.com. The Securities and Exchange Commission maintains a Web
site (www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding The
Montgomery Funds and The Montgomery Funds II.
An investment in the funds is neither insured nor guaranteed by the U.S.
government. There can be no assurance that Montgomery Government Reserve Fund,
Montgomery Federal Tax-Free Money Fund and Montgomery California Tax-Free Money
Fund will be able to maintain a stable net asset value of $1 per share. The
California Tax-Free Money Fund may invest a significant percentage of its assets
in a single issuer and, therefore, an investment in it may be riskier than an
investment in other types of money market funds.
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>
The following 21 mutual funds (the "Funds") are offered in this prospectus:
- --------------------------------------------------------------------------------
FUND FUND STOCK
NUMBER TICKER
- --------------------------------------------------------------------------------
Montgomery U.S. Equity Funds
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Growth Fund 284 MNGFX
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Small Cap Opportunities Fund 645 MNSOX
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Small Cap Fund 276 MNSCX
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Micro Cap Fund 294 MNMCX
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Equity Income Fund 293 MNEIX
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Montgomery Foreign and Global Equity Funds
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International Growth Fund 296 MNIGX
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International Small Cap Fund 283 MNISX
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Emerging Markets Fund 277 MNEMX
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Emerging Asia Fund 648 MNEAX
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Latin America Fund 652 MNLAX
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Global Opportunities Fund 285 MNGOX
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Global Communications Fund 280 MNGCX
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Montgomery Multi-Strategy Funds
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Select 50 Fund 295 MNSFX
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U.S. Asset Allocation Fund 291 MNAAX
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Global Asset Allocation Fund 649 N/A
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Montgomery U.S. Fixed-Income and Money Market Funds
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Total Return Bond Fund 650 MNTRX
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Short Duration Government Bond Fund 279 MNSGX
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Government Reserve Fund 278 MNGXX
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California Tax-Free Intermediate Bond Fund 281 MNCTX
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California Tax-Free Money Fund 292 MCFXX
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Federal Tax-Free Money Fund 647 MFFXX
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U.S. Equity Funds
Montgomery Growth Fund
Invests primarily in equity securities of domestic companies of all sizes and
emphasizes companies having total market capitalizations of more than $1
billion.
Montgomery Small Cap Opportunities Fund
Invests primarily in equity securities of small-capitalization domestic
companies (less than $1 billion).
Montgomery Small Cap Fund
Invests primarily in equity securities, usually common stocks, of
small-capitalization domestic companies (less than $1 billion). (Closed to new
investors.)
Montgomery Micro Cap Fund
Invests primarily in equity securities of domestic companies that have the
potential for rapid growth and are micro-capitalization companies. (Closed to
new investors.)
Montgomery Equity Income Fund
Invests primarily in income-producing equity securities of domestic companies
having total market capitalizations of more than $1 billion.
Foreign and Global Equity Funds
Montgomery International Growth Fund
Invests primarily in equity securities of companies outside the United States
having total market capitalizations more than $1 billion, sound fundamental
values and potential for long-term growth at a reasonable price.
2
<PAGE>
Montgomery International Small Cap Fund
Invests 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 Emerging Markets Fund
Invests primarily in equity securities of companies in countries having
economies and markets generally considered by the World Bank or the United
Nations to be emerging or developing.
Montgomery Emerging Asia Fund
Invests primarily in the equity securities of emerging Asia companies.
Montgomery Latin America Fund
Invests primarily in the equity securities of companies in Latin America.
Montgomery Global Opportunities Fund
Invests primarily in equity securities of companies of all sizes throughout the
world with sound fundamental values and potential for long-term growth at a
reasonable price.
Montgomery Global Communications Fund
Invests primarily in equity securities of communications companies throughout
the world having sound fundamental values and potential for long-term growth at
a reasonable price.
Multi-Strategy Funds
Montgomery Select 50 Fund
Invests primarily in at least 50 different equity securities of companies of all
sizes throughout the world.
Montgomery U.S. Asset Allocation Fund
A fund-of-funds that allocates its investments among three asset
classes--domestic stocks, fixed-income securities and cash or cash
equivalents--using Funds from The Montgomery Funds family.
Montgomery Global Asset Allocation Fund
A fund-of-funds that allocates its investments among five asset
classes--domestic stocks, international developed markets stocks, emerging
markets stocks, domestic dollar-denominated debt instruments and cash or cash
equivalents--using specific Montgomery Funds, each of which focuses on separate
investment disciplines.
U.S. Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund
Invests primarily in a broad range of fixed-income securities, including
marketable corporate debt securities, U.S. government securities,
mortgage-related securities, other asset-backed securities and cash or money
market instruments. It seeks 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 per share.
Montgomery Short Duration Government Bond Fund
Invests primarily in U.S. government securities and 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 per share.
Montgomery Government Reserve Fund
Invests only 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 per share.
Montgomery California Tax-Free Intermediate Bond Fund
Invests primarily in federal and state tax-exempt California municipal
securities. 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 per
share. This Fund is available to California residents only.
3
<PAGE>
Montgomery California Tax-Free Money Fund
Invests primarily in federal and state tax-exempt California municipal
securities. It seeks to maintain a stable net asset value of $1 per share. This
Fund is available to California residents only.
Montgomery Federal Tax-Free Money Fund
Invests primarily in federal tax-exempt municipal securities. It seeks to
maintain a stable net asset value of $1 per share.
The Funds offer other classes of shares to eligible investors. The other classes
of shares may have different fees and expenses that may affect performance. For
information concerning the other classes of shares not offered in this
prospectus, call The Montgomery Funds at (800) 572-FUND (3863) or contact sales
representatives or financial intermediaries who offer those classes.
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 MAXIMUM DEFERRED SALES REDEMPTION FEES+ EXCHANGE FEES
IMPOSED ON PURCHASES IMPOSED ON REINVESTED LOAD
DIVIDENDS (AND OTHER
DISTRIBUTIONS)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
None None None None None
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
+ 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. Shareholders who request redemption
checks to be sent by Federal Express may be required to pay a $10 fee
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.
</FN>
</TABLE>
<TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
<CAPTION>
MANAGEMENT FEES* OTHER EXPENSES TOTAL FUND OPERATING EXPENSES
(AFTER REIMBURSEMENT (AFTER REIMBURSEMENT UNLESS
UNLESS NOTED)* NOTED)*
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<S> <C> <C> <C>
U.S. Equity Funds
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Growth Fund 0.92% 0.33% 1.25%
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Small Cap Opportunities Fund 1.19% 0.31% 1.50%
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Small Cap Fund 1.00% 0.23% 1.23%
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Micro Cap Fund 1.34% 0.36% 1.70%
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Equity Income Fund 0.60% 0.25% 0.85%
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Foreign and Global Equity Funds
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International Growth Fund 1.10% 0.55% 1.65%
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International Small Cap Fund 1.25% 0.65% 1.90%
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Emerging Markets Fund 1.05% 0.55% 1.60%
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Emerging Asia Fund 1.25% 0.65% 1.90%
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Latin America Fund 1.25% 0.65% 1.90%
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Global Opportunities Fund 1.25% 0.65% 1.90%
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Global Communications Fund 1.25% 0.65% 1.90%
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Multi-Strategy Funds
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Select 50 Fund 1.25% 0.55% 1.80%
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U.S. Asset Allocation Fund 0.00% 1.30%#** 1.30%#
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Global Asset Allocation Fund 0.20% 1.55%#** 1.75%#
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U.S. Fixed-Income and Money Market Funds
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Total Return Bond Fund 0.50% 0.20% 0.70%
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Short Duration Government Bond Fund 0.50% 0.10% 0.60%
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4
<PAGE>
MANAGEMENT FEES* OTHER EXPENSES TOTAL FUND OPERATING EXPENSES
(AFTER REIMBURSEMENT (AFTER REIMBURSEMENT UNLESS
UNLESS NOTED)* NOTED)*
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Government Reserve Fund 0.35% 0.25% 0.60%
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California Tax-Free Intermediate Bond Fund 0.50% 0.18%+ 0.68%+
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California Tax-Free Money Fund 0.40% 0.18%+ 0.58%+
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Federal Tax-Free Money Fund 0.40% 0.20% 0.60%
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<FN>
This table is intended to assist the investor in understanding the various
expenses of each Fund. Operating expenses are paid out of a Fund's assets and
are factored into the Fund's share price. Each Fund estimates that it will have
the expenses listed (expressed as a percentage of average net assets) for the
current fiscal year.
* Expenses for the Funds are based on actual expenses and expense
limitations for the fiscal year ended June 30, 1997. Expenses for the
Montgomery Latin America Fund, Montgomery Global Asset Allocation Fund
and Montgomery Total Return Bond 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 amount indicated in the table. A Fund is required to reimburse the
Manager for any reductions in the Manager's fee only during the three
years 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, 1997 (annualized)
would have been as follows: Montgomery Equity Income Fund, 1.46% (0.86%
other expenses); Montgomery Small Cap Opportunities Fund, 1.75% (0.56%
other expenses); Montgomery Global Opportunities Fund, 2.62% (1.37% other
expenses); Montgomery Global Communications Fund, 2.00% (0.75% other
expenses); Montgomery International Growth Fund, 2.37% (1.27% other
expenses); Montgomery International Small Cap Fund, 2.60% (1.35% other
expenses); Montgomery Emerging Asia Fund, 2.69% (1.44% other expenses);
Montgomery U.S. Asset Allocation Fund, 1.49% (1.49% other expenses);
Montgomery Global Asset Allocation Fund, 4.84% (4.64% other expenses);
Montgomery Select 50 Fund, 1.92% (0.67% other expenses); Montgomery Short
Duration Government Bond Fund, 2.05% (1.55% other expenses); Montgomery
Government Reserve Fund, 0.62% (0.27% other expenses); Montgomery
California Tax-Free Money Fund, 0.69% (0.29% other expenses); Montgomery
California Tax-Free Intermediate Bond Fund, 1.18% (0.68% other expenses);
and Montgomery California Tax-Free Money Fund, 0.73% (0.33% other
expenses). Absent the reduction, actual total Fund operating expenses are
estimated to be as follows: Montgomery Total Return Bond Fund, 1.50%
(1.00% other expenses); and Montgomery Latin America Fund, 3.25% (2.00%
other expenses). The Manager may terminate these voluntary reductions at
any time. See "Management of the Funds."
** Estimated expenses of Montgomery U.S. Asset Allocation Fund and
Montgomery Global Asset Allocation Fund (excluding expenses related to
the Underlying Funds and after reimbursement) are 0.25% for the
Montgomery U.S. Asset Allocation Fund and 0.50% for the Montgomery Global
Asset Allocation Fund. Estimated expenses related to the Underlying Funds
for Montgomery U.S. Asset Allocation Fund are 1.05%, and the estimated
expenses related to the Underlying Funds for Montgomery Global Asset
Allocation Fund are 1.25%.
+ These figures show actual expenses; no reimbursements or waivers applied.
# Even if the total expenses of the Underlying Funds exceed 1.05% for the
Montgomery U.S. Asset Allocation Fund (1.25% for the Montgomery Global
Asset Allocation Fund), the Manager has agreed to limit the Montgomery
U.S. Asset Allocation Fund's total fund operating expenses to 1.30% and
the Montgomery Global Asset Allocation Fund's total fund operating
expenses to 1.75%, respectively. The total expenses for the Underlying
Funds for the Montgomery U.S. Asset Allocation Fund (currently estimated
to be 1.05%) and the total expenses for the Underlying Funds for the
Montgomery Global Asset Allocation Fund (currently estimated to be 1.25%)
will depend on the actual expenses of the respective Underlying Funds and
how the Funds' assets are allocated among those Underlying Funds.
</FN>
</TABLE>
Example of Expenses for the Funds
<TABLE>
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
U.S. Equity Funds
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Growth Fund $13 $40 $ 69 $151
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Small Cap Opportunities Fund $15 $47 $ 82 $178
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Small Cap Fund $13 $39 $ 67 $148
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Micro Cap Fund $17 $54 $ 92 $200
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Equity Income Fund $ 9 $27 $ 47 $105
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Foreign and Global Equity Funds
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International Growth Fund $17 $52 $ 90 $195
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International Small Cap Fund $19 $60 $102 $221
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Emerging Markets Fund $16 $59 $ 87 $189
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Emerging Asia Fund $19 $60 $102 $221
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Latin America Fund $19 $60 $102 $221
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</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Opportunities Fund $19 $60 $102 $221
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Global Communications Fund $19 $60 $102 $221
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Multi-Strategy Funds
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Select 50 Fund $18 $57 $ 97 $211
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U.S. Asset Allocation Fund $13 $41 $ 71 $156
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Global Asset Allocation Fund $18 $55 $ 95 $206
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U.S. Fixed-Income and Money Market Funds
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Total Return Bond Fund $ 7 $22 $ 39 $ 87
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Short Duration Government Bond Fund $ 6 $19 $ 33 $ 75
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Government Reserve Fund $ 6 $19 $ 33 $ 75
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California Tax-Free Intermediate Bond Fund $ 7 $22 $ 38 $ 85
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California Tax-Free Money Fund $ 6 $19 $ 32 $ 72
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Federal Tax-Free Money Fund $ 6 $19 $ 33 $ 75
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<FN>
This example is to show the effect of expenses. This example does not represent
past or future expenses or returns. Actual expenses and returns may vary.
</FN>
</TABLE>
6
<PAGE>
Financial Highlights
Selected per-Share Data and Ratios
<TABLE>
The following financial information for the periods ended June 30, 1992, through
June 30, 1997, was audited by Deloitte & Touche LLP, whose report, dated August
8, 1997, appears in the 1997 Annual Report of the Funds. The information for the
period ended June 30, 1991, was audited by other independent accountants whose
report is not included herein.
<CAPTION>
Small Cap
Growth Fund Opportunities Fund
FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
SELECTED PER-SHARE DATA FOR THE YEAR ENDED: 1997## 1996 1995 1994(A) 1997 1996(B)##
<S> <C> <C> <C> <C> <C> <C>
$21.94 $19.16 $15.27 $12.00 $15.80 $12.00
Net asset value--beginning of year
Net investment income/(loss) 0.15 0.17 0.12 0.04 (0.13) 0.02
Net realized and unrealized gain/(loss) on 3.90 4.32 3.91 3.31++ 1.86 3.78++
investments
Net increase/(decrease) in net assets resulting from 4.05 4.49 4.03 3.35 1.73 3.80
investment operations
Distributions:
Dividends from net investment income (0.15) (0.17) (0.07) (0.01) (0.00)# --
Distributions from net realized capital gains (2.77) (1.54) (0.07) -- -- --
Distributions in excess of net realized capital -- -- -- (0.07) -- --
gains
Total distributions (2.92) (1.71) (0.14) (0.08) (0.00)# --
Net asset value--end of year $23.07 $21.94 $19.16 $15.27 $17.53 $15.80
Total return** 20.44% 24.85% 26.53% 27.98% 10.97% 31.67%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $1,137,343 $926,382 $878,776 $149,103 $226,318 $136,140
Ratio of net investment income/(loss) to average net 0.69% 0.78% 0.98% 1.09%+ (0.86)% 0.23%+
assets
Net investment income/(loss) before deferral of fees -- -- -- $0.03 $(0.16) $(0.04)
by Manager
Portfolio turnover rate 61.10% 118.14% 128.36% 110.65% 154.50% 81.29%
Average commission rate paid+++ $0.0595 $0.0596 N/A N/A $0.0562 $0.0578
Expense ratio before deferral of fees by Manager -- -- -- 1.79%+ 1.75% 2.16%+
Expense ratio including interest expense 1.27% 1.35% 1.50% 1.49%+ 1.50% 1.50%+
<FN>
(A) The Growth Fund's Class R shares commenced operations on September 30,
1993.
(B) The Small Cap Opportunities Fund's Class R shares commenced operations on
December 29, 1995.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period
since the use of the undistributed income method did not accord with the
results of operations.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Small Cap Fund
FISCAL YEAR ENDED JUNE 30
SELECTED PER-SHARE DATA FOR THE YEAR ENDED: 1997 1996 1995 1994 1993 1992 1991 1991(A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value--beginning of year $21.55 $17.11 $15.15 $16.83 $12.90 $13.24 $10.05 $10.62
Net investment income/(loss) (0.18) (0.09) (0.10) (0.12) (0.11) (0.06) (0.06) (0.07)
Net realized and unrealized gain/(loss) on 1.43 6.31 3.04 (0.47) 4.04 3.25 3.27 2.71
investments
Net increase/(decrease) in net assets resulting 1.25 6.22 2.94 (0.59) 3.93 3.19 3.21 2.64
from investment operations
Distributions:
Dividends from net investment income -- -- -- -- -- -- -- --
Distributions in excess of net investment -- -- -- -- -- -- -- --
income
Distributions from net realized capital gains (3.28) (1.78) (0.98) (1.09) -- (2.75) (0.02) (0.02)
Distributions in excess of net realized -- -- -- -- -- -- -- --
capital gains
Distributions from capital -- -- -- -- -- (0.78) -- --
Total distributions (3.28) (1.78) (0.98) (1.09) -- (3.53) (0.02) (0.02)
Net asset value--end of year $19.52 $21.55 $17.11 $15.15 $16.83 $12.90 $13.24 $13.24
Total return** 6.81% 39.28% 20.12% (1.59)% 30.47% 27.69% 31.97% 24.89%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $198,298 $275,062 $202,399 $209,063 $219,968 $176,588 $27,181 $27,181
Ratio of net investment income/(loss) to average (0.78)% (0.47)% (0.57)% (0.68)% (0.69)% (0.44)% (0.47)% (0.45)%+
net assets
Net investment income/(loss) before deferral of -- -- -- -- -- -- -- --
fees by Manager
Portfolio turnover rate 58.71% 80.00% 85.07% 95.22% 130.37% 80.67% 194.63% 188.16%
Average commission rate paid+++ $0.0522 $0.0529 N/A N/A N/A N/A N/A N/A
Expense ratio before deferral of fees by N/A N/A N/A N/A N/A N/A N/A N/A
Manager, including interest expense
Expense ratio excluding interest expense N/A N/A N/A N/A N/A N/A N/A N/A
Expense ratio before deferral of fees by Manager -- -- -- -- -- -- -- --
Expense ratio including interest expense 1.20% 1.24% 1.37% 1.35% 1.40% 1.50% 1.50% 1.45%+
<FN>
(A) The Small Cap Fund's Class R shares became available for investment by
the public on July 13, 1990.
(B) The Micro Cap Fund's Class R shares commenced operations on December 30,
1994.
(C) The Equity Income Fund's Class R shares commenced operations on September
30, 1994.
(D) The International Growth Fund's Class R shares commenced operations on
July 3, 1995.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Micro Cap Fund Equity Income Fund International Growth Fund
FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
1997 1996 1995(B)## 1997## 1996 1995(C) 1997## 1996(D)
<S> <C> <C> <C> <C> <C> <C> <C>
$17.82 $13.75 $12.00 $16.09 $13.38 $12.00 $15.31 $12.00
(0.13) (0.04) 0.09 0.49 0.43 0.31 0.08 0.02
2.54 4.26 1.66 3.35 2.82 1.38 2.53 3.29
2.41 4.22 1.75 3.84 3.25 1.69 2.61 3.31
-- (0.04) -- (0.46) (0.42) (0.31) -- --
-- -- -- -- -- -- -- --
(1.23) (0.11) -- (1.56) (0.12) -- (1.68) --
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
(1.23) (0.15) -- (2.02) (0.54) (0.31) (1.68) --
$19.00 $17.82 $13.75 $17.91 $16.09 $13.38 $16.24 $15.31
14.77% 30.95% 14.58% 26.02% 24.56% 14.26% 19.20% 27.58%
$317,812 $306,217 $162,949 $38,595 $19,312 $6,383 $33,912 $18,303
(0.75)% (0.11)% 1.40%+ 2.93% 3.03% 4.06%+ 0.57% 0.26%+
-- $(0.05) $0.07 $0.39 $0.34 $0.13 $(0.02) $(0.07)
79.00% 88.98% 36.81% 62.31% 89.77% 29.46% 95.02% 238.91%
$0.0569 $0.0573 N/A $0.0598 $0.0423 N/A $0.0217 $0.0176
N/A N/A N/A 1.46% 1.45% 3.16%+ 2.37% 2.91%+
N/A N/A N/A 0.86% 0.85% 0.84%+ 1.66% 1.65%+
-- 1.79% 2.07%+ N/A N/A N/A N/A N/A
1.71% 1.75% 1.75%+ -- -- -- -- --
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period
since the use of the undistributed income method did not accord with the
results of operations.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
International Small Cap Fund
FISCAL YEAR ENDED JUNE 30
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED: 1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
Net asset value--beginning of year $14.86 $11.75 $12.02 $12.00
Net investment income/(loss) (0.05) 0.03 0.12 0.00#
Net realized and unrealized gain/(loss) on 2.35 3.10 (0.39) 0.02
investments
Net increase/(decrease) in net assets resulting from 2.30 3.13 (0.27) 0.02
investment operations
Distributions:
Dividends from net investment income -- (0.02) (0.00)# --
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- -- -- --
Distributions in excess of net realized capital -- -- -- --
gains
Total distributions -- (0.02) (0.00)# --
Net asset value--end of year $17.16 $14.86 $11.75 $12.02
Total Return** 15.48% 26.68% (2.23)% 0.17%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $53,602 $41,640 $28,516 $34,555
Ratio of net investment income/(loss) to average net (0.34)% 0.20% 0.95% 0.04%+
assets
Net investment income/(loss) before deferral of fees $(0.14) $(0.08) $0.05 $(0.02)
by Manager
Portfolio turnover rate 84.91% 177.36% 156.13% 123.50%
Average commission rate paid+++ $0.0157 $0.0123 N/A N/A
Expense ratio before deferral of fees by Manager, 2.60% 2.76% 2.50% 2.32%+
including interest expense
Expense ratio excluding interest expense 1.90% 1.90% 1.90% 1.90%+
Expense ratio including interest expense 1.90% 1.96% 1.91% 1.99%+
<FN>
(A) The International Small Cap Fund's Class R shares commenced operations on
September 30, 1993.
(B) The Emerging Markets Fund's Class R shares commenced operations on March
1, 1992.
(C) The Emerging Asia Fund's Class R shares commenced operations on September
30, 1996.
(D) The Global Opportunities Fund's Class R shares commenced operations on
September 30, 1993.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Emerging Markets Fund Emerging Asia Fund Global Opportunities Fund
FISCAL YEAR
FISCAL YEAR ENDED JUNE 30 ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
1997 1996 1995## 1994 1993 1992(B) 1997(C) 1997 1996 1995 1994(D)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$14.19 $13.17 $13.68 $11.07 $9.96 $10.00 $12.00 $16.96 $13.25 $12.92 $12.00
0.07 0.08 0.03 (0.03) 0.07 0.03 (0.01) (0.11) (0.06) 0.13 0.01
2.66 0.94 0.25++ 2.92 1.05 (0.07) 6.95 3.14 3.84 0.70 0.91
2.73 1.02 0.28 2.89 1.12 (0.04) 6.94 3.03 3.78 0.83 0.92
(0.07) -- -- -- (0.01) -- -- -- (0.07) -- --
-- -- -- -- -- -- (0.03) -- -- -- --
-- -- (0.42) (0.28) (0.00)# -- -- (0.82) -- (0.50) --
-- -- (0.37) -- -- -- -- -- -- -- --
(0.07) -- (0.79) (0.28) (0.01) -- (0.03) (0.82) (0.07) (0.50) --
$16.85 $14.19 $13.17 $13.68 $11.07 $9.96 $18.91 $19.17 $16.96 $13.25 $12.92
19.34% 7.74% 1.40% 26.10% 11.27% (0.40)% 57.80% 18.71% 28.64% 6.43% 7.67%
$1,259,457 $994,378 $998,083 $654,960 $206,617 $54,625 $68,095 $32,371 $28,496 $13,677 $12,504
0.48% 0.58% 0.23% (0.14)% 0.66% 1.70%+ (0.42)%+ (0.62)% (0.56)% 1.03% 0.02%+
-- -- -- -- $0.06 $0.01 $(0.02) $(0.23) $(0.16) $(0.01) $(0.05)
83.08% 109.92% 92.09% 63.79% 21.40% 0.19% 72.18% 117.10% 163.80% 118.75% 67.22%
$0.0011 $0.0007 N/A N/A N/A N/A $0.0077 $0.0240 $0.0235 N/A N/A
-- -- -- -- 1.93% 2.80%+ 2.69%+ 2.62% 3.10% 2.99% 2.75%+
1.67% 1.72% 1.80% 1.85% 1.90% 1.90%+ 2.13%+ 1.90% 1.90% 1.90% 1.90%+
-- -- -- -- -- -- 2.20%+ -- 2.05% 1.91% 1.99%+
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Global Communications Fund Select 50 Fund
FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED
JUNE 30
SELECTED PER-SHARE DATA FOR THE YEAR ENDED: 1997 1996 1995 1994 1993(A) 1997## 1996(B)
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value--beginning of year $18.05 $15.42 $14.20 $12.45 $12.00 $16.46 $12.00
Net investment income/(loss) (0.25) (0.20) (0.03) (0.05) 0.00# 0.01 0.06
Net realized and unrealized gain/(loss) on 2.72 2.83 1.28 1.80++ 0.45 4.16 4.45
investments
Net increase/(decrease) in net assets resulting 2.47 2.63 1.25 1.75 0.45 4.17 4.51
from investment operations
Distributions:
Dividends from net investment income -- -- -- -- -- (0.10) (0.04)
Distributions in excess of net investment -- -- -- -- -- -- --
income
Distributions from net realized capital gains (0.91) -- -- -- -- (0.52) --
Distributions in excess of net realized -- -- (0.03) -- -- -- (0.01)
capital gains
Distributions from capital -- -- -- -- -- -- --
Total distributions (0.91) -- (0.03) -- -- (0.62) (0.05)
Net asset value--end of year $19.61 $18.05 $15.42 $14.20 $12.45 $20.01 $16.46
Total return** 14.43% 17.06% 8.83% 14.06% 3.75% 26.35% 37.75%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $153,955 $206,671 $209,644 $234,886 $4,670 $172,509 $77,955
Ratio of net investment income/(loss) to average (1.05)% (1.01)% (0.10)% (0.46)% (0.05)%+ 0.04% 0.42%+
net sales
Net investment income/(loss) before deferral of $(0.27) $(0.22) $(0.07) $(0.06) $(0.04) $(0.01) $0.02
fees by Manager
Portfolio turnover rate 75.79% 103.73% 50.17% 29.20% 0.00% 157.93% 105.98%
Average commission rate paid+++ $0.0104 $0.0129 N/A N/A N/A $0.0011 $0.0097
Expense ratio before deferral of fees by 2.00% 2.11% 2.09% 2.04% 8.96%+ 1.92% 2.11%+
Manager, including interest expense
Expense ratio excluding interest expense 1.91% 1.90% 1.90% 1.90% 1.90%+ 1.82% 1.80%+
Expense ratio including interest expense -- 2.01% 1.91% 1.94% -- -- --
<FN>
(A) The Global Communications Fund's Class R s hares commenced operations on
June 1, 1993.
(B) The Select 50 Fund's Class R shares commenced operations on October 2,
1995.
(C) The U.S. Asset Allocation Fund's Class R shares commenced operations on
March 31, 1994.
(D) The Global Asset Allocation Fund's Class R shares commenced operations on
January 2, 1997.
(E) The Short Duration Government Bond Fund's Class R shares commenced
operations on December 18, 1992.
</FN>
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
U.S. Asset Allocation Fund Global Asset Short Duration Government Bond Fund
Allocation Fund
FISCAL YEAR
FISCAL YEAR ENDED JUNE 30 ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
1997## 1996 1995 1994(C) 1997(D)## 1997## 1996 1995 1994 1993(E)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$19.33 $16.33 $12.24 $12.00 $12.00 $9.92 $9.95 $9.80 $10.23 $10.00
0.48 0.26 0.25 0.06 0.09 0.59 0.60 0.62 0.61 0.33
2.13 3.54 4.11 0.18 1.24 0.07 (0.04) 0.16 (0.34) 0.23
2.61 3.80 4.36 0.24 1.33 0.66 0.56 0.78 0.27 0.56
(0.39) (0.25) (0.17) -- -- (0.59) (0.59) (0.62) (0.56) (0.33)
-- -- -- -- -- (0.00)# (0.00)# -- (0.07) --
(1.66) (0.55) (0.10) -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- (0.07) --
-- -- -- -- -- -- -- (0.01) -- (0.00)#
(2.05) (0.80) (0.27) -- -- (0.59) (0.59) (0.63) (0.70) (0.33)
$19.89 $19.33 $16.33 $12.24 $13.33 $9.99 $9.92 $9.95 $9.80 $10.23
14.65% 23.92% 35.99% 2.00% 11.17% 6.79% 5.74% 8.28% 2.49% 5.66%
$127,214 $132,511 $60,234 $1,548 $1,653 $47,265 $22,681 $17,093 $21,937 $22,254
2.55% 1.85% 3.43% 2.54%+ 1.31%+ 5.87% 5.88% 6.41% 5.93% 6.02%+
$0.47 $0.24 $0.19 $(0.11) $(0.21) $0.54 $0.52 $0.54 $0.51 $0.27
168.51% 225.91% 95.75% 190.94% 89.52% 450.98% 349.62% 284.23% 603.07% 213.22%
$0.0448 $0.0595 N/A N/A N/A N/A N/A N/A N/A N/A
1.49% 1.55% 2.07% 9.00%+ 4.84%+ 2.05% 2.31% 2.23% 1.75% 2.07%+
1.31% 1.30% 1.30% 1.30%+ 0.47%+ 0.60% 0.60% 0.47% 0.25% 0.22%+
1.43% 1.42% 1.31% 1.43%+ -- 1.55% 1.55% 1.38% 0.71% --
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period
since the use of the undistributed income method did not accord with
results of operations.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
Government Reserve Fund
FISCAL YEAR ENDED JUNE 30
<CAPTION>
SELECTED PER-SHARE DATA FOR THE YEAR ENDED: 1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income/(loss) 0.049 0.052 0.049 0.029 0.024
Net realized and unrealized gain/(loss) on investments 0.000### 0.000### 0.000### 0.000### 0.000###
Net increase/(decrease) in net assets resulting from
investment operations 0.049 0.052 0.049 0.029 0.024
Distributions:
Dividends from net investment income (0.049) (0.052) (0.049) (0.029) (0.024)
Distributions in excess of net investment income -- -- -- -- --
Total distributions (0.049) (0.052) (0.049) (0.029) (0.024)
Net asset value--end of year $1.00 $1.00 $1.00 $1.00 $1.00
Total return** 5.03% 5.28% 4.97% 2.96% 2.41%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $473,154 $439,423 $258,956 $211,129 $124,795
Ratio of net investment income/(loss) to average net
assets 4.93% 5.17% 4.92% 2.99% 2.96%+
Net investment income/(loss) before deferral of fees
by Manager $0.049 $0.050 $0.047 $0.028 $0.013
Portfolio turnover rate -- -- -- -- --
Expense ratio before deferral of fees by Manager,
including interest expense 0.62% 0.74% 0.79% 0.71% 0.77%+
Expense ratio excluding interest expense 0.60% 0.60% 0.60% 0.60% 0.38%+
Expense ratio before deferral of fees by Manager N/A N/A N/A N/A N/A
Expense ratio including interest expense -- -- 0.63% -- --
<FN>
(A) The Government Reserve Fund's Class R shares commenced operations on
September 14, 1992.
(B) The California Tax-Free Intermediate Bond Fund's Class R shares commenced
operations on July 1, 1993.
(C) The California Tax-Free Money Fund's Class R shares commenced operations on
September 30, 1994.
(D) The Federal Tax-Free Money Fund's Class R shares commenced operations on
July 15, 1996.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
California Tax-Free California Tax-Free Federal Tax-Free
Intermediate Bond Fund Money Fund Money Fund
FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30 FISCAL YEAR ENDED JUNE 30
1997 1996 1995 1994(B) 1997 1996 1995(C) 1997(D)
<S> <C> <C> <C> <C> <C> <C> <C>
$12.23 $12.04 $11.79 $12.00 $1.00 $1.00 $1.00 $1.00
0.53 0.54 0.44 0.41 0.029 0.030 0.027 0.032
0.30 0.19 0.25 (0.21) 0.000### 0.000### 0.000### 0.000###
0.83 0.73 0.69 0.20 0.029 0.030 0.027 0.032
(0.53) (0.54) (0.44) (0.41) (0.029) (0.030) (0.027) (0.032)
-- -- (0.00)# -- -- -- (0.000)### (0.000)###
(0.53) (0.54) (0.44) (0.41) (0.029) (0.030) (0.027) (0.032)
$12.53 $12.23 $12.04 $11.79 $1.00 $1.00 $1.00 $1.00
6.91% 6.11% 6.03% 1.65% 2.95% 3.03% 2.68% 3.26%
$21,681 $13,948 $5,153 $11,556 $118,723 $98,134 $64,780 $114,197
4.27% 4.34% 3.71% 3.44% 2.91% 2.99% 3.55%+ 3.24%+
$0.47 $0.43 $0.34 $0.25 $0.028 $0.028 $0.023 $0.030
25.60% 58.11% 37.93% 77.03% -- -- -- --
N/A N/A N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A N/A N/A
1.18% 1.43% 1.41% 1.63% 0.73% 0.80% 0.86%+ 0.69%+
0.68% 0.61% 0.56% 0.23% 0.58% 0.59% 0.33%+ 0.33%+
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
+++ Average commission rate paid per share of securities purchased and sold
by the Fund.
