As filed with the Securities and Exchange Commission on February 13, 1997
Registration Nos. 33-34841
811-6011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 47
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 48
THE MONTGOMERY FUNDS
(Exact Name of Registrant as Specified in its Charter)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Office)
1-800-572-3863
(Registrant's Telephone Number, Including Area Code)
JACK G. LEVIN
600 Montgomery Street
San Francisco, California 94111
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to Rule 485(b)
__X__ on February 14, 1997, pursuant to Rule 485(b)
_____ 60 days after filing pursuant to Rule 485(a)(1)
_____ 75 days after filing pursuant to Rule 485(a)(2)
_____ on ________________ pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of securities under the
Securities Act of 1933. The Rule 24f-2 Notice for the Registrant's fiscal year
ended June 30, 1996 was filed on August 28, 1996.
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
(415) 772-6000
Total number of pages _____. Exhibit Index appears at _____
<PAGE>
THE MONTGOMERY FUNDS
CONTENTS OF POST-EFFECTIVE AMENDMENT
This post-effective amendment to the registration statement of the
Registrant contains the following documents* :
Facing Sheet
Contents of Post-Effective Amendment
Cross-Reference Sheet for shares of Montgomery Growth Fund, Montgomery
Equity Income Fund, Montgomery Small Cap Fund, Montgomery
Small Cap Opportunities Fund, Montgomery Micro Cap Fund,
Montgomery Global Opportunities Fund, Montgomery Global
Communications Fund, Montgomery International Small Cap Fund,
Montgomery International Growth Fund, Montgomery Emerging Asia
Fund, Montgomery Emerging Markets Fund, Montgomery Select 50
Fund, Montgomery Asset Allocation Fund, Montgomery Short
Duration Government Bond Fund, Montgomery Government Reserve
Fund, Montgomery Tax-Free Money Fund, Montgomery California
Tax-Free Intermediate Bond Fund, Montgomery California
Tax-Free Money Fund and Montgomery Global Asset Allocation
Fund
Part A - Prospectus for Class R shares of Montgomery Growth Fund,
Montgomery Equity Income Fund, Montgomery Small Cap Fund,
Montgomery Small Cap Opportunities Fund, Montgomery Micro Cap
Fund, Montgomery Global Opportunities Fund, Montgomery Global
Communications Fund, Montgomery International Small Cap Fund,
Montgomery International Growth Fund, Montgomery Emerging Asia
Fund, Montgomery Emerging Markets Fund, Montgomery Select 50
Fund, Montgomery Asset Allocation Fund, Montgomery Short
Duration Government Bond Fund, Montgomery Government Reserve
Fund, Montgomery Tax-Free Money Fund, Montgomery California
Tax-Free Intermediate Bond Fund, Montgomery California
Tax-Free Money Fund and Montgomery Global Asset Allocation
Fund
Part B - Combined Statement of Additional Information for Class R,
Class P and Class L shares of Montgomery Growth Fund,
Montgomery Equity Income Fund, Montgomery Small Cap Fund,
Montgomery Small Cap Opportunities Fund, Montgomery Micro Cap
Fund, Montgomery Global Opportunities Fund, Montgomery Global
Communications Fund, Montgomery International Small Cap Fund,
Montgomery International Growth Fund, Montgomery Emerging Asia
Fund, Montgomery Emerging Markets Fund, Montgomery Select 50
Fund, Montgomery Asset Allocation Fund, Montgomery Short
Duration Government Bond Fund, Montgomery Government Reserve
Fund, Montgomery Tax-Free Money Fund, Montgomery California
Tax-Free Intermediate Bond Fund, Montgomery California
Tax-Free Money Fund and Montgomery Global Asset Allocation
Fund
Part C - Other Information
Signature Page
Exhibit
- ------------
* This Amendment does not relate to the following documents:
prospectuses for the Class P shares and Class L shares for all of the above
series and the prospectus for the prospectus and statement of additional
information for Montgomery Technology Fund.