# Amount represents less than $0.01 per share.
### Amount represented less than $0.001 per share.
</FN>
</TABLE>
15
<PAGE>
The Funds' Investment Objectives and Policies
<TABLE>
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." Specific investment practices
that may be employed by the Funds are described in "Other Investment Practices."
Certain risks associated with investments in the Funds are described in those
sections as well as in "Risk Considerations." Certain terms used in the
prospectus are defined in the glossary at the end of this prospectus.
Summary Comparison of Funds
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
ANTICIPATED MAXIMUM FOCUS TYPICAL MARKET
EQUITY EXPOSURE DEBT CAPITALIZATION OF
EXPOSURE PORTFOLIO COMPANIES
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Equity Funds
- --------------------------------------------------------------------------------------------------------------------------------
Growth Fund 65-100% 35% Growth More than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund 65-100% 35% Small-cap Less than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
Small Cap Fund 80-100% 35% Small-cap Less than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
Micro Cap Fund 65-100% 35% Micro-cap Less than $600 million
- --------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund 65-100% 35% Large-cap dividend More than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
Foreign and Global Equity Funds
- --------------------------------------------------------------------------------------------------------------------------------
International Growth Fund 65-100% 35% Foreign growth More than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund 65-100% 35% Foreign small-cap Less than $1 billion
- --------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund 65-100% 35% Foreign emerging growth Any size
- --------------------------------------------------------------------------------------------------------------------------------
Emerging Asia Fund 65-100% 35% Asian growth Any size
- --------------------------------------------------------------------------------------------------------------------------------
Latin America Fund 65-100% 35% Latin American growth Any size
- --------------------------------------------------------------------------------------------------------------------------------
Global Opportunities Fund 65-100% 35% Worldwide growth Any size
- --------------------------------------------------------------------------------------------------------------------------------
Global Communications Fund 65-100% 35% Worldwide communication Any size
- --------------------------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds
- --------------------------------------------------------------------------------------------------------------------------------
Select 50 Fund 65-100% 35% Capital appreciation Any size
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund 20-80% 20-80% U.S. Balanced Any size
- --------------------------------------------------------------------------------------------------------------------------------
Global Asset Allocation Fund 10- 95% 100% Worldwide balanced Any size
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
- --------------------------------------------------------------------------------------------------------------------------------
Total Return Bond Fund 0% 100% Total return N/A
- --------------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund 0% 100% Total return N/A
- --------------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund 0% 100% Income N/A
- --------------------------------------------------------------------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund 0% 100% California tax-free income N/A
- --------------------------------------------------------------------------------------------------------------------------------
California Tax-Free Money Fund 0% 100% California tax-free income N/A
- --------------------------------------------------------------------------------------------------------------------------------
Federal Tax-Free Money Fund 0% 100% Federal tax-free income N/A
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
U.S. Equity Funds
Montgomery Growth Fund (the "Growth Fund")
The investment objective of the Growth Fund is capital appreciation which, under
normal conditions, it seeks by investing at least 65% of its total assets in
equity securities of domestic companies. Although such companies may be of any
size, the Fund targets companies having total market capitalizations of $1
billion or more. The Fund emphasizes investments in common stock, but also
invests in other types of equity securities and equity-derivative securities.
Current income from dividends, interest and other sources is only incidental.
The Fund also may invest up to 35% of its total assets in investment-grade debt
securities or in foreign securities. See "Portfolio Securities." The Manager
does not expect the Growth Fund to be consistently fully invested in equity
securities. During periods that the Manager deems appropriate, the Fund may take
a more defensive position and be significantly invested in cash and cash
equivalents.
16
<PAGE>
The Growth Fund seeks growth at a reasonable value, identifying companies with
sound fundamental values and potential for substantial growth. The Fund selects
its investments based on a combination of quantitative screening techniques and
fundamental analysis. The Fund initially identifies a universe of investment
candidates by screening companies based on changes in rates of growth and
valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis, focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities Fund")
The investment objective of the Small Cap Opportunities Fund is capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of small-capitalization domestic
companies, which the Fund currently considers to be companies having total
market capitalizations of less than $1 billion. The Small Cap Opportunities Fund
generally invests the remaining 35% of its total assets in a similar manner, but
may invest those assets in companies having total market capitalizations of $1
billion or more and in investment-grade debt securities and foreign companies.
The Fund invests primarily in common stock. It also may invest in other types of
equity securities and equity-derivative securities. See "Portfolio Securities."
Current income from dividends, interest and other sources is only incidental.
The Small Cap Opportunities Fund seeks growth at a reasonable value, identifying
companies with sound fundamental value and potential for substantial growth. The
Fund selects its investments based on a combination of quantitative screening
techniques and fundamental analysis. The Fund initially identifies a universe of
investment candidates by screening companies based on changes in rates of growth
and valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
Montgomery Small Cap Fund (the "Small Cap Fund")
The investment objective of the Small Cap Fund is capital appreciation which,
under normal conditions, it seeks by investing at least 65% of its total assets
in equity securities of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion. The Small Cap Fund generally invests the remaining 35% of its
total assets in a similar manner, but may invest those assets in companies
having total market capitalizations of $1 billion or more and in
investment-grade debt securities.
Generally, the Small Cap Fund invests at least 80% of its total assets in common
stock. It also may invest in other types of equity securities and
equity-derivative securities, but limits to 5% of its total assets any single
other type of security. 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 macroeconomic 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 in 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 regional firms that closely follow
smaller-capitalization companies within their geographic regions.
The Small Cap Fund has been closed to new investors since March 6, 1992.
Shareholders who maintain open accounts with the Fund may make additional
investments. Once your account is closed, additional investments in the Fund may
not be possible. An account may be considered closed and subject to redemption
by the Fund if the value of the shares remaining after a transfer or redemption
falls below $1,000. The Fund may resume sales of shares to new investors at some
future date, but it has no present intention to do so.
17
<PAGE>
Montgomery Micro Cap Fund (the "Micro Cap Fund")
The investment objective of the Micro Cap Fund is capital appreciation which,
under normal conditions, it seeks by investing at least 65% of its total assets
in equity securities of domestic companies that have potential for rapid growth
and are micro-capitalization companies, which the Fund currently considers to be
companies having market capitalizations that would place them in the smallest
10% of market capitalizations for domestic companies as measured by the Wilshire
5000 Index. Currently, these companies have market capitalizations of $600
million and less. Current income from dividends, interest and other sources is
only incidental. The Micro Cap Fund generally invests the remaining 35% of its
total assets in a similar manner, but may invest those assets in other equity
securities and in investment-grade debt instruments, including foreign
securities. See "Portfolio Securities."
The Micro Cap 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 Micro Cap Fund is currently closed to new investors. The Manager may,
however, reopen and close the Micro Cap Fund to new investors from time to time
at its discretion. If the Fund is closed, shareholders who maintain open
accounts with the Fund may make additional investments in the Fund. Once a
shareholder's account is closed, additional investments in the Fund may not be
possible.
Montgomery Equity Income Fund (the "Equity Income Fund")
The investment objective of the Equity Income Fund is to provide current income
and capital appreciation primarily through investments in equity securities of
domestic companies, with the goal that the Fund provide a significantly greater
yield than the average yield offered by the stocks of the S&P 500 and a low
level of price volatility. Under normal market conditions, the Equity Income
Fund will invest at least 65% of the value of its total assets in
income-producing equity securities of domestic companies, which include common
stocks, preferred stocks and other securities, and debt securities convertible
into common stocks.
The Fund's equity investments emphasize common stock of U.S. corporations that
regularly pay dividends. The Fund normally invests in companies having total
market capitalizations 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 investment grade debt
instruments. The Fund attempts to achieve low price volatility through its
investment in mature companies. 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."
Foreign and Global Equity Funds
Montgomery International Growth Fund (the "International Growth Fund")
The investment objective of the International Growth Fund is capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of more than $1 billion. The 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
18
<PAGE>
up to 5% of its total assets in debt securities rated below investment grade.
See "Portfolio Securities" and "Risk Considerations."
The 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 with 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.
The Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will use a strategic allocation of assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
Montgomery International Small Cap Fund (the "International Small Cap Fund")
The investment objective of the International Small Cap Fund is capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of less than $1 billion. The Fund generally
invests the remaining 35% of its total assets in a similar manner, but may
invest those assets in equity securities of U.S. companies, in companies having
market capitalizations of $1 billion or more, or in debt securities, including
up to 5% of its total assets in debt securities rated below investment grade.
See "Portfolio Securities" and "Risk Considerations."
The 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 with 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.
The Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. See "Risk Considerations."
Montgomery Emerging Markets Fund (the "Emerging Markets Fund")
The investment objective of the Emerging Markets Fund is capital appreciation
which, under normal conditions, it seeks by investing at least 65% of its total
assets in equity securities of emerging markets companies. 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 markets country. The Manager currently regards the
following to be emerging markets countries: Latin America (Argentina, Brazil,
Chile, Colombia, Costa Rica, Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay
and Venezuela); Asia (Bangladesh, China/Hong Kong, India, Indonesia, Korea,
Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand and
Vietnam); southern and eastern Europe (Czech Republic, Greece, Hungary,
Kazakstan, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Turkey and
Ukraine); the Middle East (Israel and Jordan); and Africa (Egypt, Ghana, Ivory
Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia and Zimbabwe). In the
future, the Fund may invest in other emerging markets countries.
The 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 percentage of assets to invest in each country
to maximize expected returns for a given risk level. The Fund's aims are to
invest in those countries that are expected to have the highest risk/reward
trade-off when incorporated into a total portfolio context. This "top-down"
country selection is combined with "bottom-up" fundamental industry analysis and
stock selection based on original research and publicly available information
and company visits.
The Fund invests primarily in common stock, but also may invest in other types
of equity and equity-derivative securities. It may invest up to 35% of its total
assets in 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.
19
<PAGE>
The Fund may invest in certain debt securities issued by the governments of
emerging markets countries that are, or may be eligible for, conversion into
investments in emerging market companies under debt conversion programs
sponsored by such governments. The Fund deems securities that are convertible to
equity investments to be equity-derivative securities. See "Portfolio
Securities."
Montgomery Emerging Asia Fund (the "Emerging Asia Fund")
The investment objective of the Montgomery Emerging Asia Fund is long-term
capital appreciation which, under normal conditions, it seeks by investing at
least 65% of its total assets in equity securities of companies that have their
principal activities in emerging Asia. The Fund currently considers the
following to be emerging Asian countries: Bangladesh, China/Hong Kong (the Fund
considers China/Hong Kong to be one single emerging Asian country), India,
Indonesia, Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka,
Taiwan, Thailand and Vietnam. The Fund does not expect to invest in securities
in Japan, Australia or New Zealand, however. In the future the Fund may invest
in other countries in Asia when their markets become sufficiently developed.
Under normal conditions, the Fund maintains investments in at least three
emerging Asian countries at all times and invests no more than one-third of its
total assets in any one emerging Asian country (other than China/Hong Kong or
Malaysia, where the Fund may invest without being subject to the one-third of
total assets limit). As part of the remaining 35% of its total assets, the Fund
may invest in more-developed Asian countries, such as Japan and China/Hong Kong,
that may serve defensive purposes in an Asian portfolio. Alternatively,
companies in more-developed Asian markets may have significant operations in
emerging Asian countries.
The Fund considers a company to be an emerging Asian company if its securities
are principally traded in the capital market of an emerging Asian country; it
derives at least 50% of its total revenue from either goods produced or services
rendered in emerging Asian countries or from sales made in such emerging Asian
countries, regardless of where the securities of such company are primarily
traded; or it is organized under the laws of, and with a principal office in, an
emerging Asian country.
Emerging Asian countries are in various stages of economic development, with
most being considered emerging markets. Each country has its unique risks. Most
emerging Asian countries are heavily dependent on international trade. Some have
prosperous economies but are sensitive to world commodity prices. Others are
especially vulnerable to recession in other countries. Some emerging Asian
countries have experienced rapid growth, although many suffer from obsolete
financial systems, economic problems or archaic legal systems. For information
on risks, see "Portfolio Securities," "Risk Considerations" and the Statement of
Additional Information.
The Fund invests primarily in common stock but also may invest in other types of
equity and equity-derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in high-yield debt securities
rated below investment grade (also known as "junk bonds"). See "Portfolio
Securities" and "Risk Considerations."
The Fund may invest in certain debt securities issued by the governments of
emerging Asian countries that are, or may be eligible for, conversion into
investments in emerging Asian companies under debt conversion programs sponsored
by such governments. The Fund deems securities that are convertible to equity
investments to be equity-derivative securities. See "Portfolio Securities."
Montgomery Latin America Fund (the "Latin America Fund")
The investment objective of the Latin America Fund is long-term capital
appreciation which, under normal conditions, it seeks by investing at least 65%
of its total assets in equity securities of companies that have their principal
activities in Latin America. The Latin America Fund currently considers Mexico,
Central America, South America and the islands of the Caribbean to be in Latin
America. Under normal conditions, the Fund maintains investments in at least
three Latin America countries at all times and invests no more than one-half of
its total assets in any one Latin America country (other than Brazil and Mexico,
where the Fund may invest up to 75% and 67% of its assets, respectively). In
order to avoid disproportionate concentration of the Fund's total assets in any
one Latin America country, the Manager currently expects to limit the Fund's
investment in any one Latin America country to 10 times that country's relative
market capitalization as reflected in a broad-based Latin America equity index.
As of June 30, 1997, the market capitalization of the top five Latin America
markets are as follows:
20
<PAGE>
- --------------------------------------------------------------------------------
COUNTRY MARKET CAPITALIZATION (IN US$ MILLIONS)*
- --------------------------------------------------------------------------------
Brazil $195,859
- --------------------------------------------------------------------------------
Mexico $107,565
- --------------------------------------------------------------------------------
Chile $ 54,651
- --------------------------------------------------------------------------------
Argentina $ 49,460
- --------------------------------------------------------------------------------
Venezuela $ 10,042
- --------------------------------------------------------------------------------
*Source: Datastream. Investors should note that given the volatile nature of the
stock markets in most Latin America countries, the market capitalizations shown
above can and will change frequently and dramatically.
The Fund considers a company to be a Latin American company if its securities
are principally traded in the capital market of a Latin American country; it
derives at least 50% of its total revenues from either goods produced or
services rendered in Latin American countries or from sales made in such Latin
American countries, regardless of where the securities of such company are
primarily traded; or it is organized under the laws of, and with a principal
office in, a Latin American country.
The Manager believes that investment opportunities may result from recent trends
in Latin America encouraging greater market orientation and less government
intervention in economic affairs. Latin American countries are in various stages
of economic development, however, and are considered emerging markets. Each
country has its unique risks. For information on risks, see "Portfolio
Securities," "Risk Considerations" and the Statement of Additional Information.
The Fund invests primarily in common stock, but also may invest in other types
of equity-derivative securities. It also may invest up to 35% of its total
assets in debt securities, including up to 15% in high-yield debt securities
rated below investment grade (also known as "junk bonds"). The debt securities
may be dollar-denominated U.S. securities or debt securities of companies or
governments of Latin America. See "Portfolio Securities" and "Risk
Considerations."
The Fund may invest in certain debt securities issued by the governments of
Latin American countries that are, or may be eligible for, conversion into
investments in Latin American companies under debt conversion programs sponsored
by such governments. The Fund deems securities that are convertible to equity
investments to be equity-derivative securities. See "Portfolio Securities."
Montgomery Global Opportunities Fund (the "Opportunities Fund")
The investment objective of the Opportunities Fund is capital appreciation.
Under normal conditions the Opportunities Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
companies, which may be of any size, throughout the world. The Opportunities
Fund emphasizes common stocks of those companies.
The Opportunities Fund may invest up to 35% of its total assets in debt
securities, including up to 5% in debt securities rated below investment grade.
The Opportunities Fund invests in companies that, in the opinion of the Manager,
have potential for above-average, long-term growth in sales and earnings on a
sustained basis and that are reasonably priced. The Manager considers a number
of factors in evaluating potential investments, including a company's per-share
sales and earnings growth; return on capital; balance sheet; financial and
accounting policies; overall financial strength; industry sector; competitive
advantages and disadvantages; research, product development and marketing;
development of new technologies; service; pricing flexibility; quality of
management; and general operating characteristics.
The Opportunities Fund may invest substantially in securities denominated in one
or more foreign currencies. Under normal conditions, the Opportunities Fund
invests in at least three different countries, which may include the U.S., but
no country, other than the U.S. may represent more than 40% of its assets. A
significant portion of the Opportunities Fund's assets are invested in the
securities of foreign issuers, because many attractive investment opportunities
are outside the U.S. The Manager uses its financial expertise and research
capabilities in markets located throughout the world in attempting to identify
securities providing the greatest potential for long-term capital appreciation.
For information on risks, see "Portfolio Securities" and "Risk Considerations."
Montgomery Global Communications Fund (the "Communications Fund")
The investment objective of the Communications Fund is capital appreciation.
Under normal conditions, the Communications Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
communications companies, which may be of any size, throughout the world. For
this purpose, the Fund defines a "communications company" as a company engaged
in the development, manufacture or sale of communications equipment or services
that derived at least 50% of either its revenues or earnings from these
activities, or that devoted at least 50% of its assets to these activities,
based on the company's most recent fiscal year.
21
<PAGE>
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, communications 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 worldwide 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.
The Communications Fund may invest up to 35% of its total assets in debt
securities, including up to 5% in debt securities rated below investment grade.
The Communications Fund invests in companies that, in the opinion of the
Manager, have potential for above-average, long-term growth in sales and
earnings on a sustained basis and that are reasonably priced. The Manager
considers a number of factors in evaluating potential investments, including a
company's per-share sales and earnings growth; return on capital; balance sheet;
financial and accounting policies; overall financial strength; industry sector;
competitive advantages and disadvantages; research, product development and
marketing; development of new technologies; service; pricing flexibility;
quality of management; and general operating characteristics.
The Communications Fund may invest substantially in securities denominated in
one or more foreign currencies. Under normal conditions, the Communications Fund
invests in at least three different countries, which may include the U.S., but
no country other than the U.S. may represent more than 40% of its assets. A
significant portion of the Communications Fund's assets are invested in the
securities of foreign issuers, because many attractive investment opportunities,
including many of the world's communications companies, are outside the U.S. The
Manager uses its financial expertise and research capabilities in markets
located throughout the world in attempting to identify securities providing the
greatest potential for long-term capital appreciation. For information on risks,
see "Portfolio Securities" and "Risk Considerations."
Multi-Strategy Funds
Montgomery Select 50 Fund (the "Select 50 Fund")
The investment objective of the Select 50 Fund is capital appreciation which,
under normal conditions, it seeks by investing at least 65% of its total assets
in at least 50 different equity securities of companies of all sizes throughout
the world.
The Fund invests primarily in 10 equity securities selected by each of the
Manager's five different equity disciplines. These five disciplines, which may
be adjusted from time to time, include U.S. Growth Equity, U.S.
Smaller-Capitalization Companies, U.S. Equity Income and International and
Emerging Markets. See "Management of the Funds." The Manager's Equity teams
select those securities based on the potential for capital appreciation.
The Fund generally invests the remaining 35% of its total assets in equity
securities with the potential for capital appreciation, but may invest those
assets in other equity securities or in debt securities, including up to 5% of
its total assets in debt securities rated below investment grade. See "Portfolio
Securities," "Risk Considerations" and the Appendix in the Statement of
Additional Information.
The Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries, which may include the U.S., but no country other than the
U.S. may represent more than 40% of its total assets. The Manager uses its
financial expertise and research capabilities in markets throughout the world in
attempting to identify those countries, currencies and companies in which this
Fund may invest. See "Risk Considerations."
Montgomery U.S. Asset Allocation Fund (the "U.S. Asset Allocation Fund,"
formerly called the "Montgomery Asset Allocation Fund")
The investment objective of the U.S. Asset Allocation Fund is to seek high total
return, while also seeking to reduce risk, through a strategic or active
allocation of assets among domestic stocks, debt instruments and cash or cash
equivalents. The
22
<PAGE>
Fund is a "fund-of-funds," which means that the Fund will not invest directly in
securities but will instead invest in a diversified group of Funds from The
Montgomery Funds family (each, an "Underlying Fund") that the Manager considers
to be appropriate investments for achieving the U.S. Asset Allocation Fund's
investment objective. The U.S. Asset Allocation Fund adjusts the proportion of
its investments in each of these categories as needed to respond to current
market conditions, primarily by changing its allocation percentage among the
different Underlying Funds. The following table illustrates the anticipated
allocation methodology:
- --------------------------------------------------------------------------------
U.S. Asset Allocation Fund Allocation
- --------------------------------------------------------------------------------
INVESTMENT FOCUS ANTICIPATED RANGE OF UNDERLYING
ASSET ALLOCATION FUND
- --------------------------------------------------------------------------------
Domestic stocks 20 to 80% Growth Fund; After
November 30, 1997, this
may include other
domestic equity funds
advised by the Manager.
- --------------------------------------------------------------------------------
Debt instruments 20 to 80% Total Return Bond Fund
or other general
investment-grade bond
funds advised by the
Manager
- --------------------------------------------------------------------------------
Cash and cash equivalents 0 to 50% Government Reserve Fund
- --------------------------------------------------------------------------------
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.
Montgomery Global Asset Allocation Fund (the "Global Asset Allocation Fund")
<TABLE>
The investment objective of the Global Asset Allocation Fund is to seek high
total return, while also seeking to reduce risk, through a strategic or active
allocation of assets among investments in five asset classes--domestic stocks,
international developed markets stocks, emerging markets stocks, domestic
dollar-denominated debt instruments, and cash or cash equivalents. The Fund is a
"fund-of-funds," which means that the Fund will not invest directly in
securities but will instead invest in a diversified group of Funds from The
Montgomery Funds family (each, an "Underlying Fund") that the Manager considers
to be appropriate investments for achieving the Fund's investment objective. The
Fund adjusts the proportion of its investments in each of these categories as
needed to respond to current market conditions, primarily by changing its
allocation percentage among the different Underlying Funds. The following table
illustrates the anticipated allocation methodology:
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Global Asset Allocation Fund Allocation
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT FOCUS ANTICIPATED RANGE OF UNDERLYING
ASSET ALLOCATION FUND
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Domestic stocks 5 to 60% Growth Fund; After November 30, 1997, this may include
other domestic equity funds advised by the Manager.
- -------------------------------------------------------------------------------------------------------------------------
International developed markets stocks 5 to 60% International Growth Fund; After November 30, 1997,
this may include other international developed market
stock funds advised by the Manager.
- -------------------------------------------------------------------------------------------------------------------------
Emerging markets stocks 0 to 20% Emerging Markets Fund; After November 30, 1997, this
may include other emerging markets stock funds advised
by the Managaer
- -------------------------------------------------------------------------------------------------------------------------
U.S. dollar-denominated debt instruments 10 to 70% Total Return Bond Fund or other general
investment-grade bond funds advised by the Manager
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 0 to 80% Government Reserve Fund
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
U.S. Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund (the "Total Return Bond Fund")
The investment objective of the Total Return Bond Fund is to seek maximum total
return (which consists of both income and capital appreciation), consistent with
preservation of capital and prudent investment management. Under normal
conditions, the Fund seeks to achieve its objective by investing at least 65%
(and typically more than 90%) of its total assets in a broad range of
investment-grade bonds, including marketable corporate bonds, U.S. government
securities, mortgage-related securities, other asset-backed securities, and cash
or money market instruments. The Fund may also invest up to 20% of its assets in
securities denominated in foreign currencies, and may invest beyond this limit
in U.S. dollar-denominated securities of foreign issuers. See "Portfolio
Securities."
23
<PAGE>
Duration of the Total Return Bond Fund. The Total Return Bond Fund may purchase
individual securities of any maturity. The Fund, however, seeks to maintain an
average portfolio duration of between four- to five-and-a-half years.
Montgomery Short Duration Government Bond Fund (the "Short Bond Fund", formerly
called the "Short Government Bond Fund")
The investment objective of the Short Bond Fund is to provide maximum total
return consistent with preservation of capital and prudent investment
management. Total return consists of interest and dividends from underlying
securities, capital appreciation realized from the purchase and sale of
securities, and income from futures and options. Under normal conditions, the
Fund seeks to achieve its objective by investing at least 65% of the value of
its total assets in U.S. government securities. Because the Manager seeks to
manage interest rate risk by limiting effective duration, the Fund may invest in
securities of any maturity.
The 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 the
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 of $1 per share.
The Fund also may invest up to 35% of its total assets in cash, commercial paper
and investment-grade debt securities, including corporate debt instruments and
privately issued mortgage-related and asset-backed securities. The Fund also may
invest in other investment companies investing primarily in U.S. government
securities of appropriate duration. See "Portfolio Securities."
Duration of the Short Bond Fund. The Short Duration Government Bond Fund may
purchase individual securities of any maturity, and the dollar-weighted average
maturity (or period until the next interest rate reset date) of its portfolio
securities may exceed three years. The Fund, however, seeks to maintain an
average portfolio duration comparable to or less than that of three-year U.S.
Treasury notes.
Montgomery Government Reserve Fund (the "Reserve Fund")
The investment objective of the Reserve Fund is current income consistent with
liquidity and preservation of capital which, under normal conditions, it seeks
by investing exclusively in U.S. government securities, repurchase agreements
for U.S. government securities, and other money market funds investing in U.S.
government securities and those repurchase agreements. The Fund seeks to
maintain a stable net asset value of $1 per share in compliance with Rule 2a-7
under the Investment Company Act and, pursuant to procedures adopted under such
Rule, limits its investments to those U.S. government securities that the Board
of Trustees (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 the
securities in its portfolio of 90 days or less.
Montgomery California Tax-Free Intermediate Bond Fund (the "California
Intermediate Bond Fund")
Montgomery California Tax-Free Money Fund (the "California Money Fund")
Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund")
The investment objective of the California Intermediate Bond Fund is to provide
maximum current income exempt from federal income and California personal income
taxes consistent with preservation of capital and prudent investment management.
The investment objective of the California Money Fund is to maintain a stable
net asset value while maximizing current income exempt from federal and
California personal income taxes consistent with liquidity and preservation of
capital. Under normal conditions, the Federal Money Fund seeks to achieve its
objective by investing at least 80% of its net assets in municipal securities,
the interest from which is, in the opinion of counsel to the issuer, exempt from
federal income tax. The investment objective of the Federal Money Fund is to
maintain a stable net asset value while maximizing current income exempt from
federal income tax consistent with liquidity and preservation of capital. Under
normal conditions, the California Money Fund seeks to achieve its objective by
investing at least 80% of its net assets in municipal securities and at least
65% of its net assets in debt securities, the interest from which is, in the
opinion of counsel to the issuer, also exempt from California personal income
taxes ("California municipal securities"). Under normal conditions, the
California Intermediate Bond Fund seeks to achieve its objective by investing at
least 80% of its net assets in California municipal securities. The above
investment objectives and percentage requirements 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 the Fund's share value but who are not
willing to accept the
24
<PAGE>
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 values of the securities
in which the 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 of $1 per share. Consequently, the 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 in the Glossary.)
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. The Fund may invest in securities of any maturity, however. The Fund is
not suitable for investors who cannot benefit from the tax-exempt character of
its dividends, such as IRAs, qualified retirement plans or tax-exempt entities.
At least 80% of the value of the California Intermediate Bond Fund's net assets
must consist of California municipal securities that, at the time of purchase,
are rated investment grade, that is, 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 of Trustees ("the Board"), but not to exceed
20% of the 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. There is no assurance that any municipal issuers will make full payments
of principal and interest or remain solvent, however. For a description of the
ratings, see the Appendix in the Statement of Additional Information. See also
"Risk Considerations."
Under normal conditions, the California Intermediate Bond Fund and the
California Money Fund seek to invest in California municipal securities to the
greatest extent practicable, but they may invest in other municipal securities
if, in the Manager's opinion, suitable California municipal securities are not
available. The California Intermediate Bond Fund, the Federal Money and
California Money Funds may invest up to 20%, of their respective net assets in
cash, U.S. government securities, and obligations of U.S. possessions,
commercial paper and other eligible debt securities, including corporate debt
instruments or instruments the interest from which is subject to the federal
alternative minimum tax ("AMT") for individuals. Additionally, the California
Intermediate Bond Fund may invest up to 20%, and the California Money Fund may
invest 35%, of their respective net assets in eligible municipal securities
other than California municipal securities. From time to time, the California
Intermediate Bond and the California Money Funds may invest more than 25% of
their net assets in private activity bonds and industrial development bonds of
issuers located in California.
The Federal Money and California Money Funds seek to maintain a stable net asset
value of $1 per share in compliance with Rule 2a-7 under the Investment Company
Act and, pursuant to procedures adopted under such Rule, limit their investments
to those securities that the Board determines present minimal credit risks and
have remaining maturities, as determined under the Rule, of 397 calendar days or
less. These Funds also maintain a dollar-weighted average maturity of their
portfolio securities of 90 days or less.
Portfolio Securities
The following describes portfolio securities in which the Funds may invest.
Investors in the U.S. Asset Allocation Fund and the Global Asset Allocation Fund
should note that the portfolio securities of the U.S. Asset Allocation Fund and
the Global Asset Allocation Fund, respectively, consist of the portfolio
securities of each of their respective Underlying Funds.
Equity Securities
The Foreign and Global Equity Funds, the Select 50 Fund and the U.S. Equity
Funds emphasize investments in common stock. These Funds may also invest in
other types of equity securities (such as preferred stocks or convertible
securities) and equity-derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The Foreign and Global Equity Funds, the Select 50 Fund and the U.S. Equity
Funds may invest in ADRs, EDRs, GDRs and convertible securities, which the
Manager regards as a form of equity security. Each such Fund may also invest up
to 5% of its net assets in warrants.
25
<PAGE>
Privatizations
The Select 50 Fund and the Foreign and Global Equity Funds believe that foreign
governmental programs of selling interests in government-owned or -controlled
enterprises ("privatizations") may represent opportunities for significant
capital appreciation, and these Funds may invest in privatizations. The ability
of U.S. entities, such as these Funds, to participate in privatizations may be
limited by local law, or the terms for participation may be less advantageous
than for local investors. There can be no assurance that privatization programs
will be successful.
Special Situations
The Select 50 Fund and the Foreign and Global Equity 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 Foreign and Global Equity 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 Foreign and Global Equity
Funds also may incur tax liability to the extent that 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 Fund, the Foreign and Global Equity Funds, the U.S. Equity Funds
and the U.S. Fixed-Income and Money Market Funds do not intend to invest in
other investment companies unless, in the Manager's judgment, the potential
benefits exceed associated costs. As a shareholder in an investment company,
these Funds bear their ratable share of that investment company's expenses,
including advisory and administration fees. The Manager has agreed to waive its
own management fee with respect to the portion of these Funds' assets invested
in other open-end (but not closed-end) investment companies.
Debt Securities
All 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 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 Fund will not invest more than 5% (except the Latin America Fund which may
invest up to 15%) of its total assets in debt securities rated lower than
investment grade. Subject to this limitation, each of these Funds may invest in
any debt security, including securities in default. After its purchase by a
Fund, a debt security may cease to be rated or its rating may be reduced below
that required for purchase by the Fund. A security downgraded below the minimum
level may be retained if determined by the Manager and the Board to be in the
best interests of the Fund. See "Risk Considerations."
Debt securities may also consist of participation certificates in large loans
made by financial institutions to various borrowers, typically in the form of
large unsecured corporate loans. These certificates must otherwise comply with
the maturity and credit quality standards of each Fund and will be limited to 5%
of a Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, each of the Foreign and Global Equity Funds and the Equity Income
Fund may invest in external (i.e., to foreign lenders) debt obligations issued
by the governments, governmental entities and companies of emerging markets
countries. The percentage distribution between equity and debt will vary from
country to country, based on anticipated trends in inflation and interest rates;
expected rates of economic and corporate profits growth; changes in government
policy; stability, solvency and expected trends of government finances; and
conditions of the balance of payments and terms of trade.
26
<PAGE>
U.S. Government Securities
All Funds may invest in fixed-rate and floating- or variable-rate U.S.
government securities. Certain of the obligations, including U.S. Treasury
bills, notes and bonds, and mortgage-related securities of the GNMA, are issued
or guaranteed by the U.S. government. Other securities issued by U.S. government
agencies or instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. However, the U.S. government does not guarantee
the net asset value of the Funds' shares. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
Mortgage-Related Securities and Derivative Securities
The U.S. Fixed-Income and Money Market 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" under the "Other Investment Practices" for a
discussion of other reasons why these Funds invest in derivative securities.
Agency Mortgage-Related Securities
Investors in the Reserve, Tax-Free, Short Bond and Total Return Bond Funds
should note that the dominant issuers or guarantors of mortgage-related
securities today are GNMA, FNMA and the FHLMC. GNMA creates pass-through
securities from pools of government-guaranteed or -insured (Federal Housing
Authority or Veterans Administration) mortgages. FNMA and FHLMC issue
pass-through securities from pools of conventional and federally insured and/or
guaranteed residential mortgages. The principal and interest on GNMA
pass-through securities are guaranteed by GNMA and backed by the full faith and
credit of the U.S. government. FNMA guarantees full and timely payment of all
interest and principal, and FHLMC guarantees timely payment of interest and
ultimate collection of principal of its pass-through securities. Securities from
FNMA and FHLMC are not backed by the full faith and credit of the U.S.
government but are generally considered to offer minimal credit risks. The
yields provided by these mortgage-related securities have historically exceeded
the yields on other types of U.S. government securities with comparable "lives"
largely due to the risks associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
The U.S. Fixed-Income and Money Market 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. The Money Market Funds do not invest in stripped mortgage securities,
however, and the Short Bond Fund limits its stripped mortgage securities
investments to 10% of total assets. The liquidity of IOs and POs issued by the
U.S. government or its agencies and instrumentalities and backed by fixed-rate
mortgage-related securities will be determined by the Manager under the direct
supervision of the Trust's Pricing Committee and reviewed by the Board, and all
other IOs and POs will be deemed illiquid for purposes of the Fixed- Income
Funds' limitation on illiquid securities. The Short Bond and Total Return Bond
Funds may invest in derivative securities known as "floaters" and "inverse
floaters," the values of which vary in response to interest rates. These
securities may be illiquid and their values may be very volatile.
Privately Issued Mortgage-Related Securities/Derivatives
The Short Bond Fund and Total Return Bond Fund may invest in mortgage-related
securities offered by private issuers, including pass-through securities for
pools of conventional residential mortgage loans; mortgage pay-through
obligations and mortgage-backed bonds, which are considered to be obligations of
the institution issuing the bonds and are collateralized by
27
<PAGE>
mortgage loans; and bonds and CMOs collateralized by mortgage-related securities
issued by GNMA, FNMA, FHLMC or by pools of conventional mortgages, multifamily
or commercial mortgage loans.
Private issuer mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than U.S. government and
agency mortgage-related securities because they offer no direct or indirect
governmental guarantees. Many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal, however. The Short Bond Fund and Total Return Bond Fund may purchase
some mortgage-related securities through private placements that are restricted
as to further sale. See "Illiquid Securities." The value of these securities may
be very volatile.
Structured Notes and Indexed Securities
The Funds may invest in structured notes and indexed securities. Structured
notes are debt securities, the interest rate or principal of which is determined
by an unrelated indicator. Indexed securities include structured notes as well
as securities other than debt securities, the interest rate or principal of
which is determined by an unrelated indicator. Index securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent a
Fund invests in these securities, however, the Manager analyzes these securities
in its overall assessment of the effective duration of the Fund's portfolio in
an effort to monitor the Fund's interest rate risk.
Variable-Rate Demand Notes
The U.S. Fixed-Income and Money Market Funds may invest in variable-rate demand
notes ("VRDNs").
Zero Coupon Bonds
The U.S. Fixed-Income and Money Market Funds may invest in zero coupon bonds.
Zero coupon bond prices are highly sensitive to changes in market interest
rates. The original issue discount on the zero coupon bonds must be included
ratably in the income of the U.S. Fixed-Income and Money Market Funds as the
income accrues even though payment has not been received. These Funds
nevertheless intend to distribute an amount of cash equal to the currently
accrued original issue discount, and this may require liquidating securities at
times they might not otherwise do so and may result in capital loss. See "Tax
Information" in the Statement of Additional Information.
Asset-Backed Securities, Custodial Receipts, Participation Interests and Tender
Option Bonds
Each Fund may invest up to 5% (25% in the case of the Short Bond Fund and the
Total Return Bond Fund) of its total assets in asset-backed securities. Like
mortgage-related securities, these securities are subject to the risk of
prepayment. See "Risk Considerations." The California Tax-Free Intermediate Bond
Fund may invest in custodial receipts. The Tax-Free Funds may invest in
participation interests and tender option bonds.
28
<PAGE>
Other Investment Practices
<TABLE>
The table below and the following sections summarize certain investment
practices of the Funds, each of which may involve certain special risks. The
Glossary at the end of this prospectus briefly describes each of the investment
techniques summarized below. The Statement of Additional Information, under the
heading "Investment Objectives and Policies of the Funds," contains
more-detailed information about certain of these practices, including
limitations designed to reduce risks.
<CAPTION>
=============================================================================================================================
U.S. Equity Funds Foreign and Multi-Strategy U.S. Fixed-Income and
Global Equity Funds Funds Money Market Funds
-----------------------------------------------------------------------------------------
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G S S M E I I E E L G G S U G T S G C C F
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Repurchase agreements(1) x x x x x x x x x x x x x * * x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions(1) * * x x x
- -----------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one-third x x x x x x x x x x x x x * * x x x x x x
of total fund assets
- -----------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements x x x x x x x x x x x x x * * x x x x x x
- -----------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions * * x x
- -----------------------------------------------------------------------------------------------------------------------------
Leverage x x x x x x x x x x x x x * * x x(2) x
- -----------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed x x x x x x x x x x x x x * * x x x x x x
30% of total fund assets
- -----------------------------------------------------------------------------------------------------------------------------
When-issued and forward commitment x x x x x x x x x x x x x * * x(3)x(3) x x x x
securities
- -----------------------------------------------------------------------------------------------------------------------------
Forward currency contracts(4) x x x x x x x x x x x x x * * x
- -----------------------------------------------------------------------------------------------------------------------------
Purchase options on securities and x x x x x x x x x x x x x * * x x x
currencies(5)
- -----------------------------------------------------------------------------------------------------------------------------
Purchase options on securities x x x x x x x x x x x x x * *
indices(5)
- -----------------------------------------------------------------------------------------------------------------------------
Write covered call options(5) x x x x x x x x x x x x x * * x x x
- -----------------------------------------------------------------------------------------------------------------------------
Write covered put options(5) x x x x x x x x x x x x x * * x x x
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts(6) x x x x x x x x x x x x x * * x x x
- -----------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on x x x x x x x x x x x x x * * x x x
futures(6)
- -----------------------------------------------------------------------------------------------------------------------------
Equity swaps(7) x x x x x x x x x x x x x * *
- -----------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to * * x x x
10% of fund's net assets)
- -----------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to x x x x x x x x x x x x x * * x x x
15% of fund's net assets)
==============================================================================================================================
<FN>
(1) Under the Investment Company Act, repurchase agreements and reverse dollar
roll transactions are considered to be loans by a fund and must be fully
collateralized by collateral assets. If the seller defaults on its obligations
to repurchase the underlying
29
<PAGE>
security, a Fund may experience delay or difficulty in exercising its rights to
realize upon the security, may incur a loss if the value of the security
declines and may incur disposition costs in liquidating the security.
(2) The Manager will not use leverage for the Short Bond Fund if, as a result,
the Fund's portfolio duration would not be comparable to or less than that of
three-year U.S. Treasury notes..
(3) The Fund also may enter into forward commitments to sell high-grade liquid
debt securities it does not own at the time of entering such commitments.
(4) A Fund that may invest in forward currency contracts may not invest more
than one-third of its assets in such contracts. The Total Return Bond Fund can
invest 20% of its net assets in foreign securities.
(5) A Fund will not enter into any options on securities, securities indices or
currencies or related options (including options on futures) if the sum of the
initial margin deposits and premiums paid for any such option or options would
exceed 5% of its total assets, and it will not enter into options with respect
to more than 25% of its total assets.
(6) 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.
(7) A Fund that may invest in equity swaps may invest up to 10% of its total
assets in such investment.
* To the extent allowed in each Underlying Fund.
</FN>
</TABLE>
Borrowing
Subject to the limits set forth in the prospectus, the Funds may pledge their
assets in connection with borrowings. A Fund will not purchase any securities
while any borrowings exceed 10% of its total assets.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate to
further a 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 markups and other
transaction costs, and may result in the recognition of capital gains that may
be distributed to shareholders. See "Financial Highlights" for portfolio
turnover information. The annual portfolio turnover rate for the Total Return
Bond Fund is expected to exceed 100%, and the annual portfolio turnover rate for
the Latin America Fund is not expected to exceed 100%. Even when portfolio
turnover exceeds 100% for a Fund, that Fund does not regard portfolio turnover
as a limiting factor. Portfolio turnover in excess of 100% is considered high,
increases brokerage costs incurred by a Fund and may cause recognition of gain
by shareholders.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds (except the
Money Funds) may employ certain risk management practices using certain
derivative securities and techniques (known as "derivatives"). Markets in some
countries currently do not have instruments available for hedging transactions.
To the extent that such instruments do not exist, the Manager may not be able to
hedge its investment effectively in such countries. Furthermore, a Fund engages
in hedging activities only when the Manager deems it to be appropriate, and does
not necessarily engage in hedging transactions with respect to each investment.
30
<PAGE>
Hedging transactions involve certain risks. Although a Fund may benefit from the
use of hedging positions, unanticipated changes in interest rates or securities
prices may result in poorer overall performance for a Fund than if it had not
entered into a hedging position. If the correlation between a hedging position
and a portfolio position is not properly protected, the desired protection may
not be obtained and the Fund may be exposed to risk of financial loss. In
addition, a Fund pays commissions and other costs in connection with such
investments.
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 goals. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
Each Fund has 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
The following describes certain risks involved with investing in the Funds.
Investors in the U.S. Asset Allocation Fund and the Global Asset Allocation Fund
should note the risks involved with each Underlying Fund, because the U.S. Asset
Allocation Fund and the Global Asset Allocation Fund are "funds-of-funds."
Small Companies
The Small Cap, Small Cap Opportunities, Micro Cap and International Small Cap
Funds emphasize, and the Select 50, the Growth and the Foreign and Global Equity
Funds may make investments in, smaller companies that may benefit from the
development of new products and services. Such smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, more mature issuers. Such smaller companies may have limited product
lines, markets or financial resources, and their securities may trade less
frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.
Foreign Securities
The U.S. Equity Funds, the Select 50 Fund, the Total Return Bond Fund and the
Foreign and Global Equity Funds have the right to purchase securities in foreign
countries. Accordingly, shareholders should consider carefully the substantial
risks involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks of loss inherent in
domestic investments. The Select 50 and the Foreign and Global Equity Funds,
particularly the Emerging Asia, Emerging Markets and Latin America Funds, may
invest in securities of companies domiciled in, and in markets of, so-called
"emerging markets countries." These investments may be subject to higher risks
than investments in more-developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations; foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments); default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts. Additional risk factors,
including use of domestic and foreign custodian banks and depositories, are
described elsewhere in the prospectus and in the Statement of Additional
Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments in other countries are generally greater than in the U.S. Foreign
markets have different clearance and settlement procedures from those in the
U.S., and certain markets have experienced times when settlements did not keep
pace with the volume of securities transactions. The inability of a Fund to make
intended security purchases due to settlement difficulties could cause it to
miss attractive investment
31
<PAGE>
opportunities. Inability to sell a portfolio security due to settlement problems
could result in loss to the Fund if the value of the portfolio security
declined, or result in claims against the Fund. In certain countries, there is
less government supervision and regulation of business and industry practices,
stock exchanges, brokers and listed companies than in the U.S. The securities
markets of many of the countries in which these Funds may invest may also be
smaller, less liquid and subject to greater price volatility than those in the
U.S.
Because certain foreign securities may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions among 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 also may have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Fund. The Fund may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Lower-Quality Debt
As an operating policy, which may be changed by the Board without shareholder
approval, the Select 50, and the Foreign and Global Equity Funds are permitted
to invest in medium-quality debt securities, but do not invest more than 5%
(with the exception of the Latin America Fund which may invest up to 15%) of
their total assets in high-risk debt securities below investment-grade quality
(sometimes called "junk bonds.")
Medium-quality debt securities are those rated or equivalent to BBB by S&P or
Fitch's, or Baa by Moody's. 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. Junk bonds offer greater
speculative characteristics and are regarded as having a great vulnerability to
default although currently having the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
ability to maintain other terms of the contract over any long period of time may
be small. Junk bonds are more subject to default during periods of economic
downturns or increases in interest rates and their yields will fluctuate over
time. It may be more difficult to dispose of or to value junk bonds. Achievement
of a Fund's investment objective may also be more dependent on the Manager's own
credit analysis to the extent a Fund's portfolio includes junk bonds.
The Board may consider a change in this operating policy if, in its judgment,
economic conditions change such that a higher level of investment in high-risk,
lower-quality debt securities would be consistent with the interests of these
Funds and their shareholders. Unrated debt securities are not necessarily of
lower quality than rated securities but may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Manager to determine, to the
extent reasonably possible, that the planned investment is sound. From time to
time, these Funds may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Diversification
Diversifying a Fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less-diversified
mutual 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.
32
<PAGE>
Concentration in Communications Industry
The Communications Fund concentrates its investments in the global
communications industry. Consequently, the Fund's share value may be more
volatile than that of mutual funds not sharing this concentration. The value of
the Fund's shares may vary in response to factors affecting the global
communications industry, which may be subject to greater changes in governmental
policies and regulation than many other industries, and regulatory approval
requirements may materially affect the products and services. Because the Fund
must satisfy certain diversification requirements in order to maintain its
qualification as a regulated investment company within the meaning of the
Internal Revenue Code ("the Code"), the Fund may not always be able to take full
advantage of opportunities to invest in certain communications companies.
Concentration in Securities of Emerging Asian Companies
The Emerging Asia Fund concentrates its investments in companies that have their
principal activities in emerging Asian countries. Consequently, the Fund's share
value may be more volatile than that of investment companies not sharing this
geographic concentration. The value of the Fund's shares may vary in response to
political and economic factors affecting issuers in emerging Asian countries.
Although the Fund normally does not expect to invest in Japanese companies, some
emerging Asian economies are directly affected by Japanese capital investment in
the region and by Japanese consumer demands. Many of the emerging Asian
countries are developing both economically and politically. Emerging Asian
countries may have relatively unstable governments, economies based on only a
few commodities or industries, and securities markets trading infrequently or in
low volumes. Some emerging Asian countries restrict the extent to which
foreigners may invest in their securities markets. Securities of issuers located
in some emerging Asian countries tend to have volatile prices and may offer
significant potential for loss as well as gain. Further, certain companies in
emerging Asian may not have firmly established product markets, may lack depth
of management or may be more vulnerable to political or economic developments
such as nationalization of their own industries. Moreover, so long as the Fund
invests in at least three emerging Asian countries, it may invest more than 90%
of its assets in China/Hong Kong. Alternatively, it may invest more than 90% of
its assets in Malaysia. Such a heavy concentration of investment in a few
countries may make the Fund's share value extremely volatile and, in the event
of any economic downturn or other events adversely affecting those countries,
such events' impact on the Fund will be more magnified than if the Fund did not
have such a narrow concentration.
Concentration in Securities of Latin American Companies
The Latin America Fund concentrates its investments in companies that have their
principal activities in Latin American countries. Consequently, the Latin
America Fund's share value may be more volatile than that of investment
companies not sharing this geographic concentration. The value of the Latin
America Fund's shares may vary in response to political and economic factors
affecting issuers in Latin American countries. Investors should be aware that
the Latin American economies have experienced considerable difficulties in the
past decade. Although there have been significant improvements in recent years,
the Latin American economies continue to experience challenging problems,
including high inflation rates and high interest rates relative to the U.S. The
emergence of the Latin American economies and securities markets will require
continued economic and fiscal discipline, which has been lacking at times in the
past, as well as stable political and social conditions. Recovery may also be
influenced by international economic conditions, particularly those in the U.S.,
and by world prices for oil and other commodities. There is no assurance that
recent economic initiatives will be successful.
Certain risks associated with international investments and investing in
smaller, developing capital markets are heightened for investments in Latin
American countries. For example, some of the currencies of Latin American
countries have experienced steady devaluations relative to the U.S. dollar, and
major adjustments have been made in certain of these currencies periodically. In
addition, although there is a trend toward less government involvement in
commerce, governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In certain cases, the government still owns or controls many companies,
including some of the largest in the country. Accordingly, government actions in
the future could have a significant effect on economic conditions in Latin
American countries, which could affect private sector companies and the Fund, as
well as the value of securities in the Fund's portfolio.
Most Latin American countries have experienced substantial and, in some periods,
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain Latin American
countries.
Certain Latin American countries are among the largest debtors to commercial
banks and foreign governments. Some of these countries have in the past
defaulted on their sovereign debt. Holders of sovereign debt (including the
Latin America Fund) may be requested to participate in the rescheduling of such
debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.
33
<PAGE>
The limited size of many Latin American securities markets and limited trading
volume in issuers compared with the volume of trading in U.S. securities could
cause prices to be erratic for reasons apart from factors that affect the
quality of securities.
Please note the particular risks of investing in Brazil and Mexico, because the
Fund may emphasize these countries (up to 75% and 67% of assets, respectively).
The Fund's investments in Brazilian securities involve certain risks, including
Brazil's control on foreign investment and the Fund's limited ability to
exchange Brazilian reals for U.S. dollars. There is also no liquid secondary
market for certain Brazilian debt securities. This may affect the Fund's ability
to obtain accurate market quotations for portfolio valuation. It may also
adversely affect the market price for such securities.
The Fund's investments in Mexican securities also involve certain risks,
including the Mexican governments's control over the Mexican economy.
Accordingly, Mexican government actions concerning the economy and state-owned
enterprises could have a significant impact on market conditions, prices and
returns on Mexican securities. The Fund's investments in Mexico may also be
affected by currency fluctuations, economic instability, bank loan shortages and
other political or economic developments in or affecting Mexico. The Mexican
economy has experienced in the past economic crises characterized by exchange
rate volatility and large-scale devaluation of the peso against foreign
currencies as well as negative economic growth.
The portion of the Latin America Fund's assets invested directly in Chile may be
less than the portions invested in other countries in Latin America, because, at
present, capital invested in Chile normally cannot be repatriated for as long as
five years. As such, direct investments in Chile will be limited by the Latin
America Fund's nonfundamental policy of not investing more than 15% of total
assets in illiquid securities.
Interest Rates
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate change. Changes in the ability
of an issuer to make payments of interest and principal and in the market's
perception of its creditworthiness also affect the market value of that issuer's
debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a U.S. Fixed-Income and Money Market Fund, to the
extent that 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 U.S. Fixed-Income and Money Market Funds purchase mortgage-related
securities at a premium, unscheduled prepayments, which are made at par, result
in a loss equal to any unamortized premium. Duration is one of the fundamental
tools used by the Manager in managing interest rate risks including prepayment
risks. See duration in the Glossary.
Equity Swaps
The U.S. Equity, Foreign and Global Equity and Select 50 Funds may invest in
equity swaps. Equity swaps are derivatives and their value can be very volatile.
To the extent that the Manager does not accurately analyze and predict the
potential relative fluctuation of the components swapped with another party, a
Fund may suffer a loss. The value of some components of an equity swap (like the
dividends on a common stock) may also be sensitive to changes in interest rates.
Furthermore, during the period a swap is outstanding, the Fund may suffer a loss
if the counterparty defaults.
Tax-Free Funds
Investing in Municipal Securities. Because the California Intermediate Bond and
the California Money Funds invest primarily in California municipal securities,
their performance may be especially affected by factors pertaining to the
California economy and other factors specifically affecting the ability of
issuers of California municipal securities to meet their obligations. As a
result, the value of the Funds' shares may fluctuate more widely than the value
of shares of a portfolio
34
<PAGE>
investing in securities relating to a number of different states. The Federal
Money Fund also may invest a portion of its portfolio in California municipal
securities. Investors in the Federal Money Fund should note that the types of
risks of investing in California municipal securities exist in varying degrees
for municipal securities of other states.
Non-Diversified Portfolio. The California Intermediate Bond Fund is a
"non-diversified" investment company under the Investment Company Act. This
means that, with respect to 50% of its total assets, it may not invest more than
5% of its total assets in the securities of any one issuer (other than the U.S.
government). The balance of its assets may be invested in as few as two issuers.
Thus, up to 25% of the Fund's total assets may be invested in the securities of
any one issuer. For purposes of this limitation, a security is considered to be
issued by the governmental entity (or entities) the assets and revenues of which
back the security, or, with respect to an industrial development bond, that is
backed only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a guaranteed
security also may be considered to be an issuer in connection with such
guarantee. By investing in a portfolio of municipal securities, a shareholder in
the California Intermediate Bond Fund enjoys greater diversification than an
investor holding a single municipal security. The investment return on a
non-diversified portfolio, however, typically is dependent upon the performance
of a smaller number of issuers relative to the number of issuers held in a
diversified portfolio. If the financial condition or market assessment of
certain issuers changes, this Fund's policy of acquiring large positions in the
obligations of a relatively small number of issuers may affect the value of its
portfolio to a greater extent than if its portfolio were fully diversified.
Management of the Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees that establishes its Funds' policies and supervises and reviews
their management. Day-to-day operations of the Funds are administered by the
officers of the Trusts and by the Manager pursuant to the terms of an investment
management agreement with each Fund.
Montgomery Asset Management LLC is the Funds' Manager. The Manager, a Delaware
limited liability company, is a subsidiary of Commerzbank AG. The Manager was
formed in February 1997 as an investment adviser registered as such with the SEC
under the Investment Advisers Act of 1940, as amended. It advises private
accounts as well as the Funds. Commerzbank, one of the largest publicly held
commercial banks in Germany, has total assets of approximately $268 billion.
Commerzbank and its affiliates had more than $479 billion in assets under
management as of June 30, 1997. Commerzbank's asset management operations
involve more than 1,000 employees in 13 countries worldwide.
On July 31, 1997, Montgomery Asset Management, L.P., the former manager of the
Funds, completed the sale of substantially all of its assets to the Manager. At
a special meeting of shareholders on June 23, 1997, the shareholders of each
Fund approved a new Investment Management Agreement with the Manager, effective
July 31, 1997, for an initial two-year period.
Portfolio Managers
Montgomery Growth Fund
Montgomery Small Cap Opportunities Fund
Montgomery Micro Cap Fund
Roger W. Honour is a senior portfolio manager and principal. 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.
Kathryn M. Peters is a portfolio manager and principal. From 1993 to 1995, Ms.
Peters was an associate in the investment banking division of Donaldson, Lufkin
& Jenrette in New York, where she evaluated prospective equity investments for
the merchant banking fund and processed investment banking transactions,
including equity and high-yield offerings. Prior to that, she analyzed mezzanine
investments for Barclays de Zoete Wedd in New York. From 1988 to 1990, Ms.
Peters worked in the leveraged buyout group of Marine Midland Bank.
Andrew G. Pratt, CFA, is a portfolio manager and principal. 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.
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<PAGE>
Montgomery Small Cap Fund
Stuart O. Roberts is a senior portfolio manager and principal. For the five
years preceding the Fund's inception in 1990, Mr. Roberts was a portfolio
manager and analyst at Founders Asset Management in Denver, where he managed
three public mutual funds.
Jerome C. (Cam) Philpott, CFA, is a portfolio manager and principal. Before
joining the Manager, Mr. Philpott was a securities analyst with Boettcher &
Company in Denver from 1988 to 1991.
Bradford D. Kidwell is a portfolio manager and principal. He joined the Manager
in 1991 from the position he held since 1989 as the sole general partner and
portfolio manager of Oasis Financial Partners. Before then, he covered the
savings and loan industry for Dean Witter Reynolds from 1987 to 1989.
Montgomery Equity Income Fund
John H. Brown, CFA, is a senior portfolio manager and principal. Preceding his
arrival at the Manager in May 1994, Mr. Brown was an analyst and portfolio
manager at Merus Capital Management in San Francisco from June 1986.
Montgomery Emerging Markets Fund
Josephine S. Jimenez, CFA, is a senior portfolio manager and principal. 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 senior portfolio manager and principal.
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.
Angeline Ee is a portfolio manager and principal. 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.
For the backgrounds and business experience of Frank Chiang and Jesus Isidoro
Duarte, who are the other members of the Emerging Markets team, see the
discussion under the Montgomery Emerging Asia Fund and Montgomery Latin America
Fund, respectively, below.
Montgomery Emerging Asia Fund
Frank Chiang is a portfolio manager and principal. From 1993 until joining the
Manager in 1996, Mr. Chiang was managing director and portfolio manager at TCW
Asia Ltd. in Hong Kong. Mr. Chiang is supported by the Emerging Markets team,
whose other members include Josephine S. Jimenez, Bryan L. Sudweeks, Angeline Ee
and Jesus Isidoro Duarte.
Montgomery Latin America Fund
Jesus Isidoro Duarte is a portfolio manager and principal for the Manager,
responsible for the Latin American markets. Mr. Duarte began his investment
career in 1980. He joined the Manager from Latinvest Management Co. in Brazil,
where he was director and vice president responsible for research and portfolio
management for the firm's Latin American funds. Prior to Latinvest, Mr. Duarte
worked at W.I. Carr in Tokyo as a securities analyst of Japanese equities. He is
fluent in Spanish and Japanese, and conversant in French and Portuguese. Mr.
Duarte has a bachelor of arts degree in international relations and a minor in
business administration from the University of Redlands in California and has
successfully completed the Japanese Language Institute's two-year program at the
Sophia University in Tokyo. Mr. Duarte is supported by the Emerging Markets
team, whose other members include Josephine S. Jimenez, Bryan L. Sudweeks,
Angeline Ee and Frank Chiang.
Montgomery International Growth Fund
Montgomery International Small Cap Fund
Montgomery Global Opportunities Fund
Montgomery Global Communications Fund
John D. Boich, CFA, is a senior portfolio manager and principal. 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
36
<PAGE>
Common Goal World Fund, a global equity partnership. From 1987 to 1989, Mr.
Boich worked as a financial advisor with Prudential-Bache Securities and E.F.
Hutton & Company.
Oscar A. Castro, CFA, is a senior portfolio manager and principal. 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.
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. The portfolio management teams responsible
for these disciplines are described throughout this "Portfolio Managers" section
and below.
Kevin T. Hamilton, CFA, Chairman of the Manager's Investment Oversight Committee
and executive vice president, is responsible for coordinating and implementing
the investment decisions of the Manager's Equity teams and making investment
decisions relating to the allocation of assets among the Underlying Funds of the
U.S. Asset Allocation Fund and the Global Asset Allocation Fund. 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. The portfolio management teams responsible for the different
disciplines used in the Select 50 Fund are described throughout this "Portfolio
Managers" section.
Nancy Kukacka is a portfolio manager and principal. Prior to joining the
Manager, Ms. Kukacka worked at CS First Boston Investment from April 1994
through April 1995 where she was an equity research analyst covering consumer
cyclical and non-durable sectors. Previously, Ms. Kukacka was an equity research
analyst at RCM Capital Management from April 1990 through March 1994, providing
fundamental-based analysis for more than US$12 billion in equity investments.
Ms. Kukacka holds a bachelor of arts degree in economics with minors in
chemistry and biology from Bucknell University. She is a Level III CFA
candidate.
Montgomery U.S. Asset Allocation Fund
Montgomery Global Asset Allocation Fund
The U.S. Asset Allocation Fund invests its assets in separate Funds,
representing three different investment disciplines. The Global Asset Allocation
Fund invests its assets in separate Funds, representing five different
investment disciplines.
Kevin T. Hamilton, CFA, is responsible for selecting the Funds to be included in
each fund-of-funds structure and also for coordinating and implementing the
investment decisions of the U.S. Asset Allocation Fund and the Global Asset
Allocation Fund. For the background and business experience of Kevin T.
Hamilton, see the discussion under the Montgomery Select 50 Fund, above.
Montgomery Total Return Bond Fund
Montgomery Short Duration Government Bond Fund
Montgomery Government Reserve Fund
Montgomery California Tax-Free Intermediate Bond Fund
Montgomery California Tax-Free Money Fund
Montgomery Federal Tax-Free Money Fund
William C. Stevens is a senior portfolio manager and principal. 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, he was
responsible for the origination and trading of all derivative mortgage-related
securities.
Peter D. Wilson is a portfolio manager and principal. Mr. Wilson joined the
Manager's Fixed-Income team in April 1994. From 1992 to 1994, he was an
associate in the Fixed Income Client Services Department of BARRA in Berkeley,
California. At BARRA, Mr. Wilson directed research and development teams on
mortgage, CMO and other fixed-income projects. Prior to that he was an associate
in the structured finance department at Security Pacific Merchant Bank as well
as on the mortgage trading desk at Chemical Bank.
37
<PAGE>
Management Fees and Other Expenses
The Manager provides the Funds with advice on buying and selling securities,
manages the Funds' investments, including the placement of orders for portfolio
transactions, furnishes the Funds with office space and certain administrative
services, and provides personnel needed by the Funds with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with each Fund. The Manager also compensates the members of the Trusts' Boards
of Trustees who are interested persons of the Manager, and assumes the cost of
printing prospectuses and shareholder reports for dissemination to prospective
investors. As compensation, each Fund pays the Manager a management fee (accrued
daily but paid when requested by the Manager) based upon the value of the
average daily net assets of that Fund, according to the following table.
<TABLE>
The management fees for the U.S. Equity, the Select 50 and the Foreign and
Global Equity Funds are higher than for most mutual funds.
<CAPTION>
- -------------------------------------------------------- --------------------------------- -----------------------
AVERAGE DAILY NET ASSETS MANAGEMENT FEE
(ANNUAL RATE)
- -------------------------------------------------------- --------------------------------- -----------------------
<S> <C> <C>
U.S. Equity Funds
- -------------------------------------------------------- --------------------------------- -----------------------
Growth Fund First $500 million 1.00%
Next $500 million 0.90%
More than $1 billion 0.80%
- -------------------------------------------------------- --------------------------------- -----------------------
Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
More than $500 million 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Small Cap Fund First $250 million 1.00%
More than $250 million 0.80%
- -------------------------------------------------------- --------------------------------- -----------------------
Micro Cap Fund First $200 million 1.40%
More than $200 million 1.25%
- -------------------------------------------------------- --------------------------------- -----------------------
Equity Income Fund First $500 million 0.60%
More than $500 million 0.50%
- -------------------------------------------------------- --------------------------------- -----------------------
Foreign and Global Equity Funds
- -------------------------------------------------------- --------------------------------- -----------------------
International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
More than $1 billion 0.90%
- -------------------------------------------------------- --------------------------------- -----------------------
International Small Cap Fund First $250 million 1.25%
More than $250 million 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Emerging Markets Fund First $250 million 1.25%
More than $250 million 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
More than $1 billion 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Latin America Fund First $500 million 1.25%
Next $500 million 1.10%
More than $1 billion 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Global Opportunities Fund First $500 million 1.25%
Next $500 million 1.10%
More than $1 billion 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Global Communications Fund First $250 million 1.25%
More than $250 million 1.00%
- -------------------------------------------------------- --------------------------------- -----------------------
Multi-Strategy Funds
- -------------------------------------------------------- --------------------------------- -----------------------
Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
More than $500 million 0.90%
- -------------------------------------------------------- --------------------------------- -----------------------
U.S. Asset Allocation Fund All amounts 0.00%*
- -------------------------------------------------------- --------------------------------------------------------
Global Asset Allocation Fund All amounts 0.20%**
- -------------------------------------------------------- --------------------------------------------------------
U.S. Fixed-Income and Money Market Funds
- -------------------------------------------------------- --------------------------------- -----------------------
Total Return Bond Fund First $500 million 0.50%
More than $500 million 0.40%
- -------------------------------------------------------- --------------------------------- -----------------------
Short Duration Government Bond Fund First $500 million 0.50%
More than $500 million 0.40%
- -------------------------------------------------------- --------------------------------- -----------------------
Government Reserve Fund First $250 million 0.40%
38
<PAGE>
- -------------------------------------------------------- --------------------------------- -----------------------
AVERAGE DAILY NET ASSETS MANAGEMENT FEE
(ANNUAL RATE)
- -------------------------------------------------------- --------------------------------- -----------------------
Next $250 million 0.30%
More than $500 million 0.20%
- -------------------------------------------------------- --------------------------------- -----------------------
California Tax-Free Intermediate Bond Fund First $500 million 0.50%
More than $500 million 0.40%
- -------------------------------------------------------- --------------------------------- -----------------------
California Tax-Free Money Fund First $500 million 0.40%
More than $500 million 0.30%
- -------------------------------------------------------- --------------------------------- -----------------------
Federal Tax-Free Money Fund First $500 million 0.40%
More than $500 million 0.30%
- -------------------------------------------------------- --------------------------------------------------------
<FN>
*This amount represents only the management fee of the U.S. Asset Allocation
Fund and does not include management fees attributable to the Underlying Funds,
which ultimately are to be borne by shareholders of the U.S. Asset Allocation
Fund.
**This amount represents only the management fee of the Global Asset Allocation
Fund and does not include management fees attributable to the Underlying Funds,
which ultimately are to be borne by shareholders of the Global Asset Allocation
Fund.
</FN>
</TABLE>
The Manager also serves as the Funds' Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, the Funds pay the Administrator a
monthly fee at the following annual rates: Each of the Growth, Equity Income,
Opportunities, Emerging Asia and Latin America Funds pays seven one-hundredths
of one percent (0.07%) of average daily net assets (0.06% of average daily net
assets over $500 million); each of the Small Cap, Small Cap Opportunities,
Select 50, Micro Cap, Emerging Markets, International Small Cap, International
Growth and Communications Funds pays seven one-hundredths of one percent (0.07%)
of average daily net assets (0.06% of daily net assets over $250 million); each
of the Short, Reserve, Total Return Bond 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). In the case of the U.S. Asset Allocation Fund and the Global Asset
Allocation Fund, the Administrator does not charge a fee for performing
administrative services for those Funds, although it charges a fee for such
services performed for the Underlying Funds, which ultimately are borne
indirectly by shareholders of the U.S. Asset Allocation Fund and the Global
Asset Allocation Fund.