<PAGE>
THE MONTGOMERY FUNDS
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
Part A: Information Required in Prospectus
(For Combined Class R Prospectus)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Montgomery Funds," "Fees and Expenses of the Funds"
3. Condensed Financial "Financial Highlights"
4. General Description of Registrant Cover Page, "Montgomery Funds" "The Funds' Investment Objective
and Policies," "Portfolio Securities," "Other Investment Practices,"
"Risk Considerations" and "General Information"
5. Management of "The Funds' Investment Objective and Policies,"
the Fund "Management of the Funds" and
"How to Invest in the Funds"
5A. Management's Discussion Not Applicable (contained in the Funds' Annual
of Fund Performance Report)
6. Capital Stock and "Montgomery Funds," "Dividends and Distributions,"
Other Securities "Taxation" and "General Information"
7. Purchase of Securities "How to Invest in the Funds',"
Being Offered "How Net Asset Value is Determined,"
"General Information" and
"Backup Withholding Instructions"
8. Redemption or "How to Redeem an Investment in the Funds" and
Repurchase "General Information"
9. Pending Legal Not Applicable
Proceedings
<PAGE>
PART B: Information Required in
Statement of Additional Information
(Statement of Additional Information)
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------
10. Cover Page Cover Page
11. Table of Content Table of Contents
12. General Information "The Trusts" and "General Information"
and History
13. Investment Objectives "Investment Objectives and Policies of the Funds,"
"Risk Factors" and "Investment Restrictions"
14. Management of the "Trustees and Officers"
Registrant
15. Control Persons and "Trustees and Officers" and
Principal Holders of "General Information"
Securities
16. Investment Advisory "Investment Management and Other Services"
and other Services
17. Brokerage Allocation "Execution of Portfolio Transactions"
18. Capital Stock and "The Trust" and "General Information"
Other Securities
19. Purchase, Redemption "Additional Purchase and Redemption Information"
and Pricing of Securities and "Determination of Net Asset Value"
Being Offered
20. Tax Status "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
---------------------------------------------------------------------
PART A
COMBINED PROSPECTUS FOR CLASS R SHARES
---------------------------------------------------------------------
<PAGE>
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
Prospectus
February 14, 1997
The following nineteen mutual funds (the "Funds") are offered in this
Prospectus:
Fund Number
o Montgomery Growth Fund 284
o Montgomery Equity Income Fund 293
o Montgomery Small Cap Fund 276
o Montgomery Small Cap Opportunities Fund 645
o Montgomery Micro Cap Fund 294
o Montgomery Global Opportunities Fund 285
o Montgomery Global Communications Fund 280
o Montgomery International Small Cap Fund 283
o Montgomery International Growth Fund 296
o Montgomery Emerging Asia Fund 648
o Montgomery Emerging Markets Fund 277
o Montgomery Select 50 Fund 295
o Montgomery Asset Allocation Fund 291
o Montgomery Global Asset Allocation Fund 649
o Montgomery Short Duration Government Bond Fund 279
o Montgomery Government Reserve Fund 278
o Montgomery Federal Tax-Free Money Fund 647
o Montgomery California Tax-Free Intermediate Bond Fund 281
o Montgomery California Tax-Free Money Fund 292
Each Fund's shares offered in this Prospectus (the Class R shares) are sold at
net asset value with no sales load, no commissions, no Rule 12b-1 fees, and no
redemption or exchange fees. The minimum initial investment in each Fund is
$1,000 ($5,000 for the Micro Cap Fund), and subsequent investments must be at
least $100 ($500 for the Micro Cap Fund). The Manager or the Distributor may
waive these minimums. See "How to Invest in the Funds."
Each Fund is a separate series of either The Montgomery Funds or The Montgomery
Funds II, both open-end management investment companies, and managed by
Montgomery Asset Management, L.P. (the "Manager"), an affiliate of Montgomery
Securities (the "Distributor"). Each Fund has its own investment objective and
policies designed to meet different investment goals. As with all mutual funds,
attainment of each Fund's investment objective cannot be assured.
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated February 14, 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. If you are viewing the electronic version of this prospectus through
an on-line computer service, you may request a printed version free of charge by
calling (800) 572-FUND.
The Internet address for The Montgomery Funds is www.xperts.montgomery.com/1.
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT MONTGOMERY GOVERNMENT RESERVE FUND,
MONTGOMERY FEDERAL TAX-FREE MONEY FUND AND MONTGOMERY CALIFORNIA TAX-FREE MONEY
FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------
The Montgomery Funds 3
Fees and Expenses of the Funds 6
Financial Highlights 8
The Funds' Investment Objectives and Policies 12
Portfolio Securities 20
Other Investment Practices 23
Risk Considerations 25
Management of the Funds 27
How To Contact the Funds 31
How To Invest in the Funds 31
How To Redeem an Investment in the Funds 34
Exchange Privileges and Restrictions 36
How Net Asset Value is Determined 38
Dividends and Distributions 38
Taxation 39
General Information 40
Backup Withholding 41
2
<PAGE>
The Montgomery Funds
The Funds' investment objectives are summarized below. See "The Funds'
Investment Objectives and Policies" beginning on page 11, "Portfolio Securities"
beginning on page 18, "Other Investment Practices" beginning on page 21 and
"Risk Considerations" beginning on page 23 for more detailed information.