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 record keeping 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 following
percentages of each Fund's average net assets: the Growth Fund, one and
five-tenths of one percent (1.50%); the Equity Income Fund, eighty-five
one-hundredths of one percent (0.85%); the Small Cap Fund, one and four-tenths
of one percent (1.40%); the Small Cap Opportunities Fund, one and five-tenths of
one percent (1.50%); the Micro Cap Fund, one and seventy-five one-hundredths of
one percent (1.75%); the International Growth Fund, one and sixty-five
one-hundredths of one percent (1.65%); the Select 50 Fund, one and eight-tenths
of one percent (1.80%); the Emerging Asia, Emerging Markets, Latin America,
International Small Cap, Communications and Opportunities Funds, one and
nine-tenths of one percent (1.90%); the U.S. Asset Allocation Fund, one and
three-tenths of one percent (1.30%) through limits in the Underlying Funds; the
Global Asset Allocation Fund, five-tenths of one percent (0.50%) of the Global
Asset Allocation Fund's average net assets (excluding expenses related to the
Underlying Funds) or one and seventy-five one-hundredths of one percent (1.75%)
including the total expenses of the Underlying Funds; the Bond Funds,
seven-tenths of one percent (0.70%); and the Money Market Funds, six-tenths of
one percent (0.60%). The Manager also may voluntarily reduce additional amounts
to increase the return to a Fund's investors. The Manager may terminate these
voluntary reductions at any time. Any reductions made by the Manager in its fees
are subject to reimbursement by that Fund within the following three years,
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.
39
<PAGE>
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay to increase the return to that Fund's investors. If the Manager
performs a service or assumes an operating expense for which a Fund is obligated
to pay and the performance of such service or payment of such expense is not an
obligation of the Manager under the Investment Management Agreement, the Manager
is entitled to seek reimbursement from that Fund for the Manager's costs
incurred in rendering such service or assuming such expense. The Manager also
may compensate broker-dealers and other intermediaries that distribute a Fund's
shares as well as other service providers of shareholder and administrative
services. The Manager may also sponsor seminars and educational programs on the
Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. 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
that 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. 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 record-keeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How to Contact the Funds
For information on the Funds or your account, call a Montgomery shareholder
service representative at:
(800) 572-FUND (3863)
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
- --------------------------------------------------------------------------------
REGULAR MAIL EXPRESS MAIL OR OVERNIGHT SERVICE
- --------------------------------------------------------------------------------
The Montgomery Funds The Montgomery Funds
P.O. Box 419073 210 West 10th Street, 8th Floor
Kansas City, MO 64141-6073 Kansas City, MO 64105
- --------------------------------------------------------------------------------
Visit the Montgomery Funds World Wide Web site at:
www.montgomeryfunds.com
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 Funds Distributor, Inc., the Funds'
Distributor, 101 California 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, the Distributor or certain intermediaries that have an agreement with the
Funds, by the close of trading (generally, 4:00 p.m. eastern time) on any day
that the New York Stock Exchange ("NYSE") is open, Fund shares will be purchased
at the Fund's next-determined net asset value. Orders and payment for the Money
Funds must be received by 12:00 noon, eastern time. Orders for Fund shares
received after the Funds' cutoff times will be purchased at the next-determined
net asset value after receipt of the order. Shares of the U.S. Fixed-Income and
Money Market Funds will not be priced on national bank holidays.
The minimum initial investment in each Fund is $1,000 ($5,000 for the Micro Cap
Fund) (including IRAs) and $100 ($500 for the Micro Cap Fund) for subsequent
investments. The Manager or the Distributor, in its discretion, may waive these
minimums. If you buy shares through a broker or investment adviser instead of
directly from the Distributor, different minimum investment
40
<PAGE>
requirements may apply. The Funds do not accept third-party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on banks located in the U.S. Purchases may also be made in certain
circumstances by payment of securities. See the Statement of Additional
Information for further details.
Initial Investments
Minimum initial investment (including IRAs) ..............................$1,000
Minimum initial investment for the Micro Cap Fund (including IRAs)........$5,000
Initial Investments by Check
o Complete the New Account application. Tell us in which Fund(s) you want to
invest and make your check payable to The Montgomery Funds.
o A charge may be imposed on checks that do not clear.
o Dividends do not begin to accrue on the U.S. Fixed-Income and Money Market
Funds until your check has cleared.
Initial Investments by Wire
o Call the Transfer Agent to tell it 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. It will
provide you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire
instructions to ensure accurate handling of your investment.
o A completed New Account application must be sent to the Transfer Agent by
facsimile. The Transfer Agent will provide you with its fax number over the
phone.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For credit to: (shareholder(s) name)
Shareholder account number: (shareholder(s) account number)
Name of Fund: (Montgomery Fund name)
o Your bank may charge a fee for any wire transfers.
o The Funds and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Initial Investments by Telephone
You are eligible to make an initial investment into a new Fund by telephone
under the following conditions:
o You must be a shareholder in another Montgomery Fund.
o You must have been a shareholder for at least 30 days.
o Your existing account registration will be duplicated in the new Fund.
o Your initial telephone purchase into the new Fund must meet initial
investment minimums and is limited to the combined aggregate net asset
value of your existing accounts or $10,000, whichever is less.
o The Fund must receive your check or wire transfer within three business
days of the telephone purchase.
o The Fund reserves the right to collect any losses to the Fund from the
shareholder's existing account(s) that result from a telephone purchase not
funded within three business days.
Subsequent Investments
Minimum subsequent investment (including IRAs) .............................$100
Minimum subsequent investment for the Micro Cap Fund (including IRAs).......$500
41
<PAGE>
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check
with written instructions indicating the Fund name and account number to
which your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agents affiliated bank by using the bank wire information under "Initial
Investments by Wire."
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572-FUND (3863) before
the Fund cutoff time.
o Shares for IRAs may not be purchased by phone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
o You should do one of the following to ensure payment is received in time:
o Transfer funds directly from your bank account by sending a letter and
a voided check or deposit slip (for a savings account) to the Transfer
Agent.
o Send a check by overnight or second-day courier service.
o Instruct your bank to wire funds to the Transfer Agent s affiliated
bank by using the bank wire information under the section titled
"Initial Investments by Wire."
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is each Fund's subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your Montgomery
New Account application or your letter of instruction. Investments will
automatically be transferred into your Montgomery account from your
checking or savings account.
o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your New Account application or your letter of instruction,
the 20th of each month will be selected.
o You should allow 20 business days for this service to become effective.
o You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
o Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for each Fund is $100 per payroll
deduction period.
o You may automatically deposit a designated amount of your paycheck directly
into a Montgomery Funds account.
o Please call the Transfer Agent for instructions on establishing this
service.
Telephone Transactions
You agree to reimburse the Funds for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued by the
Funds at any time upon 30-days' written notice, or by you at any time by written
notice to the Funds. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the
42
<PAGE>
telephone purchase request and you may be responsible for any losses incurred by
a Fund. The Funds and the Transfer Agent will not be liable for following
instructions communicated by telephone reasonably believed to be genuine. The
Funds employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. These procedures include recording certain telephone
calls, sending a confirmation and requiring the caller to give a special
authorization number or other personal information not likely to be known by
others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Telephone privileges may be revoked at any time by the Funds as to any
shareholder if the Funds believe that a shareholder has abused the telephone
privilege by using abusive language or by purchases and redemptions that appear
to be part of a systematic market-timing strategy.
Retirement Plans
Except for the Tax-Free Funds, shares of the Funds are available for purchase by
any retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and IRAs.
Certain of the Funds are available for purchase through administrators for
retirement plans. Investors who purchase shares as part of a retirement plan
should address inquiries and seek investment servicing from their plan
administrators. Plan administrators may receive compensation from the Funds for
performing shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How to Redeem an Investment in the Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the U.S. Fixed-Income and Money
Market 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 other agents of the Funds. 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 Securities and
Exchange Commission (SEC). In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until 15 days from the purchase date. Shares tendered for redemptions through
brokers or dealers (other than the Distributor) may be subject to a service
charge by such brokers or dealers. Procedures for requesting a redemption are
set forth below.
Redeeming by Written Instruction
o Write a letter giving your name, account number, the name of the Fund from
which you wish to redeem and the dollar amount or number of shares you wish
to redeem.
o The letter must be signed the same way your account is registered. If you
have a joint account, all accountholders must sign.
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 a national securities exchange. Contact the Transfer Agent
for more information.
o If you do not have a predesignated bank account and want to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees at the Manager s discretion.
Redeeming by Check
o Check writing is available on the Government Reserve, Federal Money,
California Money, California Intermediate Tax-Free Bond, Short Government
Bond and Total Return Bond Funds.
o Checkwriting is not available for IRA accounts.
o The minimum amount per check is $250. A check for less may be returned to
you.
o All checks will require only one signature unless otherwise indicated.
43
<PAGE>
o You should not write a check to close your U.S. Fixed-Income and Money
Market Fund account.
o Checks will be returned to you at the end of each month.
o A charge may be imposed for any stop payments requested.
o Federal banking law requires us to tell you that, technically, the Funds'
checks are "drafts" payable through the Master Transfer Agent. This
difference should not affect you.
Redeeming by Telephone
o Unless you have declined telephone redemption privileges on your New
Account application, you may redeem shares up to $50,000 by calling the
Transfer Agent before the Fund cutoff time. This service is not available
for IRA accounts.
o If you included bank wire information on your New Account application or
made subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at least two business days for redemption proceeds to be
credited to your bank account. If you want to wire your redemption proceeds
to arrive at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
o Telephone redemption privileges may be canceled after an account is opened
by instructing the Transfer Agent in writing. Your request will be
processed upon receipt.
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
New Account application or by other written authorization, the shareholder
agrees to be bound by the telephone redemption instructions given by the
shareholder's designee. The Funds may change, modify or terminate these
privileges at any time upon 60-days' notice to shareholders. The Funds will not
be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See the discussion of Fund telephone
procedures and liability under "Telephone Transactions" above.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
Uncashed Distribution or Redemption Checks
If you choose to receive your distribution or redemption by a check from the
Funds (instead of bank wire), you should follow up to ensure that you have
received the distribution or redemption in a timely manner. The Funds are
responsible only for mailing the distribution or redemption checks and are not
responsible for tracking uncashed checks or determining why checks are uncashed.
If the postal or other delivery service is unable to deliver a check and the
check is returned to the Funds, the Funds will hold the check in a separate
account on your behalf for a reasonable period of time but will not invest the
money in any interest-bearing account. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, each Fund will
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000
($5,000 for the Micro Cap Fund). If a Fund decides to make an involuntary
redemption, the shareholder will first be notified that the value of the
shareholder's account is less than the minimum level and will be allowed 30 days
to make an additional investment to bring the value of that account to at least
the minimum investment required to open an account before the Fund takes any
action.
44
<PAGE>
Exchange Privileges and Restrictions
You may exchange shares from another Fund with the same registration, Taxpayer
Identification number and address. An exchange may result in a recognized gain
or loss for income tax purposes. See the discussion of telephone procedures and
limitations of liability under "Telephone Transactions" above.
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
Montgomery Funds 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'
cutoff 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. You may not exchange for shares of a Fund that is not open to
new shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-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 U.S. Fixed-Income and Money Market 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 U.S. Fixed-Income and Money Market
Funds into any other Fund. The minimum exchange is $100 ($500 for the Micro Cap
Fund). Periodically investing a set dollar amount into a Fund is also referred
to as dollar-cost averaging, because the number of shares purchased will vary
depending on the price per share. Your account with the recipient Fund must meet
the applicable minimum of $1,000, or $5,000 for the Micro Cap Fund. Exchanges
out of the U.S. Fixed-Income and Money Market Funds are exempt from the
four-exchanges limit policy.
Directed Dividend Service
If you own shares of the U.S. Fixed-Income and Money Market Funds, you may elect
to use your monthly dividends to automatically purchase additional shares of
another Fund. Your account with the recipient Fund must meet the applicable
minimum of $1,000, or $5,000 for the Micro Cap Fund.
Brokers and Other Intermediaries
Investing Through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from 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. Some of these agents may appoint
sub-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 before the relevant Fund's daily cutoff
time. 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 Funds, they may receive fees from the Funds or the Manager
for such services.
45
<PAGE>
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
the Distributor or selected securities brokers or dealers. Shareholders should
contact their securities broker or dealer for appropriate instructions and for
information concerning any transaction or service fee that may be imposed by the
broker or dealer. Shareholders are entitled to the net asset value next
determined after receipt of a redemption order by such broker-dealer, provided
the broker-dealer transmits such order on a timely basis to the Transfer Agent
so that it is received before the applicable Fund's cutoff time 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 the Fund's
cutoff time on each day that the NYSE is open for trading (but not on bank
holidays for the U.S. Fixed-Income and Money Market Funds). Generally, this is
4:00 p.m. eastern time (12:00 noon for the Money Market Funds), or earlier when
trading closes earlier. The Fixed-Income Funds will determine their net asset
values earlier when the fixed-income markets close earlier. Per-share net asset
value is calculated by dividing the value of each Fund's total net assets by the
total number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed- income securities, the mean between the closing bid and ask
price. Securities for which market quotations are not readily available or that
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the Manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Funds calculate their
net asset values may not be reflected unless the Manager, under supervision of
the Board, determines that a particular event would materially affect a Fund's
net asset value.
Dividends and Distributions
<TABLE>
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Funds intend to distribute according to the following schedule:
<CAPTION>
- ---------------------------------------- --------------------------------------------- ---------------------------------------
INCOME DIVIDENDS CAPITAL GAINS
- ---------------------------------------- --------------------------------------------- ---------------------------------------
<S> <C> <C>
Equity Funds Declared and paid in the last quarter of Declared and paid in the last quarter
(except Equity Income Fund) each year* of each year*
- ---------------------------------------- --------------------------------------------- ---------------------------------------
Equity Income Fund Declared and paid on or about the last Declared and paid in the last quarter
business day of each quarter of each year*
- ---------------------------------------- --------------------------------------------- ---------------------------------------
Multi-Strategy Funds Declared and paid in the last quarter of Declared and paid in the last quarter
each year* of each year*
- ---------------------------------------- --------------------------------------------- ---------------------------------------
U.S. Fixed-Income and Declared daily and paid monthly on or about Declared and paid in the last quarter
Money Market Funds the last business day of each month of each year*
- ---------------------------------------- --------------------------------------------- ---------------------------------------
<FN>
*Additional distributions, if necessary, may be made following each Fund's fiscal year end (June 30) in order to avoid the
imposition of tax on a Fund.
</FN>
</TABLE>
Unless you request cash distributions in writing at least seven business days
before a distribution, or on the New Account application, all dividends and
other distributions will be reinvested automatically in additional shares of the
applicable Fund
46
<PAGE>
and credited to your account at the closing net asset value on the reinvestment
date. Furthermore, if you have elected to receive cash distributions in cash and
the postal or other delivery service is unable to deliver checks to your address
of record, your distribution option will automatically be converted to having
all dividend and other distributions reinvested in additional shares. Also, as
is the case for redemption checks, no interest will accrue on amounts
represented by uncashed distribution checks. See "Uncashed Distribution or
Redemption Checks" above.
Distributions Affect a Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of a Fund,
regardless of how long you have held the shares. Dividends and capital gains
awaiting distribution are included in each Fund's daily net asset value. The
share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Growth Fund declared a dividend in the amount of $0.50 per share. If the Growth
Fund's share price was $10.00 on December 30, the Fund's share price on December
31 would be $9.50, barring market fluctuations.
"Buying a Dividend"
If you buy shares of a Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend, and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
Except for the newer Funds that intend to elect and qualify as soon as possible,
each of the Funds has elected and intends to continue to qualify to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (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
that their earnings are not distributed or are distributed in a manner that does
not satisfy the requirements of the Code. If a Fund is unable to meet certain
Code requirements, it may be subject to taxation as a corporation. Funds
investing in foreign securities also may incur tax liability to the extent that
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 gains 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 gains over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisors regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
The Federal Money, the California Money and California Intermediate Bond Funds
intend to continue to qualify to pay "exempt-interest dividends" to their
shareholders by maintaining, as of the close of each quarter of its taxable
year, at least 50% of the value of its total assets in municipal securities. If
these Funds satisfy this requirement, distributions from net investment income
to shareholders will be exempt from federal income taxation to the extent net
investment income is represented by interest on municipal securities.
Distributions from other net investment income, such as market discount on
municipal securities, and from certain other investment practices, such as
certain transactions in options, will be ordinary income. Shareholders generally
will not incur any federal income tax on the amount of exempt-interest dividends
received by them from
47
<PAGE>
these Funds, whether taken in cash or reinvested in additional shares.
Exempt-interest dividends are included, however, in determining what portion, if
any, of a person's Social Security or railroad retirement benefits are subject
to federal income tax.
General Information
The Trusts
All of the Funds with the exception of the U.S. Asset Allocation Fund are series
of The Montgomery Funds, a Massachusetts business trust organized on May 10,
1990. The U.S. Asset Allocation Fund is a series of The Montgomery Funds II, a
Delaware business trust organized on September 10, 1993. The Agreement and
Declarations of Trust of both Trusts permit their Boards to issue an unlimited
number of full and fractional shares of beneficial interest, $0.01 par value, in
any number of series. The assets and liabilities of each series within either of
the two Trusts are separate and distinct from each other series.
This prospectus relates only to the Class R shares of the Funds. The Funds offer
other classes of shares to eligible investors and may, in the future, designate
other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote, and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of its Trust,
votes separately on matters affecting only that Fund (e.g., approval of the
Investment Management Agreement); all series of each Trust vote as a single
class on matters affecting all series of that Trust jointly or that Trust as a
whole (e.g., election or removal of trustees). Voting rights are not cumulative,
so 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. Although the
Trusts are not required and do not intend to hold annual meetings of
shareholders, such meetings may be called by each Trust's Board at its
discretion, or upon demand by the holders of 10% or more of the outstanding
shares of the Trust for the purpose of electing or removing Trustees.
Shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of Trustees pursuant to the provisions
of Section 16(c) of the Investment Company Act.
Performance Information
From time to time, the Funds may publish their total return, and, in the case of
certain Funds, current yield and tax equivalent yield in advertisements and
communications to investors. Total return information generally will include a
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations. A
Fund may also advertise aggregate and average total return information over
different periods of time. Each Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 investment that includes
capital appreciation and depreciation for the stated period according to a
specific formula. Aggregate total return is calculated 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
preexisting account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period, and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. In the case of the
California Money and California Intermediate Bond Funds, tax-equivalent yield is
the yield that a taxable investment must generate in order to equal (after
applicable taxes are deducted) either Fund's yield for an investor in stated
federal income and California personal income tax brackets. For the Federal
Money Fund, tax equivalent yield is the yield that a taxable investment must
generate in order to equal (after applicable taxes are deducted) the Fund's
yield for an investor in stated federal income tax brackets. See "Performance
Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered 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 (3863).
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Legal Opinion
The validity of shares offered by this prospectus will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
During the year, the Funds will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and preauthorized automatic investment, exchange and redemption services
(quarterly).
o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semiannual reports are mailed approximately 60 days after June
30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o Annual updated prospectus is mailed to existing shareholders in October or
November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-FUND (3863).
Backup Withholding
Taxpayer Identification Number
Be sure to complete the Taxpayer Identification Number (TIN) section of the New
Account application when you open an account. Federal tax law requires that a
Fund withhold 31% of taxable dividends, capital-gains distributions and
redemption and exchange proceeds from accounts (other than those of certain
exempt payees) without a certified Social Security or Taxpayer Identification
number and certain other certified information or upon notification from the IRS
or a broker that withholding is required.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to backup withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item on the New 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 who 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, government agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult a tax
advisor.
This prospectus is not an offering of the securities herein described in any
state in which such offering is unauthorized. No salesperson, dealer or other
person is authorized to give any information or make any representation other
than those contained in this prospectus, the Statement of Additional Information
or in the Funds' official sales literature.
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Glossary
asset-backed securities. These are secured by and payable from pools of assets,
such as motor vehicle installment loan contracts, leases of various types of
real and personal property, and receivables from revolving credit (e.g., credit
card) agreements.
cash equivalents. These 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.
collateral assets. These include cash, letters of credit, U.S. government
securities or other high-grade liquid debt or equity securities (except that
instruments collateralizing loans by the Money Market Funds must be debt
securities rated in the highest grade). Collateral assets are separately
identified and rendered unavailable for investment or sale.
Collateralized Mortgage Obligations (CMOs). These 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) whereas 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.
convertible security. This 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.
The price of a convertible security is influenced by the market value of the
underlying common stock.
covered call option. A call option is "covered" if the fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option or owns an offsetting call option.
covered put option. A put option is "covered" if the fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
custodial receipts. Custodial receipts represent rights to receive certain
future principal and interest payments on municipal securities deposited with a
custodian. Typically, two classes of receipts are issued in a private placement.
The interest rate of the first class is similar to that of the underlying
municipal security. The value of the second class may be quite volatile.
depositary receipts. These include American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other similar
instruments. Depositary receipts are receipts typically issued in connection
with a U.S. or foreign bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation.
derivatives. These include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts, swaps and
options on futures contracts on U.S. government and foreign government
securities and currencies.
dollar roll transaction. This is similar to a reverse repurchase agreement
except that it requires a fund to repurchase a similar rather than the same
security.
duration. Traditionally, a debt security's "term to maturity" characterizes a
security's sensitivity to changes in interest rates "Term to maturity," however,
measures only the time until a debt security provides its final payment, taking
no account of prematurity payments. Most debt securities provide interest
("coupon") payments in addition to a final ("par") payment at maturity, and some
securities have call provisions allowing the issuer to repay the instrument in
full before maturity date, each of which affect the security's response to
interest rate changes. "Duration" is considered a more precise measure of
interest rate risk than "term to maturity." Determining duration may involve the
Manager's estimates of future economic parameters, which may vary from actual
future values. Fixed-income securities with effective durations of three years
are more responsive to
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interest rate fluctuations than those with effective durations of one year. For
example, if interest rates rise by 1%, the value of securities having an
effective duration of three years will generally decrease by approximately 3%.
emerging markets companies. A company is considered to be an emerging markets
company if its securities are principally traded in the capital market of an
emerging markets country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging markets countries or from
sales made in such emerging markets 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 markets country. An
emerging markets country is one having an economy and market that are or would
be considered by the World Bank or the United Nations to be emerging or
developing.
equity derivative securities. These include, among other things, options on
equity securities, warrants and futures contracts on equity securities.
equity swaps. These allow the parties to exchange the dividend income or other
components of return on an equity investment (e.g., a group of equity securities
or an index) for a component of return on another non-equity or equity
investment. Equity swap transactions may be volatile and may present a fund with
counterparty risks.
FHLMC. The Federal Home Loan Mortgage Corporation.
FNMA. The Federal National Mortgage Association.
forward currency contracts. This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at a
future date. The Funds generally do not enter into forward contracts with terms
greater than one year. A fund generally enters into forward contracts only under
two circumstances. First, if a fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security by entering into a forward contract to buy
the amount of a foreign currency needed to settle the transaction. Second, if
the Manager believes that the currency of a particular foreign country will
substantially rise or fall against the U.S. dollar, it may enter into a forward
contract to buy or sell the currency approximating the value of some or all of a
fund's portfolio securities denominated in such currency. A fund will not enter
into a forward contract if, as a result, it would have more than one-third of
total assets committed to such contracts (unless it owns the currency that it is
obligated to deliver or has caused its custodian to segregate segregable assets
having a value sufficient to cover its obligations). Although forward contracts
are used primarily to protect a fund from adverse currency movements, they
involve the risk that currency movements will not be accurately predicted.
futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a fund may sell interest
rate futures contracts (i.e., enter into a futures contract to sell the
underlying debt security) in an attempt to hedge against an anticipated increase
in interest rates and a corresponding decline in debt securities it owns. Each
fund will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
GNMA. The Government National Mortgage Association.
illiquid securities. The Funds treat any securities subject to restrictions on
repatriation for more than seven days and securities issued in connection with
foreign debt conversion programs that are restricted as to remittance of
invested capital or profit as illiquid. The Funds also treat repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on formal
markets for some period of time but for which an active informal market exists,
or securities that meet the requirements of Rule 144A under the Securities Act
of 1933 and that, subject to the review by the Board and guidelines adopted by
the Board, the Manager has determined to be liquid.
investment grade. Investment-grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch (at
least Baa), or unrated debt securities deemed to be of comparable quality by the
Manager using guidelines approved by the Board of Trustees.
leverage. Some funds may use leverage in an effort to increase return. Although
leverage creates an opportunity for increased income and gain, it also creates
special risk considerations. Leveraging also creates interest expenses that can
exceed the income from the assets retained.
municipal securities. These 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
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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. 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.
options on securities, securities indices and currencies. A fund may purchase
call options on securities that it intends to purchase (or on currencies in
which those securities are denominated) in order to limit the risk of a
substantial increase in the market price of such security (or an adverse
movement in the applicable currency). A fund may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a closing
sale transaction. Profit or loss from the sale depends upon whether the amount
received is more or less than the premium paid plus transaction costs. A fund
may purchase put and call options on stock indices in order to hedge against
risks of stock market or industrywide stock price fluctuations.
participation interests. Participation interests are issued by financial
institutions and represent undivided interests in municipal securities.
Participation interests may have fixed, floating or variable rates of interest.
Some participation interests are subject to a "nonappropriation" or "abatement"
feature by which, under certain conditions, the issuer of the underlying
municipal security, without penalty, may terminate its payment obligation. In
such event, the Funds must look to the underlying collateral.
repurchase agreement. With a repurchase agreement, a fund acquires a U.S.
government security or other high-grade liquid debt instrument (for the Money
Market Funds, the instrument must be rated in the highest grade) from a
financial institution that simultaneously agrees to repurchase the same security
at a specified time and price.
reverse dollar roll transactions. When a fund engages in a reverse dollar roll,
it purchases a security from a financial institution and concurrently agrees to
resell a similar security to that institution at a later date at an agreed-upon
price.
reverse repurchase agreement. In a reverse repurchase agreement, a fund sells to
a financial institution a security that it holds and agrees to repurchase at an
agreed-upon price and date.
S&P 500. Standard & Poor's 500 Composite Price Index.
securities lending. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with collateral
assets in an amount at least equal to the current market value of the loaned
securities, plus accrued interest. There is a risk of delay in receiving
collateral or in recovering the securities loaned or even a loss of rights in
collateral should the borrower fail financially.
tender option bonds. These are municipal securities that have a relatively long
maturity and bear interest at a fixed rate substantially higher than the
prevailing short-term tax-exempt rates, coupled with an option to tender the
securities at periodic intervals and in order to receive the securities' face
value. In return for the option, the holder of the securities pays a fee in an
amount that causes the municipal securities to trade at face value when the
option is issued. Effectively, the security bears the short-term tax-exempt rate
at the time the option was issued.
U.S. government securities. These include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
variable-rate demand notes (VRDNs). These are instruments with rates of interest
adjusted periodically or that "float" continuously according to specific
formulas and often have a demand feature entitling the purchaser to resell the
securities.
warrants. Typically, a warrant is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
when-issued and forward commitment securities. The Funds may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" or "delayed delivery" basis. The price is
fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but a fund will enter into
when-issued and forward
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commitments only with the intention of actually receiving or delivering the
securities. No income accrues on securities that have been purchased pursuant to
a forward commitment or on a when-issued basis prior to delivery to a fund. At
the time a fund enters into a transaction on a when-issued or forward commitment
basis, it supports its obligation with collateral assets equal to the value of
the when-issued or forward commitment securities and causes the collateral
assets to be marked to market daily. There is a risk that the securities may not
be delivered and that the fund may incur a loss.
zero coupon bonds. These are debt obligations that do not pay current interest
and are consequently issued at a significant discount from face value. The
discount approximates the total interest the bonds will accrue and compound over
the period to maturity or the first interest-payment date at a rate of interest
reflecting the market rate of interest at the time of issuance.
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Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
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
Independent Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
[LOGO]
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Invest wisely.SM
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---------------------------------------------------------------------
COMBINED STATEMENT OF ADDITIONAL INFORMATION
---------------------------------------------------------------------
<PAGE>
Rule 497(e)
33-34841 and 811-6011
THE MONTGOMERY FUNDS
--------------------
MONTGOMERY GROWTH FUND
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY MICRO CAP FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY LATIN AMERICA FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY U.S. ASSET ALLOCATION FUND
MONTGOMERY GLOBAL ASSET ALLOCATION FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
STATEMENT OF ADDITIONAL INFORMATION
October 15, 1997
The Montgomery Funds and The Montgomery Funds II are open-end
management investment companies organized, respectively, as a Massachusetts and
a Delaware business trust (together, the "Trusts"), each having different series
of shares of beneficial interest. Each of the above-named funds is a series of
The Montgomery Funds, with the exception of the Montgomery U.S. Asset Allocation
Fund, which is a series of The Montgomery Funds II (each a "Fund" and,
collectively, the "Funds"). The Funds are managed by Montgomery Asset
Management, LLC (the "Manager") and their shares are distributed by Funds
Distributor, Inc.(the "Distributor"). This Statement of Additional Information
contains information in addition to that set forth in the combined prospectuses
for all Funds dated October 15, 1997 (with respect to the Class R shares) and
dated October 15, 1997 (with respect to the Class P shares for various series)
and as each prospectus may be revised from time to time (in reference to the
appropriate Fund or Funds, the "Prospectuses"). The Prospectuses provide the
basic information a prospective investor should know before purchasing shares of
any Fund and may be obtained without charge at the address or telephone number
provided above. This Statement of Additional Information is not a prospectus and
should be read in conjunction with the appropriate Prospectuses.
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TABLE OF CONTENTS
Page
----
THE TRUSTS..................................................................B-3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS.............................B-3
RISK FACTORS...............................................................B-20
INVESTMENT RESTRICTIONS....................................................B-26
DISTRIBUTIONS AND TAX INFORMATION..........................................B-28
TRUSTEES AND OFFICERS......................................................B-33
INVESTMENT MANAGEMENT AND OTHER SERVICES...................................B-37
EXECUTION OF PORTFOLIO TRANSACTIONS........................................B-42
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................B-45
DETERMINATION OF NET ASSET VALUE...........................................B-47
PRINCIPAL UNDERWRITER......................................................B-49
PERFORMANCE INFORMATION....................................................B-49
GENERAL INFORMATION........................................................B-56
FINANCIAL STATEMENTS.......................................................B-65
Appendix A.................................................................B-66
B-2
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THE TRUSTS
The Montgomery Funds is an open-end management investment
company organized as a Massachusetts business trust on May 10, 1990, and The
Montgomery Funds II is an open-end management investment company organized as a
Delaware business trust on September 10, 1993. Both are registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act")The
Trusts currently offer shares of beneficial interest, $.01 par value per share,
in various series. Each series offers three classes of shares (Class R, Class P
and Class L).
This Statement of Additional Information pertains to twenty
series of The Montgomery Funds: Montgomery Growth Fund (the "Growth Fund");
Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities Fund");
Montgomery Small Cap Fund (the "Small Cap Fund"); Montgomery Micro Cap Fund (the
"Micro Cap Fund"); Montgomery Equity Income Fund (the "Equity Income Fund");
Montgomery International Growth Fund (the "International Growth Fund");
Montgomery International Small Cap Fund (the "International Small Cap Fund");
Montgomery Emerging Markets Fund (the "Emerging Markets Fund"); Montgomery
Emerging Asia Fund (the "Emerging Asia Fund"); Montgomery Latin America Fund
(the "Latin America Fund"); Montgomery Global Opportunities Fund (the
"Opportunities Fund"); Montgomery Global Communications Fund (the
"Communications Fund"); Montgomery Select 50 Fund (the "Select 50 Fund");
Montgomery Global Asset Allocation Fund (the "Global Asset Allocation Fund");
Montgomery Total Return Bond Fund (the "Total Return Bond Fund"); Montgomery
Short Duration Government Bond Fund (formerly called the "Montgomery Short
Government Bond Fund," the "Short Bond Fund"); Montgomery Government Reserve
Fund (the "Reserve Fund"); Montgomery California Tax-Free Intermediate Bond Fund
(the "California Intermediate Bond Fund") and Montgomery California Tax-Free
Money Fund (the "California Money Fund"); Montgomery Federal Tax-Free Money Fund
(the "Federal Money Fund"); as well as one series of The Montgomery Funds II,
Montgomery U.S. Asset Allocation Fund, which was formerly called the Montgomery
Asset Allocation Fund (the "U.S. Asset Allocation Fund").
Throughout this Statement of Additional Information, certain
Funds may be referred to together using the following terms: the Growth, Small
Cap Opportunities, Small Cap, Micro Cap and Equity Income Funds as the "U.S.