The Equity Funds
- --------------------------------------------------------------------------------
Montgomery Growth Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of domestic companies of all sizes and emphasizes companies
having market capitalizations of $1 billion or more.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Small Cap Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Micro Cap Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of domestic companies that have the potential for rapid growth
and are micro-capitalization companies, which the Fund currently considers to be
companies having total market capitalizations that would place them in the
smallest 10% of market capitalization for domestic companies as measured by
Wilshire 5000 Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Emerging Markets Fund
Seeks capital appreciation by investing primarily in equity securities of
companies in countries having economies and markets generally considered by the
World Bank or the United Nations to be emerging or developing.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Global Opportunities Fund
Seeks capital appreciation by investing primarily in equity securities of
companies of all sizes throughout the world but emphasizes companies having
market capitalizations of $1 billion or more, sound fundamental values and
potential for long-term growth at a reasonable price.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Equity Income Fund
Seeks current income and capital appreciation by investing primarily in
income-producing equity securities of domestic companies, with the goal to
provide significantly greater yield than the average yield offered by the stocks
of the S&P 500 and a low level of price volatility.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Emerging Asia Fund
Seeks long-term capital appreciation through investment primarily in the equity
securities of emerging Asian companies.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Global Communications Fund
Seeks capital appreciation by investing primarily in equity securities of
communications companies (i.e., companies primarily engaged in developing,
manufacturing or selling communications equipment or services) throughout the
world having sound fundamental values and potential for long-term growth at a
reasonable price.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery International Small Cap Fund
Seeks capital appreciation by investing primarily in equity securities of
companies outside the U.S. having total market capitalizations of less than $1
billion, sound fundamental values and potential for long-term growth at a
reasonable price.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
Montgomery International Growth Fund
Seeks capital appreciation by investing primarily in equity securities of
companies outside the United States having total market capitalizations over $1
billion, sound fundamental values and potential for long-term growth at a
reasonable price.
- --------------------------------------------------------------------------------
The Multi-Strategy Funds
- --------------------------------------------------------------------------------
Montgomery Select 50 Fund
Seeks capital appreciation by investing primarily in at least 50 different
equity securities of companies of all sizes throughout the world. Each of the
Manager's five equity discipline management teams selects 10 equity securities
based on the potential for capital appreciation.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Asset Allocation Fund
Seeks high total return, while also seeking to reduce risk, through a strategic
or active allocation of assets among domestic stocks, fixed-income securities
and cash or cash equivalents.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Global Asset Allocation Fund
Seeks 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 other than U.S.
Government securities, the Fund will not own any security directly but instead
will allocate its assets among a diversified group of five funds from The
Montgomery Funds family, each of which focuses on one of the Fund's five
investment disciplines.
- --------------------------------------------------------------------------------
The Fixed Income Funds
- --------------------------------------------------------------------------------
Montgomery Short Duration Government Bond Fund
Seeks maximum total return consistent with preservation of capital and prudent
investment management by investing primarily in U.S. government securities and,
to manage interest rate risk, maintains an average portfolio effective duration
comparable to or less than three-year U.S. Treasury notes. It targets higher
yields than money market funds generally with less fluctuation in the value of
its shares than long-term bond funds. This Fund does not maintain a stable net
asset value of $1.00 per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Government Reserve Fund
Seeks current income consistent with liquidity and preservation of capital by
investing exclusively in U.S. government securities, repurchase agreements for
U.S. government securities and other money market funds investing exclusively in
U.S. government securities and such repurchase agreements. It seeks to maintain
a stable net asset value of $1.00 per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund
Seeks current income exempt from federal income tax consistent with liquidity
and preservation of capital. It seeks to maintain a stable net asset value of
$1.00 per share.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund
Seeks maximum current income exempt from federal and California personal income
taxes consistent with liquidity and preservation of capital. It seeks to
maintain a stable net asset value of $1.00 per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund
Seeks maximum current income exempt from federal and California personal income
taxes consistent with preserving capital and prudent investment management. It
targets higher yields than tax-free money market funds but generally with less
fluctuation in the value of its shares than long-term tax-free bond funds. It
does not maintain a stable net asset value of $1.00 per share.
- --------------------------------------------------------------------------------
The Funds offer other classes of shares to eligible investors. The other classes
of shares may have different fees and expenses that may affect performance. For
information concerning the other classes of shares not offered in this
Prospectus, call The Montgomery Funds at (800) 572-FUND or contact sales
representatives or financial intermediaries who offer those classes.