Equity Funds"; the International Growth, International Small Cap, Emerging
Markets, Emerging Asia, Latin America, Opportunities and Communications Funds as
the "Foreign and Global Equity Funds"; the Select 50, U.S. Asset Allocation and
Global Asset Allocation Funds as the "Multi-Strategy Funds"; the Total Return
Bond, Short Bond and California Intermediate Bond Funds as the "Fixed Income
Funds"; the California Intermediate Bond, California Money and Federal Money
Funds as the "Tax-Free Funds"; the Reserve, California Money and Federal Money
Funds as the "Money Market Funds"; and all of the Funds other than the Tax-Free
Funds as the "Taxable Funds."
Note that the two Trusts share responsibility for the accuracy
of the Prospectuses and this Statement of Additional Information, and that each
Trust may be liable for misstatements in the Prospectuses and the Statement of
Additional Information that relate solely to the other Trust.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The investment objectives and policies of the Funds are
described in detail in the Prospectus. The following discussion supplements the
discussion in the Prospectus.
Each Fund is a diversified series, except for the Tax-Free
Funds, which are nondiversified series, of either the Montgomery Funds or The
Montgomery Funds II. The
B-3
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achievement of each Fund's investment objective will depend upon market
conditions generally and on the Manager's analytical and portfolio management
skills.
The U.S. Asset Allocation Fund and the Global Asset Allocation
Fund are funds-of-funds. Other than U.S. government securities, neither the U.S.
Asset Allocation Fund nor the Global Asset Allocation Fund owns securities of
their own. Instead, each of the U.S. Asset Allocation Fund and the Global Asset
Allocation Fund invests its assets in a number of funds in The Montgomery Funds
family (each, an "Underlying Fund")Investors of the U.S. Asset Allocation Fund
and the Global Asset Allocation Fund should therefore review the discussion in
this Statement of Additional Information that relates to each Underlying Fund of
the U.S. Asset Allocation Fund and the Global Asset Allocation Fund.
Portfolio Securities
Depositary Receipts. To the extent allowed in the Prospectus,
a Fund may hold securities of foreign issuers in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and other similar
global instruments available in emerging markets, or other securities
convertible into securities of eligible issuers. These securities may not
necessarily be denominated in the same currency as the securities for which they
may be exchanged. Generally, ADRs in registered form are designed for use in
U.S. securities markets, and EDRs and other similar global instruments in bearer
form are designed for use in European securities markets. For purposes of a
Fund's investment policies, a Fund's investments in ADRs, EDRs and similar
instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.
Other Investment Companies. Each Fund, to the extent permitted
by the prospectus, may invest in securities issued by other investment
companies. Those investment companies must invest in securities in which the
Fund can invest in a manner consistent with the Fund's investment objective and
policies. Applicable provisions of the Investment Company Act require that a
Fund limit its investments so that, as determined immediately after a securities
purchase is made: (a) not more than 10% (or 35% for the Money Market Funds) of
the value of a Fund's total assets will be invested in the aggregate in
securities of investment companies as a group; and (b) either (i) a Fund and
affiliated persons of that Fund not own together more than 3% of the total
outstanding shares of any one investment company at the time of purchase (and
that all shares of the investment company held by that Fund in excess of 1% of
the company's total outstanding shares be deemed illiquid), or (ii) a Fund not
invest more than 5% of its total assets in any one investment company and the
investment not represent more than 3% of the total outstanding voting stock of
the investment company at the time of purchase. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that Fund bears directly in connection with its own operations.
U.S. Government Securities. Some funds may, to the extent
allowed by the prospectus invest a substantial portion, if not all, of their net
assets in obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities ("U.S. Government securities"), these Funds generally will
have a lower yield than if they purchased higher yielding commercial paper or
other securities with correspondingly greater risk instead of U.S. Government
securities.
Generally, the value of U.S. Government securities held by
these Funds will fluctuate inversely with interest rates. U.S. Government
securities in which these Funds may
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invest include debt obligations of varying maturities issued by the U.S.
Treasury or issued or guaranteed by an agency or instrumentality of the U.S.
Government, including the Federal Housing Administration ("FHA"), Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Bank, Farm Credit System Financial Assistance Corporation, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate
Credit Banks, Federal Land Banks, Financing Corporation, Federal Financing Bank,
Federal National Mortgage Association ("FNMA"), Maritime Administration,
Tennessee Valley Authority, Resolution Funding Corporation, Student Loan
Marketing Association and Washington Metropolitan Area Transit Authority. Direct
obligations of the U.S. Treasury include a variety of securities that differ
primarily in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
that it sponsors, a Fund will not invest in obligations issued by an
instrumentality of the U.S. Government unless the Manager determines that the
instrumentality's credit risk makes its securities suitable for investment by
the Fund.
Mortgage-Related Securities: Government National Mortgage
Association. GNMA is a wholly owned corporate instrumentality of the U.S.
Government within the Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of, and interest on, securities
that are based on and backed by a pool of specified mortgage loans. For these
types of securities to qualify for a GNMA guarantee, the underlying collateral
must be mortgages insured by the FHA under the Housing Act, or Title V of the
Housing Act of 1949, as amended ("VA Loans"), or be pools of other eligible
mortgage loans. The Housing Act provides that the full faith and credit of the
U.S. Government is pledged to the payment of all amounts that may be required to
be paid under any guarantee. In order to meet its obligations under a guarantee,
GNMA is authorized to borrow from the U.S. Treasury with no limitations as to
amount.
GNMA pass-through securities may represent a proportionate
interest in one or more pools of the following types of mortgage loans: (1)
fixed-rate level payment mortgage loans; (2) fixed-rate graduated payment
mortgage loans; (3) fixed-rate growing equity mortgage loans; (4) fixed-rate
mortgage loans secured by manufactured (mobile) homes; (5) mortgage loans on
multifamily residential properties under construction; (6) mortgage loans on
completed multifamily projects; (7) fixed-rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (8) mortgage loans
that provide for adjustments on payments based on periodic changes in interest
rates or in other payment terms of the mortgage loans; and (9) mortgage-backed
serial notes.
Mortgage-Related Securities: Federal National Mortgage
Association. FNMA is a federally chartered and privately owned corporation
established under the Federal National Mortgage Association Charter Act. FNMA
was originally organized in 1938 as a U.S. Government agency to add greater
liquidity to the mortgage market. FNMA was transformed into a private sector
corporation by legislation enacted in 1968. FNMA provides funds to the mortgage
market primarily by purchasing home mortgage loans from local lenders, thereby
providing them with funds for additional lending. FNMA acquires funds to
purchase loans from investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for housing.
Each FNMA pass-through security represents a proportionate
interest in one or more pools of FHA Loans, VA Loans or conventional mortgage
loans (that is, mortgage loans
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that are not insured or guaranteed by any U.S. Government agency)The loans
contained in those pools consist of one or more of the following: (1) fixed-rate
level payment mortgage loans; (2) fixed-rate growing equity mortgage loans; (3)
fixed-rate graduated payment mortgage loans; (4) variable-rate mortgage loans;
(5) other adjustable-rate mortgage loans; and (6) fixed-rate mortgage loans
secured by multifamily projects.
Mortgage-Related Securities: Federal Home Loan Mortgage
Corporation. FHLMC is a corporate instrumentality of the United States
established by the Emergency Home Finance Act of 1970, as amended. FHLMC was
organized primarily for the purpose of increasing the availability of mortgage
credit to finance needed housing. The operations of FHLMC currently consist
primarily of the purchase of first lien, conventional, residential mortgage
loans and participation interests in mortgage loans and the resale of the
mortgage loans in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically
consist of fixed-rate or adjustable-rate mortgage loans with original terms to
maturity of between 10 and 30 years, substantially all of which are secured by
first liens on one-to-four-family residential properties or multifamily
projects. Each mortgage loan must include whole loans, participation interests
in whole loans and undivided interests in whole loans and participation in
another FHLMC security.
Privately Issued Mortgage-Related Securities. To the extent
allowed in the Prospectus, a Fund may invest in mortgage-related securities
offered by private issuers, including pass-through securities comprised of pools
of conventional residential mortgage loans; mortgage-backed bonds which are
considered to be obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs").
Each class of a CMO is issued at a specific fixed or floating
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on the collateral pool may cause the various classes of a CMO to be
retired substantially earlier than their stated maturities or final distribution
dates. The principal of and interest on the collateral pool may be allocated
among the several classes of a CMO in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more predictable cash flow to some of the individual tranches than
exists with the underlying collateral of the CMO. As a general rule, the more
predictable the cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on mortgage-related securities. Certain classes of CMOs may have priority
over others with respect to the receipt of prepayments on the mortgages.
To the extent allowed in the Prospectus, a Fund may invest in,
among other things, "parallel pay" CMOs and Planned Amortization Class CMOs
("PAC Bonds")Parallel pay CMOs are structured to provide payments of principal
on each payment date to more than one class. These simultaneous payments are
taken into account in calculating the stated maturity date or final distribution
date of each class which, like the other CMO structures, must be retired by its
stated maturity date or final distribution date, but may be retired earlier. PAC
Bonds are parallel pay CMOs that generally require payments of a specified
amount of principal on each payment date; the required principal payment on PAC
Bonds have the highest priority after interest has been paid to all classes.
Adjustable-Rate Mortgage-Related Securities. Because the
interest rates on the mortgages underlying adjustable-rate mortgage-related
securities ("ARMS") reset periodically,
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yields of such portfolio securities will gradually align themselves to reflect
changes in market rates. Unlike fixed-rate mortgages, which generally decline in
value during periods of rising interest rates, ARMS allow a Fund to participate
in increases in interest rates through periodic adjustments in the coupons of
the underlying mortgages, resulting in both higher current yields and low price
fluctuations. Furthermore, if prepayments of principal are made on the
underlying mortgages during periods of rising interest rates, a Fund may be able
to reinvest such amounts in securities with a higher current rate of return.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower yields to a Fund. Further, because of this
feature, the value of ARMS is unlikely to rise during periods of declining
interest rates to the same extent as fixed rate instruments. For further
discussion of the risks associated with mortgage-related securities generally,
see "Risk Considerations" in the Prospectus.
Variable Rate Demand Notes. Variable rate demand notes
("VRDNs") are tax-exempt obligations that contain a floating or variable
interest rate adjustment formula and an unconditional right of demand to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period prior to specified dates, generally at 30-, 60-, 90-, 180-, or
365-day intervals. The interest rates are adjustable at intervals ranging from
daily to six months. Adjustment formulas are designed to maintain the market
value of the VRDN at approximately the par value of the VRDN upon the adjustment
date. The adjustments typically are based upon the prime rate of a bank or some
other appropriate interest rate adjustment index.
The Tax-Free Funds also may invest in VRDNs in the form of
participation interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution")Participating VRDNs provide a Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the institution upon a specified number of days'
notice, not to exceed seven. In addition, the Participating VRDN is backed by an
irrevocable letter of credit or guaranty of the institution. A Fund has an
undivided interest in the underlying obligation and thus participates on the
same basis as the institution in such obligation except that the institution
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
Participating VRDNs may be unrated or rated, and their
creditworthiness may be a function of the creditworthiness of the issuer, the
institution furnishing the irrevocable letter of credit, or both. Accordingly,
the Tax-Free Funds may invest in such VRDNs, the issuers or underlying
institutions of which the Manager believes are creditworthy and satisfy the
quality requirements of the Funds. The Manager periodically monitors the
creditworthiness of the issuer of such securities and the underlying
institution.
During periods of high inflation and periods of economic
slowdown, together with the fiscal measures adopted by governmental authorities
to attempt to deal with them, interest rates have varied widely. While the value
of the underlying VRDN may change with changes in interest rates generally, the
variable rate nature of the underlying VRDN should minimize changes in the value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed-income
securities. The Tax-Free Funds may invest in VRDNs on which stated minimum or
maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is made in
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relation to movements of various interest rate adjustment indices, the VRDNs are
not comparable to long-term fixed-rate securities. Accordingly, interest rates
on the VRDNs may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar maturities.
Municipal Securities. Because the Tax-Free Funds invest at
least 80% of their total assets in obligations either issued by or on behalf of
states, territories and possessions of the United States 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,
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from federal income tax ("Municipal Securities"), or exempt from federal and
California personal income tax ("California Municipal Securities"), and the
California Money Fund invests at least 65% of its total assets in California
Municipal Securities, and may invest in Municipal Securities, these Funds
generally will have a lower yield than if they primarily purchased higher
yielding taxable securities, commercial paper or other securities with
correspondingly greater risk. Generally, the value of the Municipal Securities
and California Municipal Securities held by these Funds will fluctuate inversely
with interest rates.
General Obligation Bonds. Issuers of general obligation bonds
include states, counties, cities, towns and regional districts. The proceeds of
these obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds. A revenue bond is not secured by the full
faith, credit and taxing power of an issuer. Rather, the principal security for
a revenue bond is generally the net revenue derived from a particular facility,
group of facilities or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including electric, gas, water, and sewer systems; highways,
bridges, and tunnels; port and airport facilities; colleges and universities;
and hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. Industrial development bonds,
which may pay tax-exempt interest, are, in most cases, revenue bonds and are
issued by or on behalf of public authorities to raise money to finance various
privately operated facilities for business manufacturing, housing, sports, and
pollution control. These bonds also are used to finance public facilities, such
as airports, mass transit systems, ports and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for such payment. As a result
of 1986 federal tax legislation, industrial revenue bonds may no longer be
issued on a tax-exempt basis for certain previously permissible purposes,
including sports and pollution control facilities.
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Participation Interests. The Tax-Free Funds may purchase from
financial institutions participation interests in Municipal Securities, such as
industrial development bonds and municipal lease/purchase agreements. A
participation interest gives a Fund an undivided interest in a Municipal
Security in the proportion that the Fund's participation interest bears to the
total principal amount of the Municipal Security. These instruments may have
fixed, floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Board of Trustees has approved as meeting the Board's standards,
or, alternatively, the payment obligation will be collateralized by U.S.
Government securities
For certain participation interests, these Funds will have the
right to demand payment, on not more than seven days' notice, for all or any
part of their participation interest in a Municipal Security, plus accrued
interest. As to these instruments, these Funds intend to exercise their right to
demand payment only upon a default under the terms of the Municipal Securities,
as needed to provide liquidity to meet redemptions, or to maintain or improve
the quality of their investment portfolios. The California Intermediate Bond
Fund will not invest more than 15% of its total assets and the California Money
Fund will not invest more than 10% of its total assets in participation
interests that do not have this demand feature, and in other illiquid
securities.
Some participation interests are subject to a
"nonappropriation" or "abatement" feature by which, under certain conditions,
the issuer of the underlying Municipal Security may, without penalty, terminate
its obligation to make payment. In such event, the holder of such security must
look to the underlying collateral, which is often a municipal facility used by
the issuer.
Custodial Receipts. The Tax-Free Funds may purchase custodial
receipts representing the right to receive certain future principal and interest
payments on Municipal Securities that underlie the custodial receipts. A number
of different arrangements are possible. In the most common custodial receipt
arrangement, an issuer or a third party owning the Municipal Securities deposits
such obligations with a custodian in exchange for two classes of custodial
receipts with different characteristics. In each case, however, payments on the
two classes are based on payments received on the underlying Municipal
Securities. One class has the characteristics of a typical auction-rate
security, having its interest rate adjusted at specified intervals, and its
ownership changes based on an auction mechanism. The interest rate of this class
generally is expected to be below the coupon rate of the underlying Municipal
Securities and generally is at a level comparable to that of a Municipal
Security of similar quality and having a maturity equal to the period between
interest rate adjustments. The second class bears interest at a rate that
exceeds the interest rate typically borne by a security of comparable quality
and maturity; this rate also is adjusted, although inversely to changes in the
rate of interest of the first class. If the interest rate on the first class
exceeds the coupon rate of the underlying Municipal Securities, its interest
rate will exceed the rate paid on the second class. In no event will the
aggregate interest paid with respect to the two classes exceed the interest paid
by the underlying Municipal Securities. The value of the second class and
similar securities should be expected to fluctuate more than the value of a
Municipal Security of comparable quality and maturity and their purchase by one
of these Funds should increase the volatility of its net asset value and, thus,
its price per share. These custodial receipts are sold in private placements and
are subject to these Funds' limitation with respect to illiquid investments. The
Tax-Free Funds also may purchase directly from issuers, and not in a private
placement, Municipal Securities having the same characteristics as the custodial
receipts.
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Tender Option Bonds. The Tax-Free Funds may purchase tender
option bonds and similar securities. A tender option bond is a Municipal
Security, generally held pursuant to a custodial arrangement, having a
relatively long maturity and bearing interest at a fixed rate substantially
higher than prevailing short-term tax-exempt rates, coupled with an agreement of
a third party, such as a bank, broker-dealer or other financial institution,
granting the security holders the option, at periodic intervals, to tender their
securities to the institution and receive their face value. As consideration for
providing the option, the financial institution receives periodic fees equal to
the difference between the Municipal Security's fixed coupon rate and the rate,
as determined by a remarketing or similar agent at or near the commencement of
such period, that would cause the securities, coupled with the tender option, to
trade at par on the date of such determination. Thus, after payment of this fee,
the security holder effectively holds a demand obligation that bears interest at
the prevailing short-term tax-exempt rate. The Manager, on behalf of a Tax-Free
Fund, considers on a periodic basis the creditworthiness of the issuer of the
underlying Municipal Security, of any custodian and of the third party provider
of the tender option. In certain instances and for certain tender option bonds,
the option may be terminable in the event of a default in payment of principal
or interest on the underlying Municipal Obligations and for other reasons. The
California Intermediate Bond Fund will not invest more than 15% of its total
assets and the California Money Fund more than 10% of its total assets in
securities that are illiquid (including tender option bonds with a tender
feature that cannot be exercised on not more than seven days' notice if there is
no secondary market available for these obligations).
Obligations with Puts Attached. The Tax-Free Funds may
purchase Municipal Securities together with the right to resell the securities
to the seller at an agreed-upon price or yield within a specified period prior
to the securities' maturity date. Although an obligation with a put attached is
not a put option in the usual sense, it is commonly known as a "put" and is also
referred to as a "stand-by commitment." These Funds will use such puts in
accordance with regulations issued by the Securities and Exchange Commission
("SEC")In 1982, the Internal Revenue Service (the "IRS") issued a revenue ruling
to the effect that, under specified circumstances, a regulated investment
company would be the owner of tax-exempt municipal obligations acquired with a
put option. The IRS also has issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The last such
ruling was issued in 1983. The IRS subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the securities, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax-Free Funds intend to take the position that they are the owners
of any municipal obligations acquired subject to a stand-by commitment or a
similar put right and that tax-exempt interest earned with respect to such
municipal obligations will be tax exempt in its hands. There is no assurance
that stand-by commitments will be available to these Funds nor have they assumed
that such commitments would continue to be available under all market
conditions. There may be other types of municipal securities that become
available and are similar to the foregoing described Municipal Securities in
which these Funds may invest.
Zero Coupon Bonds. To the extent allowed in the Prospectus, a
Fund may invest in zero coupon securities, which are debt securities issued or
sold at a discount from their face value and do not entitle the holder to any
periodic payment of interest prior to maturity, a specified redemption date or a
cash payment date. The amount of the discount varies depending on the time
remaining until maturity or cash payment date, prevailing
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interest rates, liquidity of the security and perceived credit quality of the
issuer. Zero coupon securities also may take the form of debt securities that
have been stripped of their unmatured interest coupons, the coupons themselves
and receipts or certificates representing interests in such stripped debt
obligations and coupons. The market prices of zero coupon securities are
generally more volatile than the market prices of interest-bearing securities
and respond more to changes in interest rates than interest-bearing securities
with similar maturities and credit qualities.
Risk Factors/Special Considerations Relating to Debt Securities
To the extent allowed in the Prospectus, a Fund may invest in
debt securities that are rated below BBB by Standard & Poor's Corporation
("S&P"), Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Fitch
Investor Services ("Fitch"), or, if unrated, are deemed to be of equivalent
investment quality by the Manager. As an operating policy, which may be changed
by the Board of Trustees without shareholder approval, a Fund will invest no
more than 5% (15% for the Latin America Fund) of its assets in debt securities
rated below Baa by Moody's or BBB by S&P, or, if unrated, of equivalent
investment quality as determined by the Manager. The market value of debt
securities generally varies in response to changes in interest rates and the
financial condition of each issuer. During periods of declining interest rates,
the value of debt securities generally increases. Conversely, during periods of
rising interest rates, the value of such securities generally declines. The net
asset value of a Fund will reflect these changes in market value.
Bonds rated C by Moody's are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid. Bonds rated below BBB or Baa are often referred
to as "junk bonds."
Although such bonds may offer higher yields than higher-rated
securities, low-rated debt securities generally involve greater price volatility
and risk of principal and income loss, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low-rated debt securities are traded are more limited than those for
higher-rated securities. The existence of limited markets for particular
securities may diminish the ability of a Fund to sell the securities at fair
value either to meet redemption requests or to respond to changes in the economy
or financial markets and could adversely affect, and cause fluctuations in, the
per-share net asset value of the Fund.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of
low-rated debt securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher-rated securities, and the ability of a Fund to
achieve its investment objectives may, to the extent it invests in low-rated
debt securities, be more dependent upon such credit analysis than would be the
case if the Fund invested in higher-rated debt securities.
Low-rated debt securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than
investment-grade securities. The prices of low-rated debt securities have been
found to be less sensitive to interest rate changes than higher-rated debt
securities but more sensitive to adverse economic downturns or individual
corporate developments. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a sharper decline in the prices
of low-rated debt securities because the advent of a recession could lessen the
ability of a highly leveraged
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company to make principal and interest payments on its debt securities. If the
issuer of low-rated debt securities defaults, the Fund may incur additional
expenses to seek financial recovery. The low-rated bond market is relatively
new, and many of the outstanding low-rated bonds have not endured a major
business downturn.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate risks
a Fund, to the extent allowed in the Prospectus, may enter into forward foreign
currency exchange contracts ("forward contracts") and foreign currency futures
contracts, as well as purchase put or call options on foreign currencies, as
described below. The Fund also may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market.
To the extent allowed in the Prospectus, a Fund also may
purchase other types of options and futures and may, in the future, write
covered options, as described below and in the Prospectus.
Forward Contracts. To the extent allowed in the Prospectus, a
Fund may enter into forward contracts to attempt to minimize the risk from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract, which is individually negotiated and privately
traded by currency traders and their customers, involves an obligation to
purchase or sell a specific currency for an agreed-upon price at a future date.
A Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security denominated in a
foreign currency or is expecting a dividend or interest payment in order to
"lock in" the U.S. dollar price of a security, dividend or interest payment.
When a Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency, or when a Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that currency for a fixed dollar
amount.
In connection with a Fund's forward contract transactions, an
amount of the Fund's assets equal to the amount of its commitments will be held
aside or segregated to be used to pay for the commitments. Accordingly, a Fund
always will have cash, cash equivalents or liquid equity or debt securities
denominated in the appropriate currency available in an amount sufficient to
cover any commitments under these contracts. Segregated assets used to cover
forward contracts will be marked to market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of a Fund to utilize forward contracts may be restricted. Forward contracts may
limit potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by a Fund than if it had not entered into
such contracts. A Fund generally will not enter into a forward foreign currency
exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge
against movements in interest rates, securities prices or currency exchange
rates a Fund, to the extent allowed in the Prospectus, may purchase and sell
various kinds of futures contracts and options on futures contracts. These Funds
also may enter into closing purchase and sale transactions with respect to any
such contracts and options. Futures contracts may be based on various
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securities (such as U.S. Government securities), securities indices, foreign
currencies and other financial instruments and indices.
These Funds have filed a notice of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets,
before engaging in any purchases or sales of futures contracts or options on
futures contracts. Pursuant to Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility included the representation
that these Funds will use futures contracts and related options for bona fide
hedging purposes within the meaning of CFTC regulations, provided that a Fund
may hold positions in futures contracts and related options that do not fall
within the definition of bona fide hedging transactions if the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
that Fund's net assets (after taking into account unrealized profits and
unrealized losses on any such positions) and that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
from such 5%.
These Funds will attempt to determine whether the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
these Funds or which they expect to purchase. These Funds' futures transactions
generally will be entered into only for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities or currencies and will be purchased to protect a Fund against an
increase in the price of securities it intends to purchase (or the currencies in
which they are denominated)All futures contracts entered into by these Funds are
traded on U.S. exchanges or boards of trade licensed and regulated by the CFTC
or on foreign exchanges.
Positions taken in the futures markets are not normally held
to maturity but are instead liquidated through offsetting or "closing" purchase
or sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, these
Funds seek to establish more certainty than would otherwise be possible with
respect to the effective price, rate of return or currency exchange rate on
portfolio securities or securities that these Funds propose to acquire. For
example, when interest rates are rising or securities prices are falling, a Fund
can seek, through the sale of futures contracts, to offset a decline in the
value of its current portfolio securities. When rates are falling or prices are
rising, a Fund, through the purchase of futures contracts, can attempt to secure
better rates or prices than might later be available in the market with respect
to anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that such Fund has acquired
or expects to acquire.
As part of its hedging strategy, a Fund also may enter into
other types of financial futures contracts if, in the opinion of the Manager,
there is a sufficient degree of correlation between price trends for the Fund's
portfolio securities and such futures
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contracts. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Manager will attempt to estimate the extent of this difference in volatility
based on historical patterns and to compensate for it by having that Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting that Fund's securities
portfolio. When hedging of this character is successful, any depreciation in the
value of portfolio securities can be substantially offset by appreciation in the
value of the futures position. However, any unanticipated appreciation in the
value of a Fund's portfolio securities could be offset substantially by a
decline in the value of the futures position.
The acquisition of put and call options on futures contracts
gives a Fund the right (but not the obligation), for a specified price, to sell
or purchase the underlying futures contract at any time during the option
period. Purchasing an option on a futures contract gives a Fund the benefit of
the futures position if prices move in a favorable direction, and limits its
risk of loss, in the event of an unfavorable price movement, to the loss of the
premium and transaction costs.
A Fund may terminate its position in an option contract by
selling an offsetting option on the same series. There is no guarantee that such
a closing transaction can be effected. A Fund's ability to establish and close
out positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by these Funds is
potentially unlimited.
These Funds will engage in transactions in futures contracts
and related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
their qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies. To
the extent allowed in the Prospectus, a Fund may purchase put and call options
on securities in which it has invested, on foreign currencies represented in its
portfolios and on any securities index based in whole or in part on securities
in which the Fund may invest. The Fund also may enter into closing sales
transactions in order to realize gains or minimize losses on options they have
purchased.
A Fund normally will purchase call options in anticipation of
an increase in the market value of securities of the type in which it may invest
or a positive change in the currency in which such securities are denominated.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities or a specified amount of a foreign
currency at a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and
foreign exchanges. Although these Funds will generally purchase only those
options for which there appears to be an active secondary market, there can be
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options, no secondary
market on an exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that a Fund
would have to exercise its options in order to realize any profit and would
incur transaction costs upon the purchase or sale of the underlying securities.
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Secondary markets on an exchange may not exist or may not be
liquid for a variety of reasons including: (i) insufficient trading interest in
certain options; (ii) restrictions on opening transactions or closing
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances which interrupt normal
operations on an exchange; (v) inadequate facilities of an exchange or the
Options Clearing Corporation to handle current trading volume at all times; or
(vi) discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although the Funds do not currently intend to do so, they may,
in the future, write (i.e., sell) covered put and call options on securities,
securities indices and currencies in which they may invest. A covered call
option involves a Fund's giving another party, in return for a premium, the
right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. A covered call option serves as a
partial hedge against the price decline of the underlying security. However, by
writing a covered call option, a Fund gives up the opportunity, while the option
is in effect, to realize gain from any price increase (above the option exercise
price) in the underlying security. In addition, a Fund's ability to sell the
underlying security is limited while the option is in effect unless the Fund
effects a closing purchase transaction.
The Funds also may write covered put options that give the
holder of the option the right to sell the underlying security to the Fund at
the stated exercise price. A Fund will receive a premium for writing a put
option but will be obligated for as long as the option is outstanding to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise. In order to "cover" put options
it has written, a Fund will cause its custodian to segregate cash, cash
equivalents, U.S. Government securities or other liquid equity or debt
securities with at least the value of the exercise price of the put options. A
Fund will not write put options if the aggregate value of the obligations
underlying the put options exceeds 25% of the Fund's total assets.
There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of the Options Clearing Corporation inadequate, and result in the
institution by an exchange of special procedures that may interfere with the
timely execution of the Funds' orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectus, the Funds
may enter into repurchase agreements. A Fund's repurchase agreements will
generally involve a short-term investment in a U.S. Government security or other
high-grade liquid debt security, with the seller of the underlying security
agreeing to repurchase it at a mutually agreed-upon time and price. The
repurchase price is generally higher than the purchase price, the difference
being interest income to the Fund. Alternatively, the purchase and repurchase
prices may be the same, with interest at a stated rate due to a Fund together
with the repurchase price on the date of repurchase. In either case, the income
to a Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price.
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The Manager, acting under the supervision of the Boards, reviews on a periodic
basis the suitability and creditworthiness, and the value of the collateral, of
those sellers with whom the Funds enter into repurchase agreements to evaluate
potential risk. All repurchase agreements will be made pursuant to procedures
adopted and regularly reviewed by the Boards.
The Funds generally will enter into repurchase agreements of
short maturities, from overnight to one week, although the underlying securities
will generally have longer maturities. The Funds regard repurchase agreements
with maturities in excess of seven days as illiquid. A Fund may not invest more
than 15% (10% in the case of the Money Market Funds) of the value of its net
assets in illiquid securities, including repurchase agreements with maturities
greater than seven days.
For purposes of the Investment Company Act, a repurchase
agreement is deemed to be a collateralized loan from a Fund to the seller of the
security subject to the repurchase agreement. It is not clear whether a court
would consider the security acquired by a Fund subject to a repurchase agreement
as being owned by that Fund or as being collateral for a loan by the Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect to
the seller of the security before its repurchase, a Fund may encounter delays
and incur costs before being able to sell the security. Delays may involve loss
of interest or a decline in price of the security. If a court characterizes such
a transaction as a loan and a Fund has not perfected a security interest in the
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor. As such, a Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for a Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, a
Fund also runs the risk that the seller may fail to repurchase the security.
However, the Funds always require collateral for any repurchase agreement to
which they are a party in the form of securities acceptable to them, the market
value of which is equal to at least 100% of the amount invested by the Funds
plus accrued interest, and the Funds make payment against such securities only
upon physical delivery or evidence of book entry transfer to the account of its
custodian bank. If the market value of the security subject to the repurchase
agreement becomes less than the repurchase price (including interest), a Fund,
pursuant to its repurchase agreement, may require the seller of the security to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement equals or exceeds the repurchase price (including
interest) at all times.
The Funds may participate in one or more joint accounts with
each other and other series of the Trusts that invest in repurchase agreements
collateralized, subject to their investment policies, either by (i) obligations
issued or guaranteed as to principal and interest by the U.S. Government or by
one of its agencies or instrumentalities, or (ii) privately issued
mortgage-related securities that are in turn collateralized by securities issued
by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using objective criteria. Any
such repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event have a duration
of more than seven days.
Reverse Repurchase Agreements. To the extent allowed in the
Prospectus, a Fund may enter into reverse repurchase agreements, as set forth in
the Prospectus. A Fund typically will invest the proceeds of a reverse
repurchase agreement in money market
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instruments or repurchase agreements maturing not later than the expiration of
the reverse repurchase agreement. This use of proceeds involves leverage, and a
Fund will enter into a reverse repurchase agreement for leverage purposes only
when the Manager believes that the interest income to be earned from the
investment of the proceeds would be greater than the interest expense of the
transaction. A Fund also may use the proceeds of reverse repurchase agreements
to provide liquidity to meet redemption requests when sale of the Fund's
securities is disadvantageous.
The Funds cause their custodian to segregate liquid assets,
such as cash, U.S. Government securities or other liquid equity or debt
securities equal in value to their obligations (including accrued interest) with
respect to reverse repurchase agreements. Such assets are marked to market daily
to ensure that full collateralization is maintained.
Dollar Roll Transactions. To the extent allowed in the
Prospectus, a Fund may enter into dollar roll transactions. A dollar roll
transaction involves a sale by a Fund of a security to a financial institution
concurrently with an agreement by that Fund to purchase a similar security from
the institution at a later date at an agreed-upon price. The securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase, a
Fund will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in additional portfolio
securities of that Fund, and the income from these investments, together with
any additional fee income received on the sale, may or may not generate income
for that Fund exceeding the yield on the securities sold.
At the time a Fund enters into a dollar roll transaction, it
causes its custodian to segregate liquid assets such as cash, U.S. Government
securities or other liquid equity or debt securities having a value equal to the
purchase price for the similar security (including accrued interest) and
subsequently marks the assets to market daily to ensure that full
collateralization is maintained.
Lending of Portfolio Securities. Although the Funds currently
do not intend to do so, a Fund may lend its portfolio securities having a value
of up to 30% of its total assets in order to generate additional income. Such
loans may be made to broker-dealers or other financial institutions whose
creditworthiness is acceptable to the Manager. These loans would be required to
be secured continuously by collateral, including cash, cash equivalents,
irrevocable letters of credit, U.S. Government securities, or other high-grade
liquid debt securities, maintained on a current basis (i.e., marked to market
daily) at an amount at least equal to 100% of the market value of the securities
loaned plus accrued interest. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
income earned on the cash to the borrower or placing broker. Loans are subject
to termination at the option of a Fund or the borrower at any time. Upon such
termination, a Fund is entitled to obtain the return of the securities loaned
within five business days.
For the duration of the loan, a Fund will continue to receive
the equivalent of the interest or dividends paid by the issuer on the securities
loaned, will receive proceeds from the investment of the collateral and will
continue to retain any voting rights with respect to those securities. As with
other extensions of credit, there are risks of delay in recovery or even losses
of rights in the securities loaned should the borrower of the securities fail
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
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When-Issued and Forward Commitment Securities. To the extent
allowed in the Prospectus, a Fund may purchase securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" or "delayed
delivery" basis. The price of such securities is fixed at the time the
commitment to purchase or sell is made, but delivery and payment for the
securities take place at a later date. Normally, the settlement date occurs
within one month of the purchase; during the period between purchase and
settlement, no payment is made by a Fund to the issuer. While the Funds reserve
the right to sell when-issued or delayed delivery securities prior to the
settlement date, the Funds intend to purchase such securities with the purpose
of actually acquiring them unless a sale appears desirable for investment
reasons. At the time a Fund makes a commitment to purchase a security on a
when-issued or delayed delivery basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The market
value of the when-issued securities may be more or less than the settlement
price. The Funds do not believe that their net asset values will be adversely
affected by their purchase of securities on a when-issued or delayed delivery
basis. The Funds cause their custodian to segregate cash, U.S. Government
securities or other liquid equity or debt securities with a value equal in value
to commitments for when-issued or delayed delivery securities. The segregated
securities either will mature or, if necessary, be sold on or before the
settlement date. To the extent that assets of a Fund are held in cash pending
the settlement of a purchase of securities, that Fund will earn no income on
these assets.
To the extent allowed in the Prospectus, a Fund may seek to
hedge investments or to realize additional gains through forward commitments to
sell high-grade liquid debt securities it does not own at the time it enters
into the commitments. Such forward commitments effectively constitute a form of
short sale. To complete such a transaction, the Fund must obtain the security
which it has made a commitment to deliver. If the Fund does not have cash
available to purchase the security it is obligated to deliver, it may be
required to liquidate securities in its portfolio at either a gain or a loss, or
borrow cash under a reverse repurchase or other short-term arrangement, thus
incurring an additional expense. In addition, the Fund may incur a loss as a
result of this type of forward commitment if the price of the security increases
between the date the Fund enters into the forward commitment and the date on
which it must purchase the security it is committed to deliver. The Fund will
realize a gain from this type of forward commitment if the security declines in
price between those dates. The amount of any gain will be reduced, and the
amount of any loss increased, by the amount of the interest or other transaction
expenses the Fund may be required to pay in connection with this type of forward
commitment. Whenever this Fund engages in this type of transaction, it will
segregate assets as discussed above.
Illiquid Securities. To the extent allowed in the Prospectus,
a Fund may invest in illiquid securities. The term "illiquid securities" for
this purpose means securities that cannot be disposed of within seven days in
the ordinary course of business at approximately the amount at which a Fund has
valued the securities and includes, among others, repurchase agreements maturing
in more than seven days, certain restricted securities and securities that are
otherwise not freely transferable. Illiquid securities also include shares of an
investment company held by a Fund in excess of 1% of the total outstanding
shares of that investment company. Restricted securities may be sold only in
privately negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act")Illiquid securities acquired by the Funds may include those that are
subject to restrictions on transferability contained in the securities laws of
other countries. Securities that are freely marketable in the country where they
are principally traded, but that would not be freely marketable in the United
States, will not be considered illiquid. Where registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may
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elapse between the time of the decision to sell and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, a Fund might
obtain a less favorable price than prevailed when it decided to sell.
In recent years a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial paper,
foreign securities and corporate bonds and notes. These instruments often are
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not seek to sell
these instruments to the general public, but instead will often depend either on
an efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities sold pursuant to Rule 144A in many cases provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified buyers interested in purchasing Rule 144A-eligible restricted
securities, however, could adversely affect the marketability of such portfolio
securities and result in a Fund's inability to dispose of such securities
promptly or at favorable prices.
The Boards of Trustees have delegated the function of making
day-to-day determinations of liquidity to the Manager pursuant to guidelines
approved by the Boards. The Manager takes into account a number of factors in
reaching liquidity decisions, including, but not limited to: (i) the frequency
of trades for the security, (ii) the number of dealers that quote prices for the
security, (iii) the number of dealers that have undertaken to make a market in
the security, (iv) the number of other potential purchasers, and (v) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer)The Manager
monitors the liquidity of restricted securities in the Funds' portfolios and
reports periodically on such decisions to the Boards.
RISK FACTORS
The following describes certain risks involved with investing in the Funds.
Investors in the U.S. Asset Allocation Fund and the Global Asset Allocation Fund
should note the risks involved with each Underlying Fund, because the U.S. Asset
Allocation Fund and the Global Asset Allocation Fund are "funds-of-funds."
Foreign Securities
Investors in Funds that may, as allowed by the Prospectus,
invest in foreign securities should consider carefully the substantial risks
involved in securities of companies located or doing business in, and
governments of, foreign nations, which are in addition to the usual risks
inherent in domestic investments. There may be less publicly
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available information about foreign companies comparable to the reports and
ratings published regarding companies in the United States. Foreign companies
are often not subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements often may not be comparable
to those applicable to U.S. companies. Many foreign markets have substantially
less volume than either the established domestic securities exchanges or the OTC
markets. Securities of some foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Commission rates in foreign
countries, which may be fixed rather than subject to negotiation as in the U.S.,
are likely to be higher. In many foreign countries there is less government
supervision and regulation of securities exchanges, brokers and listed companies
than in the U.S., and capital requirements for brokerage firms are generally
lower. Settlement of transactions in foreign securities may, in some instances,
be subject to delays and related administrative uncertainties.
Emerging Market Countries
To the extent allowed in the Prospectus, a Fund may invest in
securities of companies domiciled in, and in markets of, so-called "emerging
market countries." These investments may be subject to potentially higher risks
than investments in developed countries. These risks include (i) volatile
social, political and economic conditions; (ii) the small current size of the
markets for such securities and the currently low or nonexistent volume of
trading, which result in a lack of liquidity and in greater price volatility;
(iii) the existence of national policies which may restrict these Funds'
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain emerging market countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in certain emerging market countries may be
slowed or reversed by unanticipated political or social events in such
countries.
Exchange Rates and Polices
Funds, to the extent allowed in the Prospectus, that buy and
sell foreign currencies endeavor to do so on favorable terms. Some price spreads
on currency exchange (to cover service charges) may be incurred, particularly
when these Funds change investments from one country to another or when proceeds
from the sale of shares in U.S. dollars are used for the purchase of securities
in foreign countries. Also, some countries may adopt policies which would
prevent these Funds from repatriating invested capital and dividends, withhold
portions of interest and dividends at the source, or impose other taxes, with
respect to these Funds' investments in securities of issuers of that country.
There also is the possibility of expropriation, nationalization, confiscatory or
other taxation, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could adversely affect investments in securities of issuers in
those nations.
These Funds may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Boards of both Trusts consider at least annually the
likelihood of the imposition by any foreign government of exchange control
restrictions that would affect the liquidity of the Funds' assets maintained
with custodians in foreign countries, as well as
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the degree of risk from political acts of foreign governments to which such
assets may be exposed. The Boards also consider the degree of risk attendant to
holding portfolio securities in domestic and foreign securities depositories
(see "Investment Management and Other Services").
Hedging Transactions
While transactions in forward contracts, options, futures
contracts and options on futures (i.e., "hedging positions") may reduce certain
risks, such transactions themselves entail certain other risks. Thus, while a
Fund may benefit from the use of hedging positions, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance for that Fund than if it had not entered into any
hedging positions. If the correlation between a hedging position and portfolio
position which is intended to be protected is imperfect, the desired protection
may not be obtained, and a Fund may be exposed to risk of financial loss.
Perfect correlation between a Fund's hedging positions and
portfolio positions may be difficult to achieve because hedging instruments in
many foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
California Municipal Securities
The information set forth below is a general summary intended
to give a recent historical description. It is not a discussion of any specific
factors that may affect any particular issuer of California Municipal
Securities. The information is not intended to indicate continuing or future
trends in the condition, financial or otherwise, of California. Such information
is derived from official statements utilized in connection with securities
offerings of the State of California that have come to the attention of the
Trusts and were available prior to the date of this Statement of Additional
Information. Such information has not been independently verified by the
California Intermediate Bond and California Money Funds.
Because the California Intermediate Bond and California Money
Funds expect to invest substantially all of their assets in California Municipal
Securities, they will be susceptible to a number of complex factors affecting
the issuers of California Municipal Securities, including national and local
political, economic, social, environmental and regulatory policies and
conditions. These Funds cannot predict whether or to what extent such factors or
other factors may affect the issuers of California Municipal Securities, the
market value or marketability of such securities or the ability of the
respective issuers of such securities acquired by these Funds to pay interest
on, or principal of, such securities. The creditworthiness of obligations issued
by local California issuers may be unrelated to the creditworthiness of
obligations issued by the State of California, and there is no responsibility on
the part of the State of California to make payments on such local obligations.
There may be specific factors that are applicable in connection with investment
in the obligations of particular issuers located within California, and it is
possible these Funds will invest in obligations of particular issuers as to
which such specific factors are applicable.
From mid-1990 to late 1993, California suffered the most
severe recession in the State since the 1930s. Construction, manufacturing
(especially aerospace), exports and
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financial services, among other industries, have been severely affected. Since
the start of 1994, however, California's economy has been on a steady recovery.
The rate of economic growth in California in 1996, in terms of job gains,
exceeded that of the rest of the United States. The State added nearly 350,000
jobs during 1996, surpassing its pre-recession employment peak of 12.7 million
jobs. Another 380,000 jobs are expected to be created in 1997. The unemployment
rate, while still higher than the national average, fell to the low 6 percent
range in mid-1997, compared to over 10 percent during the recession. Many of the
new jobs were created in such industries as computer services, software design,
motion pictures and high technology manufacturing. Business services, export
trade and other manufacturing also experienced growth. All major economic
regions of the State grew, with particularly large gains in the Silicon Valley
region of Northern California.
The recession severely affected State revenues while the
State's health and welfare costs were increasing. Consequently, the State had a
lengthy period of budget imbalance; the State's accumulated budget deficit
approached $2.8 billion at its peak at June 30, 1993. A consequence of the large
budget deficits has been that the State depleted its available cash resources
and had to use a series of external borrowings to meet its cash needs. With the
end of the recession, the State's financial condition has improved in the
1995-96 and 1996-97 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint. As of June 30, 1997, the State's budget reserve had a positive cash
balance of $281 million. No deficit borrowing has occurred at the end of the
last two fiscal years and the State's cash flow borrowing was limited to $3
billion in 1996-97.
In each of these two fiscal years, the State budget contained the
following major features:
1. Expenditures for K-14 schools grew significantly, as new revenues
were directed to school spending under Proposition 98.
2. The budgets restrained health and welfare spending levels and
attempted to reduce General Fund spending by calling for greater
support from the federal government. The State also attempted to shift
to the federal government a larger share of the cost of incarceration
and social services for illegal immigrants. Federal support never
reached the levels anticipated when the budgets were enacted. These
funding shortfalls were filled, however, by revenue collections which
exceeded expectations.
3. General Fund support for the University of California and California
State Universities grew by an average of 5.2 percent and 3.3 percent
per year, respectively, and there were no increases in student fees.
4. General Fund support for the Department of Corrections grew as
needed to meet increased prison population. No new prisons were
approved for construction, however.
5. There were no tax increases and, starting January 1, 1997, there was
a 5 percent cut in corporate taxes. The suspension of the Renter's Tax
Credit was continued.
As noted, the economy grew strongly during these fiscal years, and as a
result, the General Fund took in substantially greater tax revenues (around $2.2
billion in 1995-96 and $1.6 billion in 1996-97) than were initially planned when
the budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. As a result, there was not
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any dramatic increase in budget reserves, although the accumulated budget
deficit from the recession years was finally eliminated in the past fiscal
years.
On August 18, 1997, the Governor signed the 1997-98 Budget Act. The
Budget Act anticipates General Fund revenues and transfers of $52.5 billion (a
6.8 percent increase over the final 1996-97 levels), and expenditures of $52.8
billion (an 8.0 percent increase from the 1996-97 levels)On a budgetary basis,
the budget reserve (SFEU) is projected to decrease from $408 million at June 30,
1997 to $112 million at June 30, 1998. The Budget Act also includes Special Fund
expenditures of $14.4 billion (as against estimated Special Fund revenues of
$14.0 billion), and $2.1 billion of expenditures from various Bond Funds.
Following enactment of the Budget Act, the State implemented its annual cash
flow borrowing program, issuing $3 billion of notes which mature on June 30,
1998.
The following are major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contains a large
increase in funding for K-14 education, reflecting strong revenues which have
exceeded initial budgeted amounts. Part of the nearly $1.75 billion in increased
spending is allocated to prior fiscal years.
2. The Budget Act reflects a $1.235 billion pension case
judgment payment, and returns funding of the State's pension contribution to the
quarterly basis existing prior to the deferral actions invalidated by the
courts.
3. Continuing the third year of a four-year "compact" which
the State Administration has made with higher education units, funding from the
General Fund for the University of California and California State University
has increased by about 6 percent ($121 million and $107 million, respectively),
and there was no increase in student fees.
4. Because of the effect of the pension payment, most other
State programs were continued at 1996-97 levels.
5. Health and welfare costs are contained, continuing
generally the grant levels from prior years, as part of the initial
implementation of the new CalWORKs welfare reform program.
6. Unlike prior years, this Budget Act does not depend on
uncertain federal budget actions. About $300 million in federal funds, already
included in the federal FY 1997 and 1998 budgets, are included in the Budget
Act, to offset incarceration costs for illegal immigrants.
7. The Budget Act contains no tax increases, and no tax
reductions. The Renters Tax Credit was suspended for another year, saving
approximately $500 million.
After enactment of the Budget Act, and prior to the end of the
Legislative Session on September 12, 1997, the Legislature and the Governor
reached certain agreements related to State expenditures and taxes. The
Legislature passed a bill restoring $203 million of education-related
expenditures which the Governor had vetoed in the original Budget Act, based on
agreement with the Governor on an education testing program. The Legislature
also passed a bill to restore $48 million of welfare cost savings which had been
part of earlier legislation vetoed by the Governor. The Legislature also passed
several bills encompassing a coordinated package of fiscal reforms, mostly to
take effect after the 1997-98 Fiscal Year. Included in the legislation already
signed by the Governor are a variety of phased-in tax cuts, conformity with
certain provisions of the federal tax reform law passed earlier in the
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year, and reform of funding for county trial courts, with the State to assume
greater financial responsibility.
Because of the deterioration in the State's budget and cash
situation, the State's credit ratings have been reduced. Since late 1991, all
three major nationally recognized statistical rating organizations have lowered
their ratings for general obligation bonds of the State from the highest ranking
of "AAA" to "A+" by S&P, "A1" by Moody's and "A+" by Fitch Investors Service,
Inc. It is not presently possible to determine whether, or the extent to which,
Moody's, S&P or Fitch will change such ratings in the future. It should be noted
that the creditworthiness of obligations issued by local California issuers may
be unrelated to the creditworthiness of obligations issued by the State, and
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
Constitutional and Statutory Limitations. Article XIII A of
the California Constitution (which resulted from the voter approved Proposition
13 in 1978) limits the taxing powers of California public agencies. With certain
exceptions, the maximum ad valorem tax on real property cannot exceed one
percent of the "full cash value" of the property; Article XIII A also
effectively prohibits the levying of any other ad valorem property tax for
general purposes. One exception to Article XIII A permits an increase in ad
valorem taxes on real property in excess of one percent for certain bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. The "full cash value" of property may be adjusted annually to
reflect increases (not to exceed two percent) or decreases, in the consumer
price index or comparable local data, or to reflect reductions in property value
caused by substantial damage, destruction or other factors, or when there is a
"change in ownership" or "new construction".
Constitutional challenges to Article XIII A to date have been
unsuccessful. In 1992, the United States Supreme Court ruled that
notwithstanding the disparate property tax burdens that Proposition 13 might
place on otherwise comparable properties, those provisions of Proposition 13 do
not violate the Equal Protection Clause of the United States Constitution.
In response to the significant reduction in local property tax
revenue caused by the passage of Proposition 13, the State enacted legislation
to provide local governments with increased expenditures from the General Fund.
This fiscal relief has ended, however.
Article XIII B of the California Constitution generally limits
the amount of appropriations of the State and of local governments to the amount
of appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of taxes" of
the State and/or local government exceed its appropriations limit, the excess
revenues must be rebated. Certain expenditures, including debt service on
certain bonds and appropriations for qualified capital outlay projects, are not
included in the appropriations limit.
In 1986, California voters approved an initiative statute
known as Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. While some
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional, the California Supreme Court recently
upheld Proposition 62's requirement that special taxes be approved by a
two-thirds vote of the voters voting in an election on the issue. This recent
decision may invalidate
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other taxes that have been imposed by local governments in California and make
it more difficult for local governments to raise taxes.
In 1988 and 1990, California voters approved initiatives known
as Proposition 98 and Proposition 111, respectively. These initiatives changed
the State's appropriations limit under Article XIII B to (i) require that the
State set aside a prudent reserve fund for public education, and (ii) guarantee
a minimum level of State funding for public elementary and secondary schools and
community colleges.
In November 1996, California voters approved Proposition 218.
The initiative applied the provisions of Proposition 62 to all entities,
including charter cities. It requires that all taxes for general purposes obtain
a simple majority popular vote and that taxes for special purposes obtain a
two-thirds majority vote. Prior to the effectiveness of Proposition 218, charter
cities could levy certain taxes such as transient occupancy taxes and utility
user's taxes without a popular vote. Proposition 218 will also limit the
authority of local governments to impose property-related assessments, fees and
charges, requiring that such assessments be limited to the special benefit
conferred and prohibiting their use for general governmental services.
Proposition 218 also allows voters to use their initiative power to reduce or
repeal previously-authorized taxes, assessments, fees and charges.
The effect of constitutional and statutory changes and of
budget developments on the ability of California issuers to pay interest and
principal on their obligations remains unclear, and may depend on whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds being generally less affected)There is no assurance that any
California issuer will make full or timely payments of principal or interest or
remain solvent. For example, in December 1994, Orange County filed for
bankruptcy.
Certain tax-exempt securities in which a Fund may invest may
be obligations payable solely from the revenues of specific institutions, or may
be secured by specific properties, which are subject to provisions of California
law that could adversely affect the holders of such obligations. For example,
the revenues of California health care institutions may be subject to state
laws, and California law limits the remedies of a creditor secured by a mortgage
or deed of trust on real property.
In addition, it is impossible to predict the time, magnitude,
or location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck the Los Angeles area, causing
significant damage in a four-county area. The possibility exists that another
such earthquake could create a major dislocation of the California economy.
The Tax-Free Funds' (other than the Federal Money Fund)
concentration in California Municipal Securities provides a greater level of
risk than a fund that is diversified across numerous states and municipal
entities.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been
adopted by each Fund and (unless otherwise noted) are fundamental and cannot be
changed without the affirmative vote of a majority of a Fund's outstanding
voting securities as defined in the Investment Company Act. A Fund may not:
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1. In the case of each Fixed Income Fund, purchase any common
stocks or other equity securities, except that a Fund may invest in securities
of other investment companies as described above and consistent with restriction
number 9 below.
2. With respect to 75% (100% for the Federal Money Fund) of
its total assets, invest in the securities of any one issuer (other than the
U.S. Government and its agencies and instrumentalities) if immediately after and
as a result of such investment more than 5% of the total assets of a Fund would
be invested in such issuer. There are no limitations with respect to the
remaining 25% of its total assets, except to the extent other investment
restrictions may be applicable (not applicable to the Federal Money Fund). This
investment restriction does not apply to the U.S. Asset Allocation and Global
Asset Allocation Funds nor the California Intermediate Bond Fund.
3. Make loans to others, except (a) through the purchase of
debt securities in accordance with its investment objective and policies, (b)
through the lending of up to 30% of its portfolio securities as described above
and in its Prospectus, or (c) to the extent the entry into a repurchase
agreement or a reverse dollar roll transaction is deemed to be a loan.
4. (a) Borrow money, except for temporary or emergency
purposes from a bank, or pursuant to reverse repurchase agreements or dollar
roll transactions for a Fund that uses such investment techniques and then not
in excess of one-third of the value of its total assets (at the lower of cost or
fair market value)Any such borrowing will be made only if immediately thereafter
there is an asset coverage of at least 300% of all borrowings (excluding any
fully collateralized reverse repurchase agreements and dollar roll transactions
the Fund may enter into), and no additional investments may be made while any
such borrowings are in excess of 10% of total assets.
(b) Mortgage, pledge or hypothecate any of its assets
except in connection with permissible borrowings and permissible forward
contracts, futures contracts, option contracts or other hedging transactions.
5. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite securities(This does not
preclude a Fund from obtaining such short-term credit as may be necessary for
the clearance of purchases and sales of its portfolio securities.)
6. Buy or sell real estate or commodities or commodity
contracts; however, a Fund, to the extent not otherwise prohibited in the
Prospectus or this Statement of Additional Information, may invest in securities
secured by real estate or interests therein or issued by companies which invest
in real estate or interests therein, including real estate investment trusts,
and may purchase or sell currencies (including forward currency exchange
contracts), futures contracts and related options generally as described in the
Prospectus and this Statement of Additional Information.
7. Invest in securities of other investment companies, except
to the extent permitted by the Investment Company Act and discussed in the
Prospectus or this Statement of Additional Information, or as such securities
may be acquired as part of a merger, consolidation or acquisition of assets.
8. Invest, in the aggregate, more than 15% (10% for the Money
Market Funds) of its net assets in illiquid securities, including (under current
SEC interpretations) restricted securities (excluding liquid Rule 144A-eligible
restricted securities), securities
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which are not otherwise readily marketable, repurchase agreements that mature in
more than seven days and over-the-counter options (and securities underlying
such options) purchased by a Fund (This is an operating policy which may be
changed without shareholder approval, consistent with the Investment Company
Act, changes in relevant SEC interpretations).
9. Invest in any issuer for purposes of exercising control or
management of the issuer(This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company Act.)
10. Except with respect to communications companies for the
Communications Fund, as described in the Prospectus, invest more than 25% of the
market value of its total assets in the securities of companies engaged in any
one industry(This does not apply to investment in the securities of the U.S.
Government, its agencies or instrumentalities or California Municipal
Obligations or Municipal Obligations for the Tax-Free Funds.) For purposes of
this restriction, the Funds generally rely on the U.S. Office of Management and
Budget's Standard Industrial Classifications.
11. Issue senior securities, as defined in the Investment
Company Act, except that this restriction shall not be deemed to prohibit a Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b) entering
into permissible repurchase and dollar roll transactions.
12. Except as described in the Prospectus and this Statement
of Additional Information, acquire or dispose of put, call, straddle or spread
options subject to the following conditions (for other than the Total Return
Bond, Short Bond and California Intermediate Bond Funds):
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options which
are held at any time do not exceed 5% of the Fund's total assets.
(This is an operating policy which may be changed without
shareholder approval.)
13. Except as described in the Prospectus and this Statement
of Additional Information, engage in short sales of securities(This is an
operating policy which may be changed without shareholder approval, consistent
with applicable regulations.)
14. Purchase more than 10% of the outstanding voting
securities of any one issuer. This investment restriction does not relate to the
Fixed Income Funds(This is an operating policy which may be changed without
shareholder approval.)
15. Invest in commodities, except for futures contracts or
options on futures contracts if, as a result thereof, more than 5% of a Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to initial deposits and premiums on open futures contracts
and options on such contracts. The Money Market Funds may not enter into a
futures contract or option on a futures contract regardless of the amount of the
initial deposit or premium.
To the extent these restrictions reflect matters of operating
policy which may be changed without shareholder vote, these restrictions may be
amended upon approval by the appropriate Board and notice to shareholders.
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If a percentage restriction is adhered to at the time of
investment, a subsequent increase or decrease in a percentage resulting from a
change in the values of assets will not constitute a violation of that
restriction, except as otherwise noted.
The Board of Trustees of The Montgomery Funds has elected to
value the assets of the Money Market Funds in accordance with Rule 2a-7 under
the Investment Company Act. This Rule also imposes various restrictions on these
Funds' portfolios which are, in some cases, more restrictive than these Funds'
stated fundamental policies and investment restrictions. Due to amendments to
Rule 2a-7 adopted by the SEC in 1991, any fund which holds itself out as a money
market fund must also follow certain portfolio provisions of Rule 2a-7 regarding
the maturity and quality of each portfolio investment, and the diversity of such
investments. Thus, although the restrictions imposed by Rule 2a-7 are not
fundamental policies of these Funds, these Funds must comply with these
provisions unless their shareholders vote to change their policies of being
money market funds.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Funds receive income in the form of
dividends and interest earned on their investments in securities. This income,
less the expenses incurred in their operations, is the Funds' net investment
income, substantially all of which will be declared as dividends to the Funds'
shareholders.
The amount of income dividend payments by the Funds is
dependent upon the amount of net investment income received by the Funds from
their portfolio holdings, is not guaranteed and is subject to the discretion of
the Funds' Board. These Funds do not pay "interest" or guarantee any fixed rate
of return on an investment in their shares.
The Funds also may derive capital gains or losses in
connection with sales or other dispositions of their portfolio securities. Any
net gain a Fund may realize from transactions involving investments held less
than the period required for long-term capital gain or loss recognition or
otherwise producing short-term capital gains and losses (taking into account any
carryover of capital losses from the eight previous taxable years), although a
distribution from capital gains, will be distributed to shareholders with and as
a part of dividends giving rise to ordinary income. If during any year a Fund
realizes a net gain on transactions involving investments held for the period
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
that Fund's shares may have been held by the shareholders.
Any dividend or distribution per share paid by a Fund reduces
that Fund's net asset value per share on the date paid by the amount of the
dividend or distribution per share. Accordingly, a dividend or distribution paid
shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to income taxes (except for
distributions from the Tax-Free Funds to the extent not subject to income
taxes).
Dividends and other distributions will be reinvested in
additional shares of the applicable Fund unless the shareholder has otherwise
indicated. Investors have the right to change their elections with respect to
the reinvestment of dividends and distributions by
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notifying the Transfer Agent in writing, but any such change will be effective
only as to dividends and other distributions for which the record date is seven
or more business days after the Transfer Agent has received the written request.
Tax Information. Each Fund intends to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), for each taxable year by
complying with all applicable requirements regarding the source of its income,
the diversification of its assets, and the timing of its distributions. Each
Fund that has filed a tax return has so qualified and elected in prior tax
years. Each Fund's policy is to distribute to its shareholders all of its
investment company taxable income and any net realized capital gains for each
fiscal year in a manner that complies with the distribution requirements of the
Code, so that Fund will not be subject to any federal income tax or excise taxes
based on net income. However, the Board of Trustees may elect to pay such excise
taxes if it determines that payment is, under the circumstances, in the best
interests of a Fund.
In order to qualify as a regulated investment company, each
Fund must, among other things, (a) derive at least 90% of its gross income each
year from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock or securities or
foreign currency gains related to investments in stocks or other securities, or
other income (generally including gains from options, futures or forward
contracts) derived with respect to the business of investing in stock,
securities or currency, (b) for taxable years beginning or before August 5,
1997, derive less than 30% of its gross income each year from the sale or other
disposition of stock or securities (or options thereon) held less than three
months (excluding some amounts otherwise included in income as a result of
certain hedging transactions), and (c) diversify its holdings so that, at the
end of each fiscal quarter, (i) at least 50% of the market value of its assets
is represented by cash, cash items, U.S. Government securities, securities of
other regulated investment companies and other securities limited, for purposes
of this calculation, in the case of other securities of any one issuer to an
amount not greater than 5% of that Fund's assets or 10% of the voting securities
of the issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies)As such, and by complying
with the applicable provisions of the Code, a Fund will not be subject to
federal income tax on taxable income (including realized capital gains) that is
distributed to shareholders in accordance with the timing requirements of the
Code. If a Fund is unable to meet certain requirements of the Code, it may be
subject to taxation as a corporation.
Distributions of net investment income and net realized
capital gains by a Fund will be taxable to shareholders whether made in cash or
reinvested in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from the eight prior taxable years will
be applied against capital gains. Shareholders receiving distributions in the
form of additional shares will have a cost basis for federal income tax purposes
in each share so received equal to the net asset value of a share of a Fund on
the reinvestment date. Fund distributions also will be included in individual
and corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Funds or any securities dealer effecting a redemption of
the Funds' shares by a shareholder will be required to file information reports
with the IRS with respect to distributions and payments made to the shareholder.
In addition, the Funds will be required to withhold federal income tax at the
rate of 31% on taxable dividends, redemptions and other payments made to
accounts of individual or other non-exempt shareholders who have not furnished
their correct taxpayer identification numbers and made certain required
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certifications on the Account Application Form or with respect to which a Fund
or the securities dealer has been notified by the IRS that the number furnished
is incorrect or that the account is otherwise subject to withholding.
The Funds intend to declare and pay dividends and other
distributions, as stated in the Prospectus. In order to avoid the payment of any
federal excise tax based on net income, each Fund must declare on or before
December 31 of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
realized in the one-year period ending October 31 of that year, together with
any undistributed amounts of ordinary income and capital gains (in excess of
capital losses) from the previous calendar year.
A Fund may receive dividend distributions from U.S.
corporations. To the extent that a Fund receives such dividends and distributes
them to its shareholders, and meets certain other requirements of the Code,
corporate shareholders of the Fund may be entitled to the "dividends received"
deduction. Availability of the deduction is subject to certain holding period
and debt-financing limitations.
If more than 50% in value of the total assets of a Fund at the
end of its fiscal year is invested in stock or other securities of foreign
corporations, that Fund may elect to pass through to its shareholders the pro
rata share of all foreign income taxes paid by that Fund. If this election is
made, shareholders will be (i) required to include in their gross income their
pro rata share of any foreign income taxes paid by that Fund, and (ii) entitled
either to deduct their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S. income tax,
subject to certain limitations under the Code, including certain holding period
requirements. In this case, shareholders will be informed in writing by that
Fund at the end of each calendar year regarding the availability of any credits
on and the amount of foreign source income (including or excluding foreign
income taxes paid by that Fund) to be included in their income tax returns. If
50% or less in value of that Fund's total assets at the end of its fiscal year
are invested in stock or other securities of foreign corporations, that Fund
will not be entitled under the Code to pass through to its shareholders their
pro rata share of the foreign income taxes paid by that Fund. In this case,
these taxes will be taken as a deduction by that Fund
A Fund may be subject to foreign withholding taxes on
dividends and interest earned with respect to securities of foreign
corporations. A Fund may invest up to 10% of its total assets in the stock of
foreign investment companies. Such companies are likely to be treated as
"passive foreign investment companies" ("PFICs") under the Code. Certain other
foreign corporations, not operated as investment companies, may nevertheless
satisfy the PFIC definition. A portion of the income and gains that these Funds
derive from PFIC stock may be subject to a non-deductible federal income tax at
the Fund level. In some cases, a Fund may be able to avoid this tax by electing
to be taxed currently on its share of the PFIC's income, whether or not such
income is actually distributed by the PFIC. A Fund will endeavor to limit its
exposure to the PFIC tax by investing in PFICs only where the election to be
taxed currently will be made. Because it is not always possible to identify a
foreign issuer as a PFIC in advance of making the investment, a Fund may incur
the PFIC tax in some instances.
The Tax-Free Funds. Provided that, as anticipated, each
Tax-Free Fund qualifies as a regulated investment company under the Code, and,
at the close of each quarter of its taxable year, at least 50% of the value of
the total assets of each of the California
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Intermediate Bond and California Money Funds consist of obligations (including
California Municipal Securities) the interest on which is exempt from California
personal income taxation under the laws of California, such Fund will be
qualified to pay exempt-interest dividends to its shareholders that, to the
extent attributable to interest received by the Fund on such obligations, are
exempt from California personal income tax. If at the close of each quarter of
its taxable year, at least 50% of the value of the total assets of the Federal
Money Fund consists of obligations (including Municipal Securities) the interest
on which is exempt from federal personal income taxation under the Constitution
or laws of the United States, the Federal Money Fund will be qualified to pay
exempt-interest dividends to its shareholders that, to the extent attributable
to interest received by the Fund on such obligations, are exempt from federal
personal income tax. The total amount of exempt-interest dividends paid by these
Funds to their shareholders with respect to any taxable year cannot exceed the
amount of interest received by these Funds during such year on tax-exempt
obligations less any expenses attributable to such interest. Income from other
transactions engaged in by these Funds, such as income from options, repurchase
agreements and market discount on tax-exempt securities purchased by these
Funds, will be taxable distributions to its shareholders.
The Code may also subject interest received on certain
otherwise tax-exempt securities to an alternative minimum tax. In addition,
certain corporations which are subject to the alternative minimum tax may have
to include a portion of exempt-interest dividends in calculating their
alternative minimum taxable income.
Exempt-interest dividends paid to shareholders that are
corporations subject to California franchise tax will be taxed as ordinary
income to such shareholders. Moreover, no exempt-interest dividends paid by
these Funds will qualify for the corporate dividends-received deduction for
federal income tax purposes.
Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of these Funds is not deductible for
federal income tax purposes. Under regulations used by the IRS for determining
when borrowed funds are considered used for the purposes of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares of these Funds. California personal income
tax law restricts the deductibility of interest on indebtedness incurred by a
shareholder to purchase or carry shares of a fund paying dividends exempt from
California personal income tax, as well as the allowance of losses realized upon
a sale or redemption of shares, in substantially the same manner as federal tax
law. Further, these Funds may not be appropriate investments for persons who are
"substantial users" of facilities financed by industrial revenue bonds or are
"related persons" to such users. Such persons should consult their own tax
advisers before investing in these Funds.
Up to 85% of social security or railroad retirement benefits
may be included in federal (but not California) taxable income for benefit
recipients whose adjusted gross income (including income from tax-exempt sources
such as tax-exempt bonds and these Funds) plus 50% of their benefits exceeding
certain base amounts. Income from these Funds, and other funds like them, is
included in the calculation of whether a recipient's income exceeds these base
amounts, but is not taxable directly.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. It can be expected that similar
proposals may be introduced in the future. Proposals by members of state
legislatures may also be introduced which could affect the
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state tax treatment of these Funds' distributions. If such proposals were
enacted, the availability of Municipal Securities for investment by these Funds
and the value of these Funds' portfolios would be affected. In such event, these
Funds would reevaluate their investment objectives and policies.
Hedging. The use of hedging strategies, such as entering into
futures contracts and forward contracts and purchasing options, involves complex
rules that will determine the character and timing of recognition of the income
received in connection therewith by a Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by a Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
For accounting purposes, when a Fund purchases an option, the
premium paid by the Fund is recorded as an asset and is subsequently adjusted to
the current market value of the option. Any gain or loss realized by a Fund upon
the expiration or sale of such options held by a Fund generally will be capital
gain or loss.
Any security, option, or other position entered into or held
by a Fund that substantially diminishes a Fund's risk of loss from any other
position held by that Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of a Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that a Fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to a
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that
are subject to Section 1256 of the Code ("Section 1256 Contracts") and that are
held by a Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable
to certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
Redemptions and exchanges of shares of a Fund will result in
gains or losses for tax purposes to the extent of the difference between the
proceeds and the shareholder's
B-32
<PAGE>
adjusted tax basis for the shares. Any loss realized upon the redemption or
exchange of shares within six months from their date of purchase will be treated
as a long-term capital loss to the extent of distributions of long-term capital
gain dividends with respect to such shares during such six-month period. Any
loss realized upon the redemption or exchange of shares of a Tax-Free Fund
within six months from their date of purchase will be disallowed to the extent
of distributions of exempt-interest dividends with respect to such shares during
such six-month period. All or a portion of a loss realized upon the redemption
of shares of a Fund may be disallowed to the extent shares of the same Fund are
purchased (including shares acquired by means of reinvested dividends) within 30
days before or after such redemption.
Distributions and redemptions may be subject to state and
local income taxes, and the treatment thereof may differ from the federal income
tax treatment Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the
Prospectus are not intended to be complete discussions of all applicable federal
tax consequences of an investment in the Funds. The law firm of Paul, Hastings,
Janofsky & Walker LLP has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Funds.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Funds.
TRUSTEES AND OFFICERS
The Trustees of the Trusts (the two Trusts have the same
members on their Boards, are responsible for the overall management of the
Funds, including general supervision and review of their investment activities.
The officers (the two Trusts, as well as an affiliated Trust, The Montgomery
Funds III, have the same officers), who administer the Funds' daily operations,
are appointed by the Boards of Trustees. The current Trustees and officers of
the Trusts performing a policy-making function and their affiliations and
principal occupations for the past five years are set forth below:
Richard W. Ingram, President and Treasurer (Age 42)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Ingram is the
Executive Vice President and Director of Client Services and Treasury
Administration of FDI; Senior Vice President of Premier Mutual Fund Services,
Inc., an affiliate of FDI ("Premier Mutual") and an officer of certain
investment companies advised or administered by JP Morgan ("Morgan"), Dreyfus
Corporation ("Dreyfus"), Waterhouse Asset Management, Inc. ("Waterhouse"), RCM
Capital Management LLC ("RCM") and Harris Trust and Savings Bank ("Harris") or
their respective affiliates. Prior to April 1997, Mr. Ingram was Senior Vice
President and Director of Client Services and Treasury Administration of FDI.
From March 1994 to November 1995, Mr. Ingram was Vice President and Division
Manager of First Data Investor Services Group, Inc. From 1989 to 1994, Mr.
Ingram was Vice President, Assistant Treasurer and Tax Director Mutual Funds of
The Boston Company, Inc.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (Age 30)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered
B-33
<PAGE>
by Morgan, Waterhouse, RCM and Harris or their respective affiliates. From June
1994 to January 1996, Ms. Jacoppo-Wood was a Manager, SEC Registration, Scudder,
Stevens & Clark, Inc. From 1988 to May 1994, Ms. Jacoppo-Wood was a Senior
Paralegal at The Boston Company Advisers, Inc. ("TBCA").
Elizabeth A. Keeley, Vice President and Assistant Secretary (Age 28)
200 Park Avenue, New York, New York 10166. Ms. Keeley is the Vice President and
Senior Counsel of FDI and Premier Mutual, and an officer of certain investment
companies advised or administered by Morgan, Dreyfus, RCM, Waterhouse and Harris
or their respective affiliates. Prior to August 1996, Ms. Keeley was Assistant
Vice President and Counsel of FDI and premier Mutual. Prior to September 1995,
Ms. Keeley was enrolled at Fordham University School of Law and received her
J.D. in May 1995. Prior to September 1995, Ms. Keeley was an Assistant at the
National Association for Public Interest Law.
Christopher J. Kelley, Vice President and Assistant Secretary (Age 32)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in Legal and Compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
Mary A. Nelson, Vice President and Assistant Treasurer (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
John E. Pelletier, Vice President and Secretary (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 0209. Mr. Pelletier is the
Senior Vice President, General Counsel, Secretary and Clerk of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From February 1992 to April 1994, Mr. Pelletier served as Counsel for TBCA. From
August 1990 to February 1992, Mr. Pelletier was employed as an Associate at
Ropes & Gray (a Boston law firm).
Gary S. MacDonald, Vice President and Assistant Treasurer (Age 32)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of Bay. Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
Marie E. Connolly, Vice President and Assistant Treasurer (Age 40)
B-34
<PAGE>
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (Age 28)
60 State Street, Suite 130, Boston, Massachusetts 02109. Mr. Conroy is the
Assistant Vice President and Manager of Treasury Services and Administration of
FDI and an officer of certain investment companies advised or administered by
Morgan and Dreyfus or their respective affiliates. Prior to April 1997, Mr.
Conroy was Supervisor of Treasury Services and Administration of FDI. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank
& Trust Company. From December 1991 to March 1993, Mr. Conroy was employed as a
Fund Accountant at The Boston Company, Inc.
Joseph F. Tower, III, Vice President and Assistant Treasurer (Age 35)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of FDI. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company, Inc.
John A. Farnsworth, Trustee (Age 55)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner off Pearson, Caldwell & Farnsworth, Inc., an executive
search consulting firm. From May 1988 to September 1991, Mr. Farnsworth was the
Managing Partner of the San Francisco office of Ward Howell International, Inc.,
and executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
Andrew Cox, Trustee (Age 53)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr. Cox has been
engaged as an independent investment consultant. From September 1976 until June
1988, Mr. Cox was a Vice President of the Founders Group of Mutual Funds,
Denver, Colorado, and Portfolio Manager or Co-Portfolio Manager of several of
the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (Age 48)
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was Managing
Director of Morgan Guaranty Trust Company. From 1983 to 1991 she was General
Manager of the bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking.
B-35
<PAGE>
Ms. Herbert is a member of the Board of Schools of the Sacred Heart, and is a
member of the Archdiocese of San Francisco Finance Council, where she chairs the
Investment Committee.
R. Stephen Doyle, Chairman of the Board of Trustees (Age 56).*
101 California Street, San Francisco, California 94111. R. Stephen Doyle, the
founder of Montgomery Asset Management, began his career in the financial
services industry in 1974. Before starting Montgomery Asset Management in 1990,
Mr. Doyle was a General Partner and member of the Management Committee at
Montgomery Securities with specific responsibility for private placements and
venture capital. Prior to joining Montgomery Securities, Mr. Doyle was at E.F.
Hutton & Co. as a Vice President with responsibility for both retail and
institutional accounts. Mr. Doyle was also with Connecticut General Insurance,
where he served as Consultant to New York Stock Exchange Member Firms in the
area of financial planning.
<TABLE>
The officers of the Trusts, and the Trustees who are
considered "interested persons" of the Trusts, receive no compensation directly
from the Trusts for performing the duties of their offices. However, those
officers and Trustees who are officers or partners of the Manager or the
Distributor may receive remuneration indirectly because the Manager will receive
a management fee from the Funds and Funds Distributor, Inc. will receive
commissions for executing portfolio transactions for the Funds. The Trustees who
are not affiliated with the Manager or the Distributor receive an annual
retainer and fees and expenses for each regular Board meeting attended. The
aggregate compensation paid by each Trust to each of the Trustees during the
fiscal year ended June 30, 1997, and the aggregate compensation paid to each of
the Trustees during the fiscal year ended June 30, 1997 by all of the registered
investment companies to which the Manager provides investment advisory services,
are set forth below.
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement From the
Aggregate Compensation Benefits Trusts and
Compensation from The Accrued as Fund Complex
from The Montgomery Part of Fund (1 additional
Name of Trustee Montgomery Funds Funds II Expenses* Trust)
<S> <C> <C> <C> <C>
R. Stephen Doyle None None -- None
John A. Farnsworth $25,000 $5,000 -- $35,000
Andrew Cox $25,000 $5,000 -- $35,000
Cecilia H. Herbert $25,000 $5,000 -- $35,000
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus,
investment management services are provided to the Funds (except the U.S. Asset
Allocation Fund) by Montgomery Asset Management, LLC, the Manager, pursuant to
an Investment Management Agreement between the Manager and The Montgomery Funds
dated July 31, 1997; and to the U.S. Asset
- -----------------
* Trustee deemed an "interested person" of the Funds as defined in
the Investment Company Act.
B-36
<PAGE>
Allocation Fund by the Manager pursuant to an Investment Management Agreement
between the Manager and The Montgomery Funds II dated July 31, 1997(together,
the "Agreements").
The Agreements are in effect with respect to each Fund for two
years after the Fund's inclusion in its Trust's Agreement (on or around its
beginning of public operations) and then continue for each Fund for periods not
exceeding one year so long as such continuation is approved at least annually by
(1) the Board of the appropriate Trust or the vote of a majority of the
outstanding shares of that Fund, and (2) a majority of the Trustees who are not
interested persons of any party to the relevant Agreement, in each case by a
vote cast in person at a meeting called for the purpose of voting on such
approval. The Agreements may be terminated at any time, without penalty, by a
Fund or the Manager upon 60 days' written notice, and are automatically
terminated in the event of its assignment as defined in the Investment Company
Act.
For services performed under the Agreements, each Fund pays
the Manager a management fee (accrued daily but paid when requested by the
Manager) based upon the average daily net assets of the Fund at the following
annual rates:
Fund Average Daily Net Annual
Assets Rate
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
Montgomery Small Cap Opportunities First $200 million 1.20%
Fund Next $300 million 1.10%
Over $500 million 1.00%
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
Montgomery International Growth First $500 million 1.10%
Fund Next $500 million 1.00%
Over $1 billion 0.90%
Montgomery International Small Cap First $250 million 1.25%
Fund Over $250 million 1.00%
Montgomery Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
Montgomery Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Latin America Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
B-37
<PAGE>
Montgomery Global Opportunities First $500 million 1.25%
Fund Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global Communications First $250 million 1.25%
Fund 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 U.S. Asset Allocation All Amounts None
Fund
Montgomery Global Asset Allocation All Amounts 0.20%*
Fund
Montgomery Total Return Bond Fund First $500 million 0.50%
Over $500 million 0.40%
Montgomery Short Duration First $500 million 0.50%
Government Bond Fund 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 First $500 million 0.50%
Intermediate Bond Fund Over $500 million 0.40%
Montgomery California Tax-Free First $500 million 0.40%
Money Fund Over $500 million 0.30%
Montgomery Federal Tax-Free Money First $500 million 0.40%
Fund Over $500 million 0.30%
* This amount represents only the management fee of the U.S. Asset
Allocation Fund and does not include management fees attributable to the
Underlying Funds which ultimately are to be borne by shareholders of the
Global Asset Allocation Fund.
** This amount represents only the management fee of the Global Asset
Allocation Fund and does not include management fees attributable to the
Underlying Funds which ultimately are to be borne by shareholders of the
Global Asset Allocation Fund.
As noted in the Prospectus, the Manager has agreed to reduce
some or all of its management fee if necessary to keep total operating expenses,
expressed on an annualized basis, at or below the following percentages of each
Fund's average net assets (excluding Rule 12b-1 fees): International Small Cap,
Emerging Markets, Emerging Asia, Latin America, Opportunities and Communications
Funds, one and nine-tenths of one percent (1.90%) each; Select 50 Fund, one and
eight-tenths of one percent (1.80%); Micro Cap Fund, one and three-fourths
percent (1.75%); International Growth Fund, one and sixty-five one-hundredths of
one percent (1.65%); Growth and Small Cap Opportunities Fund, one and
five-tenths of one percent (1.50%); Small Cap Fund, one and four-tenths of one
percent (1.40%); U.S. Asset Allocation Fund, one and three-tenths percent
(1.30%); Global Asset Allocation Fund, five-tenths of one percent (0.50%) of the
Global Asset Allocation Fund's average net assets (excluding expenses related to
the Underlying Funds) or one and seventy-five one-hundredths of one percent
B-38
<PAGE>
(1.75%) (including total expenses of the Underlying Funds), the Short Bond,
Total Return Bond, and California Intermediate Bond Funds, seven-tenths of one
percent (0.70%) each; the Equity Income Fund, eighty-five-one-hundredths of one
percent (0.85%); and the Money Market Funds, six-tenths of one percent (0.60%),
each. The Manager also may voluntarily reduce additional amounts to increase the
return to a Fund's investors. Any reductions made by the Manager in its fees are
subject to reimbursement by that Fund within the following three years provided
the Fund is able to effect such reimbursement and remain in compliance with the
foregoing 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.
Operating expenses for purposes of the Agreements include the
Manager's management fee but do not include any taxes, interest, brokerage
commissions, expenses incurred in connection with any merger or reorganization
or extraordinary expenses such as litigation.
The Agreements were approved with respect to each Fund by the
Board of the Trust at duly called meetings. In considering the Agreements, the
Trustees specifically considered and approved the provision which permits the
Manager to seek reimbursement of any reduction made to its management fee within
the three-year period. The Manager's ability to request reimbursement is subject
to various conditions. First, any reimbursement is subject to a Fund's ability
to effect such reimbursement and remain in compliance with applicable expense
limitations in place at that time. Second, the Manager must specifically request
the reimbursement from the Board of Trustees. Third, the Board of Trustees must
approve such reimbursement as appropriate and not inconsistent with the best
interests of the Fund and the shareholders at the time such reimbursement is
requested. Because of these substantial contingencies, the potential
reimbursements will be accounted for as contingent liabilities that are not
recordable on the balance sheet of a Fund until collection is probable; but the
full amount of the potential liability will appear footnote to each Fund's
financial statements. At such time as it appears probable that a Fund is able to
effect such reimbursement, that the Manager intends to seek such reimbursement
and that the Board of Trustees has or is likely to approve the payment of such
reimbursement, the amount of the reimbursement will be accrued as an expense of
that Fund for that current period.
<TABLE>
As compensation for its investment management services, each
of the following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
<CAPTION>
Fund Year or Period Ended June 30,
1997 1996 1995
<S> <C> <C> <C>
Montgomery Growth Fund $9,429,758 $8,336,529 $5,566,892
Montgomery Small Cap $2,352,549 $ 217,603 NA
Opportunities Fund
Montgomery Small Cap Fund $2,290,187 $2,364,834 $2,095,945
Montgomery Micro Cap Fund $4,042,815 $3,732,720 $ 703,124
</TABLE>
B-39
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Montgomery Equity Income Fund $ 244,249 $ 101,709 $ 12,589
Montgomery International Growth Fund $ 378,515 $ 97,137 NA
Montgomery International Small Cap $ 823,594 $ 611,587 $ 473,200
Fund
Montgomery Emerging Markets Fund $10,621,310 $10,262,601 $ 9,290,178
Montgomery Emerging Asia Fund $ 257,092 NA NA
Montgomery Latin America Fund NA NA NA
Montgomery Global Opportunities Fund $ 562,210 $ 381,316 $ 226,283
Montgomery Global Communications $ 2,298,528 $ 3,186,649 $ 2,952,058
Fund
Montgomery Select 50 Fund $ 1,366,989 $ 359,453 NA
Montgomery U.S. Asset Allocation $ 1,211,759 $ 998,198 $ 150,882
Fund
Montgomery Global Asset Allocation $ 1,231 NA NA
Fund
Montgomery Total Return Bond Fund NA NA NA
Montgomery Short Duration $ 231,870 $ 93,531 $ 99,249
Government Bond Fund
Montgomery Government Reserve Fund $ 2,175,561 $ 1,703,723 $ 1,440,964
Montgomery California Tax-Free $ 103,992 $ 48,596 $ 43,889
Intermediate Bond Fund
Montgomery California Tax-Free $ 640,819 $ 538,030 $ 149,574
Money Fund
Montgomery Federal Tax-Free $ 319,348 NA NA
Money Fund
</TABLE>
The Manager also may act as an investment adviser or
administrator to other persons, entities, and corporations, including other
investment companies. Please refer to the table above, which indicates officers
and trustees who are affiliated persons of the Trusts and who are also
affiliated persons of the Manager.
The use of the name "Montgomery" by the Trusts and by the
Funds is pursuant to the consent of the Manager, which may be withdrawn if the
Manager ceases to be the Manager of the Funds.
Share Marketing Plan. The Trusts have adopted a Share
Marketing Plan (or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Funds
pursuant to Rule 12b-1 under the Investment Company Act. The Distributor serves
as the distribution coordinator under the 12b-1 Plan and, as such, receives any
fees paid by the Funds pursuant to the 12b-1 Plan.
B-40
<PAGE>
Prior to August 24, 1995, the Funds offered only one class of
shares. On that date, the Board of Trustees of the Trusts, including a majority
of the Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the 12b-1 Plan or in
any agreement related to the 12b-1 Plan (the "Independent Trustees"), at their
regular quarterly meeting, adopted the 12b-1 Plan for the newly designated Class
P and Class L shares of each Fund. The initial shareholder of the Class P and
Class L shares, if any, of each Fund approved the 12b-1 Plan covering each
Class. The single class of shares existing before that date was redesignated the
Class R shares. Class R shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, each Fund pays distribution fees to the
Distributor at an annual rate of 0.25% of the Fund's aggregate average daily net
assets attributable to its Class P shares and at an annual rate of 0.75% of the
Fund's aggregate average daily net assets attributable to its Class L shares,
respectively, to reimburse the Distributor for its expenses in connection with
the promotion and distribution of those Classes.
The 12b-1 Plan provides that the Distributor may use the
distribution fees received from the Class of the Fund covered by the 12b-1 Plan
only to pay for the distribution expenses of that Class. Distribution fees are
accrued daily and paid monthly, and are charged as expenses of the Class P and
Class L shares as accrued.
Class P and Class L shares are not obligated under the 12b-1
Plan to pay any distribution expense in excess of the distribution fee. Thus, if
the 12b-1 Plan were terminated or otherwise not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Class to the
Distributor.
The 12b-1 Plan provides that it shall continue in effect from
year to year provided that a majority of the Board of Trustees of the Trust,
including a majority of the Independent Trustees, vote annually to continue the
12b-1 Plan. The 12b-1 Plan (and any distribution agreement between the Fund, the
Distributor or the Manager and a selling agent with respect to the Class P or
Class L shares) may be terminated without penalty upon at least 60-days' notice
by the Distributor or the Manager, or by the Fund by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding shares (as
defined in the Investment Company Act) of the Class to which the 12b-1 Plan
applies.
All distribution fees paid by the Funds under the 12b-1 Plan
will be paid in accordance with Rule 2830 of the NASD Rules of Conduct, as such
Rule may change from time to time. Pursuant to the 12b-1 Plan, the Boards of
Trustees will review at least quarterly a written report of the distribution
expenses incurred by the Manager on behalf of the Class P and Class L shares of
each Fund. In addition, as long as the 12b-1 Plan remains in effect, the
selection and nomination of Trustees who are not interested persons (as defined
in the Investment Company Act) of the Trust shall be made by the Trustees then
in office who are not interested persons of the Trust.
Shareholder Services Plan. The Trusts have adopted a
Shareholder Services Plan (the "Services Plan") with respect to the Funds. The
Manager (or its affiliate) serves as the service provider under the Services
Plan and, as such, receives any fees paid by the Funds pursuant to the Services
Plan. The Trusts have not yet implemented the Services Plan for any Fund and
have not set a date for implementation. Affected shareholders will be notified
at least 60 days before implementation of the Services Plan.
On August 24, 1995, the Board of Trustees of the Trusts,
including a majority of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Services Plan or in any agreement related to the Services Plan (the "Independent
Trustees"), at their regular quarterly meeting, adopted the
B-41
<PAGE>
Services Plan for the newly designated Class P and Class L shares of each Fund.
The initial shareholder of the Class P and Class L shares, if any, of each Fund
approved the Services Plan covering each Class. Class R shares are not covered
by the Services Plan.
Under the Services Plan, when implemented, Class P and Class L
of each Fund will pay a continuing service fee to the Manager, the Distributor
or other service providers, in an amount, computed and prorated on a daily
basis, equal to 0.25% per annum of the average daily net assets of Class P and
Class L shares of each Fund. Such amounts are compensation for providing certain
services to clients owning shares of Class P or Class L of the Funds, including
personal services such as processing purchase and redemption transactions,
assisting in change of address requests and similar administrative details, and
providing other information and assistance with respect to a Fund, including
responding to shareholder inquiries.
The Distributor. The Distributor may provide certain
administrative services to the Funds on behalf of the Manager. The Distributor
will also perform investment banking, investment advisory and brokerage services
for persons other than the Funds, including issuers of securities in which the
Funds may invest. These activities from time to time may result in a conflict of
interests of the Distributor with those of the Funds, and may restrict the
ability of the Distributor to provide services to the Funds.
The Custodian. Morgan Stanley Trust Company serves as
principal Custodian of the Funds' assets, which are maintained at the
Custodian's principal office and at the offices of its branches and agencies
throughout the world. The Custodian has entered into agreements with foreign
sub-custodians approved by the Trustees pursuant to Rule 17f-5 under the
Investment Company Act. The Custodian, its branches and sub-custodians generally
hold certificates for the securities in their custody, but may, in certain
cases, have book records with domestic and foreign securities depositories,
which in turn have book records with the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is based on a
schedule of charges agreed on from time to time.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Funds, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreements, the Manager determines which securities
are to be purchased and sold by the Funds and which broker-dealers are eligible
to execute the Funds' portfolio transactions, subject to the instructions of,
and review by, the Funds and the Boards. Purchases and sales of securities
within the U.S. other than on a securities exchange will generally be executed
directly with a "market-maker" unless, in the opinion of the Manager or a Fund,
a better price and execution can otherwise be obtained by using a broker for the
transaction.
The Foreign and Global Equity Funds contemplate purchasing
most equity securities directly in the securities markets located in emerging or
developing countries or in the over-the-counter markets. A Fund purchasing ADRs
and EDRs may purchase those listed on stock exchanges, or traded in the
over-the-counter markets in the U.S. or Europe, as the case may be. ADRs, like
other securities traded in the U.S., will be subject to negotiated commission
rates. The foreign and domestic debt securities and money market instruments in
which a Fund may invest may be traded in the over-the-counter markets.
Purchases of portfolio securities for the Funds also may be
made directly from issuers or from underwriters. Where possible, purchase and
sale transactions will be effected through dealers (including banks) which
specialize in the types of securities which the Funds will be holding, unless
better executions are available elsewhere. Dealers and underwriters
B-42
<PAGE>
usually act as principals for their own account. Purchases from underwriters
will include a concession paid by the issuer to the underwriter and purchases
from dealers will include the spread between the bid and the asked price. If the
execution and price offered by more than one dealer or underwriter are
comparable, the order may be allocated to a dealer or underwriter that has
provided research or other services as discussed below.
In placing portfolio transactions, the Manager will use its
best efforts to choose a broker-dealer capable of providing the services
necessary generally to obtain the most favorable price and execution available.
The full range and quality of services available will be considered in making
these determinations, such as the firm's ability to execute trades in a specific
market required by a Fund, such as in an emerging market, the size of the order,
the difficulty of execution, the operational facilities of the firm involved,
the firm's risk in positioning a block of securities, and other factors.
Provided the Trusts' officers are satisfied that the Funds are
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Funds' shares as a factor in the selection of
broker-dealers to execute their portfolio transactions. The placement of
portfolio transactions with broker-dealers who sell shares of the Funds is
subject to rules adopted by the National Association of Securities Dealers, Inc.
While the Funds' general policy is to seek first to obtain the
most favorable price and execution available, in selecting a broker-dealer to
execute portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Funds or to the Manager, even if the specific services were not imputed just to
the Funds and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, a Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by that Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to that Fund or
assist the Manager in carrying out its responsibilities to that Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Funds. The Boards review all brokerage allocations where
services other than best price and execution capabilities are a factor to ensure
that the other services provided meet the criteria outlined above and produce a
benefit to the Funds.
Investment decisions for the Funds are made independently from
those of other client accounts of the Manager or its affiliates, and suitability
is always a paramount consideration. Nevertheless, it is possible that at times
the same securities will be acceptable for one or more Funds and for one or more
of such client accounts. The Manager and its personnel may have interests in one
or more of those client accounts, either through direct investment or because of
management fees based on gains in the account. The Manager has adopted
allocation procedures to ensure the fair allocation of securities and prices
between the Funds and the Manager's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use
B-43
<PAGE>
allocation methodologies that are appropriate to their investment discipline on
client accounts.
To the extent any of the Manager's client accounts and a Fund
seek to acquire the same security at the same general time (especially if the
security is thinly traded or is a small cap stock), that Fund may not be able to
acquire as large a portion of such security as it desires, or it may have to pay
a higher price or obtain a lower yield for such security. Similarly, a Fund may
not be able to obtain as high a price for, or as large an execution of, an order
to sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that a Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between that Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased or sold and other factors deemed relevant
by the Manager. In many cases, the Funds' transactions are bunched with the
transactions for other client accounts. It is recognized that in some cases this
system could have a detrimental effect on the price or value of the security
insofar as that Fund is concerned. In other cases, however, it is believed that
the ability of the Fund to participate in volume transactions may produce better
executions for the Fund.
Other than for the U.S. Fixed Income and Money Market Funds,
the Manager's sell discipline for investments in issuers is based on the premise
of a long-term investment horizon; however, sudden changes in valuation levels
arising from, for example, new macroeconomic policies, political developments,
and industry conditions could change the assumed time horizon. Liquidity,
volatility, and overall risk of a position are other factors considered by the
Manager in determining the appropriate investment horizon. These Funds will
limit investments in illiquid securities to 15% of net assets.
For each Fund, sell decisions at the country level are
dependent on the results of the Manager's asset allocation model. Some countries
impose restrictions on repatriation of capital and/or dividends which would
lengthen the Manager's assumed time horizon in those countries. In addition, the
rapid pace of privatization and initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a
number of factors including current stock valuation relative to the estimated
fair value range, or a high P/E relative to expected growth. Negative changes in
the relevant industry sector, or a reduction in international competitiveness
and a declining financial flexibility may also signal a sell.
For the year ended June 30, 1997, the Funds' total securities
transactions generated commissions of $12,725,341, of which $27,015 was paid to
Montgomery Securities.
For the year ended June 30, 1996, the Funds' total securities
transactions generated commissions of $14,874,777, of which $164,056 was paid to
Montgomery Securities. For the year ended June 30, 1995, the Funds' total
securities transactions generated commissions of $11,840,329, of which $74,850
was paid to Montgomery Securities. Throughout those fiscal years, Montgomery
Securities was affiliated with the Funds through its ownership of Montgomery
Asset Management L.P., the former Manager of the Funds.
The Funds do not effect securities transactions through
brokers in accordance with any formula, nor do they effect securities
transactions through such brokers solely for selling shares of the Funds.
However, brokers who execute brokerage transactions as described above may from
time to time effect purchases of shares of the Funds for their customers.
B-44
<PAGE>
Depending on the Manager's view of market conditions, the
Funds may or may not purchase securities with the expectation of holding them to
maturity, although their general policy is to hold securities to maturity. The
Funds may, however, sell securities prior to maturity to meet redemptions or as
a result of a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Trust reserves the right in its sole discretion to (i)
suspend the continued offering of its Funds' shares, and (ii) reject purchase
orders in whole or in part when in the judgment of the Manager or the
Distributor such suspension or rejection is in the best interest of a Fund.
When in the judgment of the Manager it is in the best
interests of a Fund, an investor may purchase shares of that Fund by tendering
payment in kind in the form of securities, provided that any such tendered
securities are readily marketable (e.g., the Funds will not acquire restricted
securities), their acquisition is consistent with that Fund's investment
objective and policies, and the tendered securities are otherwise acceptable to
that Fund's Manager. Such securities are acquired by that Fund only for the
purpose of investment and not for resale. For the purposes of sales of shares of
that Fund for such securities, the tendered securities shall be valued at the
identical time and in the identical manner that the portfolio securities of that
Fund are valued for the purpose of calculating the net asset value of that
Fund's shares. A shareholder who purchases shares of a Fund by tendering payment
for the shares in the form of other securities may be required to recognize gain
or loss for income tax purposes on the difference, if any, between the adjusted
basis of the securities tendered to the Fund and the purchase price of the
Fund's shares acquired by the shareholder.
Payments to shareholders for shares of a Fund redeemed
directly from that Fund will be made as promptly as possible but no later than
three days after receipt by the Transfer Agent of the written request in proper
form, with the appropriate documentation as stated in the Prospectus, except
that a Fund may suspend the right of redemption or postpone the date of payment
during any period when (i) trading on the New York Stock Exchange ("NYSE") is
restricted as determined by the SEC or the NYSE is closed for other than
weekends and holidays; (ii) an emergency exists as determined by the SEC (upon
application by a Fund pursuant to Section 22(e) of the Investment Company Act)
making disposal of portfolio securities or valuation of net assets of a Fund not
reasonably practicable; or (iii) for such other period as the SEC may permit for
the protection of the Fund's shareholders.
The Funds intend to pay cash (U.S. dollars) for all shares
redeemed, but, under abnormal conditions that make payment in cash unwise, the
Funds may make payment partly in their portfolio securities with a current
amortized cost or market value, as appropriate, equal to the redemption price.
Although the Funds do not anticipate that they will make any part of a
redemption payment in securities, if such payment were made, an investor may
incur brokerage costs in converting such securities to cash. The Trusts have
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Funds pay in cash all requests for
redemption by any shareholder of record limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Trust's net
assets at the beginning of such period.
The value of shares on redemption or repurchase may be more or
less than the investor's cost, depending upon the market value of a Fund's
portfolio securities at the time of redemption or repurchase.
B-45
<PAGE>
Retirement Plans. Shares of the Taxable Funds are available
for purchase by any retirement plan, including Keogh plans, 401(k) plans, 403(b)
plans and individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Taxable
Funds through an IRA, there is available through these Funds a prototype
individual retirement account and custody agreement. The custody agreement
provides that DST Systems, Inc. will act as custodian under the plan, and will
furnish custodial services for an annual maintenance fee per participating
account of $10(These fees are in addition to the normal custodian charges paid
by these Funds and will be deducted automatically from each Participant's
account.) For further details, including the right to appoint a successor
custodian, see the plan and custody agreements and the IRA Disclosure Statement
as provided by these Funds. An IRA that invests in shares of these Funds may
also be used by employers who have adopted a Simplified Employee Pension Plan.
Individuals or employers who wish to invest in shares of a Fund under a
custodianship with another bank or trust company must make individual
arrangements with such institution.
The IRA Disclosure Statement available from the Taxable Funds
contains more information on the amount investors may contribute and the
deductibility of IRA contributions. In summary, an individual may make
deductible contributions to the IRA of up to 100% of earned compensation, not to
exceed $2,000 annually (or $2,250 to two IRAs if there is a non-working
spouse)For tax years beginning after 1996, however, the $2,250 limitation is
expended to $4,000. An IRA may be established whether or not the amount of the
contribution is deductible. Generally, a full deduction for federal income tax
purposes will only be allowed to taxpayers who meet one of the following two
additional tests:
(A) the individual and the individual's spouse are each not an
active participant in an employer's qualified retirement plan, or
(B) the individual's adjusted gross income (with some
modifications) before the IRA deduction is (i) $40,000 or less for married
couples filing jointly, or (ii) $25,000 or less for single individuals. The
maximum deduction is reduced for a married couple filing jointly with a combined
adjusted gross income (before the IRA deduction) between $40,000 and $50,000,
and for a single individual with an adjusted gross income (before the IRA
deduction) between $25,000 and $35,000.
It is advisable for an investor considering the funding of any
retirement plan to consult with an attorney or to obtain advice from a competent
retirement plan consultant with respect to the requirements of such plans and
the tax aspects thereof.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is calculated as
follows: all liabilities incurred or accrued are deducted from the valuation of
total assets, which includes accrued but undistributed income; the resulting net
assets are divided by the number of shares of that Fund outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
As noted in the Prospectus, the net asset value of shares of
the Funds generally will be determined at least once daily as of 4:00 p.m.
(12:00 noon for the Money Market Funds), eastern time, (or earlier when trading
closes earlier) on each day the NYSE is open for trading (except national bank
holidays for the Fixed Income Funds). It is expected that the NYSE will be
closed on Saturdays and Sundays and on New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas. The national bank holidays, in addition to New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day,
B-46
<PAGE>
Thanksgiving Day and Christmas, include January 2, Good Friday, Columbus Day,
Veteran's Day and December 26. The Funds may, but do not expect to, determine
the net asset values of their shares on any day when the NYSE is not open for
trading if there is sufficient trading in their portfolio securities on such
days to affect materially per-share net asset value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Funds' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Fund calculates its net asset value may occur between the times
when such securities are valued and the close of the NYSE that will not be
reflected in the computation of that Fund's net asset value unless the Board or
its delegates deem that such events would materially affect the net asset value,
in which case an adjustment would be made.
Generally, the Funds' investments are valued at market value
or, in the absence of a market value, at fair value as determined in good faith
by the Manager and the Trust's Pricing Committee pursuant to procedures approved
by or under the direction of the Board.
The Funds' securities, including ADRs, EDRs and GDRs, which
are traded on securities exchanges are valued at the last sale price on the
exchange on which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any reported sales, at the mean
between the last available bid and asked price. Securities that are traded on
more than one exchange are valued on the exchange determined by the Manager to
be the primary market. Securities traded in the over-the-counter market are
valued at the mean between the last available bid and asked price prior to the
time of valuation. Securities and assets for which market quotations are not
readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Boards.
Short-term debt obligations with remaining maturities in
excess of 60 days are valued at current market prices, as discussed above.
Short-term securities with 60 days or less remaining to maturity are, unless
conditions indicate otherwise, amortized to maturity based on their cost to a
Fund if acquired within 60 days of maturity or, if already held by a Fund on the
60th day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and
asset-backed securities held by the Funds are valued on the basis of valuations
provided by dealers in those instruments, by an independent pricing service,
approved by the appropriate Board, or at fair value as determined in good faith
by procedures approved by the Boards. Any such pricing service, in determining
value, will use information with respect to transactions in the securities being
valued, quotations from dealers, market transactions in comparable securities,
analyses and evaluations of various relationships between securities and yield
to maturity information.
An option that is written by a Fund is generally valued at the
last sale price or, in the absence of the last sale price, the last offer price.
An option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures
B-47
<PAGE>
contracts will be valued at their fair market value as determined by or under
the direction of the Boards.
If any securities held by a Fund are restricted as to resale
or do not have readily available market quotations, the Manager and the Trusts'
Pricing Committees determine their fair value, following procedures approved by
the Boards. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition)In addition, specific factors are also generally considered, such as
the cost of the investment, the market value of any unrestricted securities of
the same class (both at the time of purchase and at the time of valuation), the
size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of
foreign currencies are translated into U.S. dollars at the official exchange
rate or, alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Boards in good faith will establish a conversion rate for such currency.
All other assets of the Funds are valued in such manner as the
Boards in good faith deem appropriate to reflect their fair value.
The Money Market Funds value their portfolio instruments at
amortized cost, which means that securities are valued at their acquisition
cost, as adjusted for amortization of premium or discount, rather than at
current market value. Calculations are made at least weekly to compare the value
of these Funds' investments valued at amortized cost with market values. Market
valuations are obtained by using actual quotations provided by market makers,
estimates of market value, or values obtained from yield data relating to
classes of money market instruments published by reputable sources at the mean
between the bid and asked prices for the instruments. The amortized cost method
of valuation seeks to maintain a stable $1.00 per-share net asset value even
where there are fluctuations in interest rates that affect the value of
portfolio instruments. Accordingly, this method of valuation can in certain
circumstances lead to a dilution of shareholders' interest. If a deviation of
0.50% or more were to occur between the net asset value per share calculated by
reference to market values and these Fund's $1.00 per-share net asset value, or
if there were any other deviation which the Board of Trustees believed would
result in a material dilution to shareholders or purchasers, the Board would
promptly consider what action, if any, should be initiated. If these Funds'
per-share net asset values (computed using market values) declined, or were
expected to decline, below $1.00 (computed using amortized cost), the Board
might temporarily reduce or suspend dividend payments or take other action in an
effort to maintain the net asset value at $1.00 per share. As a result of such
reduction or suspension of dividends or other action by the Board, an investor
would receive less income during a given period than if such a reduction or
suspension had not taken place. Such action could result in investors receiving
no dividend for the period during which they hold their shares and receiving,
upon redemption, a price per share lower than that which they paid. On the other
hand, if these Funds' per-share net asset values (computed using market values)
were to increase, or were
B-48
<PAGE>
anticipated to increase, above $1.00 (computed using amortized cost), the Board
might supplement dividends in an effort to maintain the net asset value at $1.00
per share.
PRINCIPAL UNDERWRITER
The Distributor acts as the Funds' principal underwriter in a
continuous public offering of the Funds' shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, is a member of
most of the principal securities exchanges in the U.S., and is a member of the
National Association of Securities Dealers, Inc. The Underwriting Agreement
between each Fund and the Distributor is in effect for each Fund for the same
periods as the Agreements, and shall continue in effect thereafter for periods
not exceeding one year if approved at least annually by (i) the appropriate
Board of Trustees or the vote of a majority of the outstanding securities of
that Fund (as defined in the Investment Company Act), and (ii) a majority of the
Trustees who are not interested persons of any such party, in each case by a
vote cast in person at a meeting called for the purpose of voting on such
approval. The Underwriting Agreement with respect to each Fund may be terminated
without penalty by the parties thereto upon 60 days' written notice and is
automatically terminated in the event of its assignment as defined in the
Investment Company Act. There are no underwriting commissions paid with respect
to sales of the Funds' shares.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Funds may, from time to time,
quote various performance figures in advertisements and investor communications
to illustrate their past performance. Performance figures will be calculated
separately for the Class R, Class P and Class L shares.
The Money Market Funds. Current yield reflects the interest
income per share earned by these Funds' investments. Current yield 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 a seven-day period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then annualizing the result by multiplying the base period return by
(365/7).
Effective yield is computed in the same manner except that the
annualization of the return for the seven-day period reflects the results of
compounding by adding 1 to the base period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result. This figure is
obtained using the Securities and Exchange Commission formula:
Effective Yield = [(Base Period Return + 1) 365/7 ] -1
The Short Bond Fund and California Intermediate Bond Fund.
These Funds' 30-day yield figure described in the Prospectus is calculated
according to a formula prescribed by the SEC, expressed as follows:
6
YIELD=2[(a-b +1) -1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
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<PAGE>
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining the interest earned (variable
"a" in the formula) on debt obligations that were purchased by these Funds at a
discount or premium, the formula generally calls for amortization of the
discount or premium; the amortization schedule will be adjusted monthly to
reflect changes in the market values of the debt obligations.
Investors should recognize that, in periods of declining
interest rates, these Funds' yields will tend to be somewhat higher than
prevailing market rates and, in periods of rising interest rates, will tend to
be somewhat lower. In addition, when interest rates are falling, monies received
by these Funds from the continuous sale of their shares will likely be invested
in instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
The Tax-Free Funds. A tax equivalent yield demonstrates the
taxable yield necessary to produce an after-tax yield equivalent to that of a
fund that invests in tax-exempt obligations. The tax equivalent yield for one of
the Tax-Free Funds is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Fund (computed for the Fund as indicated above)
that is tax exempt by one minus a stated income tax rate and adding the quotient
to that portion (if any) of the yield of the Fund that is not tax exempt. In
calculating tax equivalent yields for the California Intermediate Bond and
California Money Funds, these Funds assume an effective tax rate (combining
federal and California tax rates) of 45.22%, based on a California tax rate of
9.3% combined with a 39.6% federal tax rate. The Federal Money Fund assumes a
federal tax rate of 39.6% The effective rate used in determining such yield does
not reflect the tax costs resulting from the loss of the benefit of personal
exemptions and itemized deductions that may result from the receipt of
additional taxable income by taxpayers with adjusted gross incomes exceeding
certain levels. The tax equivalent yield may be higher than the rate stated for
taxpayers subject to the loss of these benefits.
<TABLE>
Yields. The yields for the indicated periods ended June 30,
1997, were as follows:
<CAPTION>
Tax-Equiv.
Effective Effective Current Tax-Equiv.
Yield Yield Yield* Yield Yield*
Fund (7-day) (7-day) (7-Day) (30-day) (30-day)
<S> <C> <C> <C> <C> <C>
Montgomery Total N/A N/A N/A N/A N/A
Return Bond Fund
Montgomery Short N/A N/A N/A 6.03% N/A
Duration Government
Bond Fund
Montgomery Government 5.10% 5.23% N/A 5.09% N/A
Reserve Fund
Montgomery Federal 3.61% 3.67% 6.08% 3.29% 5.45%
Tax-Free Money Fund
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<PAGE>
Montgomery N/A N/A N/A 4.19% 7.65%
California Tax-Free
Intermediate Bond
Fund
Montgomery 3.43% 3.49% 6.37% 3.21% 5.86%
California Tax-Free
Money Fund
<FN>
*Calculated using a combined federal and California income tax rate of 46.24%
for the California Funds and a federal rate of 39.6% for the Federal Money Fund.
</FN>
</TABLE>
Average Annual Total Return. Total return may be stated for
any relevant period as specified in the advertisement or communication. Any
statements of total return for a Fund will be accompanied by information on that
Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from that Fund's inception of operations. The
Funds may also advertise aggregate and average total return information over
different periods of time. A Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC expressed as follows:
n
P(1 + T) =ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or
10-year period at the end of each respective
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions
and complete redemption of the hypothetical
investment at the end of the measuring period.
Aggregate Total Return. A Fund's "aggregate total return"
figures represent the cumulative change in the value of an investment in that
Fund for the specified period and are computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of a l-, 5- or
10-year period at the end of a l-, 5- or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions
and complete redemption of the hypothetical
investment at the end of the measuring period.
Each Fund's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its operating
expenses. Consequently, any given performance quotation should not be considered
representative of that Fund's
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<PAGE>
performance for any specified period in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in that Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing that Fund's
performance with that of other investment companies should give consideration to
the quality and maturity of the respective investment companies' portfolio
securities.
<TABLE>
The average annual total return for each Fund for the periods
indicated was as follows:
<CAPTION>
Year 5-Years Inception*
Ended Ended Through
Fund June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
Montgomery Growth Fund 20.44% N/A 26.78%
Montgomery Small Cap 10.97% N/A 28.65%
Opportunities Fund
Montgomery Small Cap Fund 6.81% 18.07% 20.47%
Montgomery Micro Cap Fund 14.77% N/A 24.26%
Montgomery Equity Income 26.02% N/A 23.67%
Fund
Montgomery International 19.20% N/A 23.43%
Growth Fund
Montgomery International
Small Cap Fund 15.48% N/A 10.06%
Montgomery Emerging Markets
Fund 19.34% 12.84% 11.91%
Montgomery Emerging Asia 57.80% N/A 57.80%
Fund
Montgomery Latin America N/A N/A N/A
Fund
Montgomery Global
Opportunities Fund 18.71% N/A 16.09%
Montgomery Global
Communications Fund 14.43% N/A 14.30%
Montgomery Select 50 Fund 26.35% N/A 37.38%
Montgomery U.S. Asset
Allocation Fund 14.65% N/A 23.21%
Montgomery Global Asset
Allocation Fund 19.20% N/A 23.43%
Montgomery Total Return Bond
Fund N/A N/A N/A
Montgomery Short Duration
Government Bond Fund 6.79% N/A 6.38%
</TABLE>
B-52
<PAGE>
<TABLE>
<CAPTION>
Year 5-Years Inception*
Ended Ended Through
Fund June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C>
Montgomery Government
Reserve Fund 5.03% N/A 4.30%
Montgomery California Tax-
Free Intermediate Bond Fund 6.91% N/A 5.17%
Montgomery California Tax-
Free Money Fund 2.95% N/A 3.15%
Montgomery Federal Tax-Free N/A N/A 3.26%
Money Fund
<FN>
- ----------------
* Total return for periods of less than one year are
aggregate, not annualized, return figures. The dates of inception for the Funds
were:
Growth Fund, September 30, 1993; Small Cap Opportunities Fund, December 29,
1995; Small Cap Fund, July 13, 1990; Micro Cap Fund, December 30, 1994; Equity
Income Fund, September 30, 1994; International Growth Fund, June 30, 1995;
International Small Cap Fund, September 30, 1993; Emerging Markets Fund, March
1, 1992; Emerging Asia Fund, September 30, 1996; Latin America Fund, June 30,
1997; Global Opportunities Fund, September 30, 1993; Global Communications Fund,
June 1, 1993; Select 50 Fund, October 27, 1995; U.S. Asset Allocation Fund,
March 31, 1994; Global Asset Allocation Fund, January 2, 1997; Total Return Bond
Fund, June 30, 1997; Short Duration Government Bond Fund, December 18, 1992;
Government Reserve Fund, September 14, 1992; California Intermediate Bond Fund,
July 1, 1993; California Tax-Free Money Fund, September 30, 1994; and Federal
Tax-Free Money Fund, June 30, 1996.
</FN>
</TABLE>
Presentation of Other Performance Information Regarding the Opportunities Fund
John Boich and Oscar Castro jointly managed a limited
partnership called the Common Goal World Fund Limited Partnership (the
"Partnership") before joining the Manager. John Boich has served as the
Partnership's General Partner since its inception on January 7, 1990 until April
1993, when Mr. Castro and Mr. Boich joined the Manager as Managing Directors and
Portfolio Managers. On September 30, 1993, the Montgomery Global Opportunities
Fund, which has a similar investment strategy as the partnership, was launched
On October 1, 1993, the Partnership was dissolved and the assets were
transferred in-kind into the Opportunities Fund. Consistent with applicable law,
the Managers may advertise the performance of the Partnership as part of
materials concerning the Opportunity Fund.
The annual total return for the Partnership for the periods
indicated was as follows:
Period Partnership Annual Total Return
(Net of fees)
Year ended Dec. 31, 1990* 2.04%
Year ended Dec. 31, 1991 25.32%
Year ended Dec. 31, 1992 4.53%
9-month Period ended Sept. 30, 1993 17.29%
B-53
<PAGE>
*The Partnership commenced operations on January 7, 1990.
Presentation of Other Performance Information Regarding the Emerging Asia Fund
From time to time, the Manager may advertise the performance of a
related mutual fund sold only in Canada and advised by the Manager that has a
substantially similar investment objective as the Emerging Asia Fund. The
related mutual fund, called the "Navigator Asia Pacific Fund" commenced
operations on May 19, 1995. The Manager managed that Fund until July 31, 1997.
The performance information of the Navigator Asia Pacific Fund (net of fees) was
as follows:
Period Aggregate Total Return
(Net of fees)
Year to date ended July 31, 1997 42.09%
Since inception 78.70%
Comparisons. To help investors better evaluate how an
investment in the Funds might satisfy their investment objectives,
advertisements and other materials regarding the Funds may discuss various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
Publications, indices and averages, including but not limited to, the following
may be used in discussion of a Fund's performance or the investment
opportunities it may offer:
a) Standard & Poor's 500 Composite Stock Index, one or more of the
Morgan Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) Bank Rate Monitor -- A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings account rates
and average loan rates.
c) Lipper -- Mutual Fund Performance Analysis and Lipper Fixed Income
Fund Performance Analysis -- A ranking service that measures total return and
average current yield for the mutual fund industry and ranks individual mutual
fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Donoghue's Money Fund Report -- Industry averages for 7-day
annualized and compounded yields of taxable, tax-free, and government money
funds.
e) Salomon Brothers Bond Market Roundup -- A weekly publication which
reviews yield spread changes in the major sectors of the money, government
agency, futures, options, mortgage, corporate, Yankee, Eurodollar, municipal,
and preferred stock markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
f) Lehman Brothers indices -- Lehman Brothers fixed-income indices may
be used for appropriate comparisons.
g) other indices --- including Consumer Price Index, Ibbotson,
Micropal, CNBC/Financial News Composite Index, MSCI EAFE Index (Morgan Stanley
Capital International, Europe, Australasia, Far East Index -- a
capitalization-weighted index that includes all
B-54
<PAGE>
developed world markets except for those in North America), Datastream,
Worldscope, NASDAQ, Russell 2000 and IFC Emerging Markets Database.
In addition, one or more portfolio managers or other employees
of the Manager may be interviewed by print media, such as by the Wall Street
Journal or Business Week, or electronic news media, and such interviews may be
reprinted or excerpted for the purpose of advertising regarding the Funds.
In assessing such comparisons of performance, an investor
should keep in mind that the composition of the investments in the reported
indices and averages is not identical to the Funds' portfolios, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formulae used by the
Funds to calculate their figures.
The Funds may also publish their relative rankings as
determined by independent mutual fund ranking services like Lipper Analytical
Services, Inc. and Morningstar, Inc.
Investors should note that the investment results of the Funds
will fluctuate over time, and any presentation of a Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
Reasons to Invest in the Funds. 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. The information will generally 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,
Bloomberg, Morningstar, Barings, WEFA, Consensus Estimates, Datastream,
Micropal, 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. The Funds
may, by way of further example, present a region as possessing the fastest
growing economies and may also present projected gross domestic product (GDP)
for selected economies. In using this information, the Montgomery Emerging Asia
Fund also may claim that certain Asian countries are regarded as having high
rates of growth for their economies (GDP), international trade and corporate
earnings; thus producing what the Manager believes to be a favorable investment
climate.
Research. The Manager has developed its own tradition of
intensive research and has made intensive research one of the important
characteristics of the Montgomery Funds style.
The portfolio managers for Montgomery's Foreign and Global
Equity Funds work extensively on developing an in-depth understanding of
particular foreign markets and particular companies. And they very often
discover that they are the first analysts from the United States to meet with
representatives of foreign companies, especially those in emerging markets
nations.
Extensive research into companies that are not well known --
discovering new opportunities for investment -- is a theme that crosses a number
of the Funds and is reflected in the number of Funds oriented towards smaller
capitalization businesses
B-55
<PAGE>
In-depth research, however, goes beyond gaining an
understanding of unknown opportunities. The portfolio analysts have also
developed new ways of gaining information about well-known parts of the domestic
market. The growth equity team, for example, has developed its own strategy and
proprietary database for analyzing the growth potential of U.S. companies, often
large, well-known companies.
From time to time, advertising and sales materials for the Montgomery
Funds may include biographical information about portfolio managers as well as
commentary by portfolio managers regarding investment strategy, asset growth,
current or past economic, political or financial conditions that may be of
interest to investors.
Also, from time to time, the Manager may refer to its quality and size,
including references to its total assets under management (currently $9 billion
for retail and institutional investors) and total shareholders invested in the
Funds (currently around 307,000).
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress
through periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the organization of The
Montgomery Funds and the registration of shares of the Small Cap Fund as the
initial series of the Trust have been assumed by the Small Cap Fund; all
expenses incurred in connection with the organization of The Montgomery Funds II
have been assumed by Montgomery Institutional Series: Emerging Markets Portfolio
and the Manager. Expenses incurred in connection with the establishment and
registration of shares of each of the other funds constituting Trusts as
separate series of the Trusts have been assumed by each respective Fund. The
expenses incurred in connection with the establishment and registration of
shares of the Funds as separate series of the Trusts have been assumed by the
respective Funds and are being amortized over a period of five years commencing
with their respective dates of inception. The Manager has agreed, to the extent
necessary, to advance the organizational expenses incurred by certain Funds and
will be reimbursed for such expenses after commencement of those Funds'
operations. Investors purchasing shares of a Fund bear such expenses only as
they are amortized daily against that Fund's investment income.
As noted above, Morgan Stanley Trust Company (the "Custodian")
acts as custodian of the securities and other assets of the Funds. The Custodian
does not participate in decisions relating to the purchase and sale of
securities by the Funds.
Investors Fiduciary Trust Company, 127 West 10th Street,
Kansas City, Missouri 64105, is the Funds' Master Transfer Agent. The Master
Transfer Agent has delegated certain transfer agent functions to DST Systems,
Inc., P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' Transfer and
Dividend Disbursing Agent.
Deloitte & Touche LLP, 50 Fremont Street, San Francisco,
California 94105, are the independent auditors for the Funds.
The validity of shares offered hereby will be passed on by
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
The shareholders of The Montgomery Funds (but not The
Montgomery Funds II) as shareholders of a Massachusetts business trust could,
under certain circumstances, be held
B-56
<PAGE>
personally liable as partners for its obligations. However, the Trust's
Agreement and Declaration of Trust ("Declaration of Trust") contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Funds' assets for any shareholder held personally liable for
obligations of the Funds or Trust. The Declaration of Trust provides that the
Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Funds or Trust and satisfy any
judgment thereon. All such rights are limited to the assets of the Funds. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the activities
of the Trust as an investment company as distinguished from an operating company
would not likely give rise to liabilities in excess of the Funds' total assets.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is extremely remote because it is limited to the unlikely
circumstances in which both inadequate insurance exists and a Fund itself is
unable to meet its obligations.
Among the Boards' powers enumerated in the Agreements and
Declaration of Trust is the authority to terminate the Trusts or any of their
series, or to merge or consolidate the Trusts or one or more of their series
with another trust or company without the need to seek shareholder approval of
any such action.
As of September 30, 1997 to the knowledge of the Funds, the
following shareholders owned of record 5 percent or more of the outstanding
Class R Shares of the respective Funds indicated:
B-57
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Growth Fund
Charles Schwab & Co., Inc. 18,675,502 36.66
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 4,265,685 8.37
For The Exclusive Benefit of Our Customers
ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Small Cap Opportunities Fund
Charles Schwab & Co., Inc. 4,875,495 36.73
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,027,699 9.10
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Small Cap Fund
The Trust Company of 735,263 7.57
Knoxville
620 Market Street, #300
Knoxville, TN 37902-2232
Charles Schwab & Co., Inc. 1,544,261 15.89
101 Montgomery Street
San Francisco, CA 94104-4122
Micro Cap Fund
Charles Schwab & Co., Inc. 6,178,834 36.62
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 980,263 5.81
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Equity Income Fund
</TABLE>
B-58
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Charles Schwab & Co., Inc. 1,085,789 51.12
101 Montgomery Street
San Francisco, CA 94104-4122
International Growth Fund
Charles Schwab & Co., Inc. 460,926 18.58
101 Montgomery Street
San Francisco, CA 94104-4122
Stanley S. Schwartz TR 209,595 8.45
U/A December 20, 1988 Stanley S. Schwartz
Rev Living Trust/Arista Foundation
Montgomery Asset Management
Attn: S. Wang
101 California Street
San Francisco, CA 94111-2702
Resources Trust Co. Custody 241,362 9.73
For the Exclusive Benefit of Ian
P.O. Box 3865
Englewood, CO 80155-3865
International Small Cap Fund
Charles Schwab & Co., Inc. 1,202,775 40.90
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp for the 206,203 7.01
Exclusive Use of Our Customers
Attn: Mutual Funds
PO Box 3730
Church Street Station
New York, NY 10008-3730
Emerging Markets Fund
Charles Schwab & Co., Inc. 35,178,272 45.39
101 Montgomery Street
San Francisco, CA 94014-4122
National Financial Services Corp. 6,415,317 8.28
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Emerging Asia Fund
Charles Schwab & Co., Inc. 1,043,187 34.78
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
B-59
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
National Financial Services Corp. 490,193 16.34
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Global Opportunities Fund
Charles Schwab & Co., Inc. 697,590 38.29
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 134,397 7.38
For The Exclusive Benefit of Our Customers
--ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Wayne Boich 133,436 7.32
155 East Broad, No. 23
Columbus, OH 43215-3609
Global Communications Fund
Charles Schwab & Co., Inc. 3,029,720 39.65
101 Montgomery Street
San Francisco, CA 94104-4122
Select 50 Fund
Charles Schwab & Co., Inc. 3,459,076 31.11
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,175,797 10.57
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Latin America Fund
Charles Schwab & Co., Inc. 105,664 12.71
101 Montgomery Street
San Francisco, CA 94104-9122
Donaldson, Lufkin & Jenrette 45,872 5.52
Securities Corporation
Mutual Funds Department, 5th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052
</TABLE>
B-60
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Montgomery Securities 61,118 7.35
401K Deferred Compensation Plan
For the Exclusive Benefit of Clients
Attn: Jeanette Harrison
600 Montgomery Street
San Francisco, CA 94111-2777
Nations Banc Montgomery Seecurities 83,333 10.03
001-00200-14
Attn: Mutual Funds, 5th Floor
600 Montgomery Street
San Francisco, CA 94111-2702
U.S. Asset Allocation Fund
Charles Schwab & Co., Inc. 2,126,188 33.16
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp. 882,783 13.77
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Total Return Bond Fund
Asset Allocation Fund 6,281,199 93.76
Attn: Gina Lopez
101 California Street
San Francisco, CA 94111-5802
Short Duration Government Bond Fund
Charles Schwab & Co., Inc. 1,376,828 31.47
101 Montgomery Street
San Francisco, CA 94104-4122
Donaldson, Lufkin & Jenrette 451,734 10.32
Securities Corp.
Mutual Funds Department, 5th Floor
P. O. Box 2052
Jersey City, NJ 07383-2052
KONIAG Inc. 480,341 10.98
c/o Montgomery Asset Management
Attn: Carl Obeck
600 Montgomery Street
San Francisco, CA 94111-2702
</TABLE>
B-61
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Prudential Securities Inc. 553,649 12.65
Special Custody Account for The Exclusive
Benefit of Customers-PC
1 New York Plaza
Attn: Mutual Funds
New York, NY 10004-1902
Wertheim Schroeder & Co. Inc. 255,929 5.85
Mutual Fund Control A/C
c/o LEWCO Securities
Attn: Tony Muoia
34 Exchange Place, Floor 4
Jersey City, NJ 07302-3901
Government Reserve Fund
Mary Miner, Trustee for Robert 59,393,306 10.72
Miner and Mary Miner Trust
U/A dated 3/14/94
1832 Baker Street
San Francisco, CA 94115-2011
California Tax-Free Intermediate Bond Fund
Charles Schwab & Co., Inc. 913,915 45.83
101 Montgomery Street
San Francisco, CA 94104-4122
Montgomery Securities 113,202 5.68
110-02832-15
Attn: Mutual Funds -- 4th Floor
600 Montgomery Street
San Francisco, CA 94111-2777
California Tax-Free Money Market Fund
First Broadcasting Company 8,020,823 5.14
Attn: Ron Unkefer
300 Broadway
San Francisco, CA 94133
</TABLE>
B-62
<PAGE>
<TABLE>
As of September 30, 1997 to the knowledge of the Funds, the
following shareholders owned of record 5 percent or more of the outstanding
Class P Shares of the respective Funds indicated:
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Growth Fund
Dreyfus Investment Services Corp. 1,014 26.56
FBO 649772181
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Dreyfus Investment Services Corp. 238 6.24
FBO 659026941
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Gruntal & Co. 357 9.34
FBO 210-08164-18
14 Wall Street
New York, NY 10005-2101
ABN AMRO Chicago Corp. 239 6.26
FBO 086-79443-16
Attn: Mutual Fund Operations
P.O. Box 6108
Chicago, IL 60680-6108
Gruntal & Co., L.L.C. 243 6.38
FBO 825-28374-12
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., L.L.C. 281 7.36
FBO 886-09481-19
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., L.L.C. 281 7.36
FBO 886-09482-18
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., L.L.C. 237 6.22
FBO 886-09483-17
14 Wall Street
New York, NY 10005-2101
Small Cap Opportunities Fund
E*Trade Securities Inc. 348 56.06
A/C 7880-1618
Thomas S. Smogolski C/F
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3317
</TABLE>
B-63
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
U.S. Clearing Corp. 138 22.26
FBO 720-90531-10
26 Broadway
New York, NY 1004-1798
Gruntal & Co., L.L.C. 135 21.69
FBO 886-10149-11
14 Wall Street
New York, NY 10005-2101
Small Cap Fund
State Street Bank & Trust Co. 176,596 41.94
U/A July 01, 1996
McClaren/Hart Employee Ret. Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. 80, 184 19.04
U/A January 2, 1996
Waretek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. Tr. 44,030 10.46
GE 401K Trac Plans
c/o Defined Contributions BFDS
P.O. Box 8705
Boston, MA 0226-8705
State Street Bank & Trust Co. Tr. 81,450 19.34
U/A December 1, 1993
Ameridata Tech. Employee Svgs. Plan
Attn: Steven Shipman - Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
State Street Bank & Trust Co. 38,819 9.22
The Bordon Group, Inc.
401K Retirement & P.S.P.
P.O. Box 1992
Boston, MA 02105-1992
Equity-Income Fund
State Street Bank & Trust Co. Tr. 63,370 99.98
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
Emerging Markets Fund
</TABLE>
B-64
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
State Street Bank & Trust Co. 27,464 64.80
V/A Jan. 2, 1996
Waretek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
US Clearing Corp. 2,199 5.19
FB0 720-90531-10
26 Broadway
New York, NY 1004-1798
US Clearing Corp. 5,851 13.81
FBO 780-16649-18
26 Broadway
New York, NY 10004-1798
Select 50 Fund
Gruntal & Co., LLC 122 5.13
FBO 884-04563-16
14 Wall Street
New York, NY 10005-2101
BA Investment Services 925 38.77
FBO 423416511
185 Berry Street, 3rd FL
San Francisco, CA 94107-1729
BA Investment Services 556 23.26
FBO 210426271
185 Berry Street, 3rd FL
San Francisco, CA 94107-1729
US Clearing Corp. 252 10.56
FBO 780-95252-10
26 Broadway
New York, NY 10004-1798
Anthony J. Mattio 226 9.49
Bank of America NT & SA
AS IRA Rollover Custodian
2555 Sundew Ave
Henderson, NV 89012-2911
U.S. Asset Allocation Fund
Gruntal & Co., LLC 316 26.59
FBO 886-09482-18
14 Wall Street
New York, NY 10005-2101
</TABLE>
B-65
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
<S> <C> <C>
Gruntal & Co., LLC 316 26.59
FBO 886-09481-19
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., LLC 290 24.36
FBO 880-12981-11
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., LLC 267 22.46
FBO 886-09483-17
14 Wall Street
New York, NY 10005-2101
</TABLE>
As of October 7, 1997, officers and directors of the
Montgomery Funds owned, in aggregate, of record more than 1% of the outstanding
shares in the California Tax-Free Intermediate Bond Fund, holding a combined
2.5% of the shares outstanding.
The Trusts are registered with the Securities and Exchange
Commission as non-diversified management investment companies, although each
Fund, except for the Tax-Free Funds, is a diversified series of the Trust. Such
a registration does not involve supervision of the management or policies of the
Funds. The Prospectus and this Statement of Additional Information omit certain
of the information contained in the Registration Statements filed with the SEC.
Copies of the Registration Statements may be obtained from the SEC upon payment
of the prescribed fee.
FINANCIAL STATEMENTS
Audited financial statements for the relevant periods ending
June 30, 1997, for the Growth, Micro Cap, Small Cap, Small Cap Opportunities,
Equity Income, Opportunities, Communications, International Growth,
International Small Cap, Emerging Markets, Select 50, U.S. Asset Allocation,
Global Asset Allocation, Short Bond, Reserve, Federal Tax-Free Money, California
Intermediate Bond and California Money Funds, as contained in the Annual Report
to Shareholders of such Funds for the fiscal year ended June 30, 1997 (the
"Report"), are incorporated herein by reference to the Report.
B-66
<PAGE>
Appendix A
Description of Moody's corporate bond ratings:
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to a
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Nonrated -- where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1An application for rating was not received or accepted.
2The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
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3There is a lack of essential data pertaining to the issuer.
4The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonably up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
Description of Standard & Poor's Corporation's corporate bond ratings:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in the A category.
BB, B, CCC, CC, C -- Bonds rated BB, B, CCC, CC, and C are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C1 -- The rating C1 is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-) -- The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR -- indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Fitch Investor's Service
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AAA -- Bonds and notes rated AAA are regarded as being of the highest quality,
with the obligor having an extraordinary ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA -- Bonds and notes rated AA are regarded as high quality obligations. The
obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA-rated securities, and more subject to possible change
over the term of the issue.
A -- Bonds and notes rated A are regarded as being of good quality. The
obligor's ability to pay interest and repay principal is strong but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds and notes with higher ratings.
BBB -- Bonds and notes rated BBB are regarded as being of satisfactory quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
Note: Fitch ratings may be modified by the addition of a plus (+) or a minus (-)
sign to show relative standing within the major rating categories. These are
refinements more closely reflecting strengths and weaknesses, and are not to be
used as trend indicators.
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Commercial Paper Ratings
Moody's commercial paper ratings are assessments of the issuer's
ability to repay punctually promissory obligations. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers: Prime 1--highest quality; Prime
2--higher quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment. Ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
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