5
<PAGE>
Fees And Expenses Of The Funds
Shareholder Transaction Expenses
<TABLE>
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load Imposed
Imposed on Purchases on Reinvested Dividends Deferred Sales Load Redemption Fees+ Exchange Fees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None None
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
<CAPTION>
Other Expenses Total Fund Operating Expenses
(after reimbursement (after reimbursement
The Equity Funds Management Fee* unless noted)* unless noted)*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Montgomery Growth Fund 0.96% 0.39%+ 1.35%+
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund 0.60% 0.25% 0.85%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund 1.00% 0.24%+ 1.24%+
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund 1.20% 0.30% 1.50%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund 1.40% 0.35% 1.75%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Opportunities Fund 1.25% 0.65% 1.90%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund 1.25% 0.65% 1.90%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund 1.25% 0.65% 1.90%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund 1.10% 0.55% 1.65%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Asia Fund 1.25% 0.65% 1.90%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund 1.06% 0.66%+ 1.72%+
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Other Expenses Total Fund Operating Expenses
The Multi-Strategy and Fixed Income Funds Management Fee* (after reimbursement)* (after reimbursement)*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Select 50 Fund 1.25% 0.55% 1.80%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund 0.80% 0.50% 1.30%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Asset Allocation Fund 0.20% 1.55%#** 1.75%#
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Short Duration Government Bond Fund 0.50% 0.20% 0.70%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund 0.40% 0.20% 0.60%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund 0.40% 0.20% 0.60%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund 0.50% 0.20% 0.70%
- -----------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund 0.40% 0.20% 0.60%
- -----------------------------------------------------------------------------------------------------------------------------------
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.
+ These figures show actual expenses; no reimbursements or waivers applied.
6
<PAGE>
<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. The Montgomery Funds reserve the right upon 60
days' advance notice to shareholders to impose a redemption fee of up to 1%
on shares redeemed within 90 days of purchase. The Funds also reserve the
right to impose a $20 annual account maintenance fee on accounts that fall
below the minimum investment because of redemptions. See "How to Redeem an
Investment in the Funds."
* Expenses for the Funds are based on actual expenses and expense limitations
for the fiscal year ended June 30, 1996. Expenses for the Montgomery
Emerging Asia Fund, Montgomery Global Asset Allocation Fund and Montgomery
Federal Tax-Free Money Fund are estimated. The Manager will reduce its fees
and may absorb or reimburse a Fund for certain expenses to the extent
necessary to limit total annual fund operating expenses to the lesser of the
amount indicated in the table for a Fund or the maximum allowed by
applicable state expense limitations. A Fund is required to reimburse the
Manager for any reductions in the Manager's fee only during the two years
(three years in the case of the Montgomery Asset Allocation Fund) following
that reduction and only if such reimbursement can be achieved within the
foregoing expense limits. The Manager generally seeks reimbursement for the
oldest reductions and waivers before payment for fees and expenses for the
current year. Absent reduction, actual total Fund operating expenses for the
period ended June 30, 1996 (annualized) would have been as follows:
Montgomery Equity Income Fund, 1.45% (0.85% other expenses); Montgomery
Small Cap Opportunities Fund, 2.16% (0.96% other expenses); Montgomery Micro
Cap Fund, 1.79% (0.39% other expenses); Montgomery Global Opportunities
Fund, 2.05% (0.80% other expenses); Montgomery Global Communications Fund,
2.01% (0.76% other expenses); Montgomery International Growth Fund, 2.91%
(1.81% other expenses); Montgomery International Small Cap Fund, 2.76%
(1.53% other expenses); Montgomery Asset Allocation Fund, 1.55% (0.95% other
expenses); Montgomery Select 50 Fund, 2.11% (0.86% other expenses);
Montgomery Short Government Bond Fund, 2.31% (1.81% other expenses);
Montgomery Government Reserve Fund, 0.74% (0.36% other expenses); Montgomery
California Tax-Free Intermediate Bond Fund, 1.43% (0.93% other expenses);
and Montgomery California Tax-Free Money Fund, 0.80% (0.40% other expenses).
Absent the reduction, actual total Fund operating expenses are estimated to
be as follows: Montgomery Federal Tax-Free Money Fund, 1.00%(0.60% other
expenses); Montgomery Emerging Asia Fund, 3.25% (2.00% other expenses) and
Montgomery Global Asset Allocation Fund, 2.50% (0.60% other expenses and
1.70% Underlying Fund expenses). The Manager may terminate these voluntary
reductions at any time. See "Management of the Funds."
# Even if the total expenses of the Underlying Funds exceed 1.25%, the Manager
has agreed to limit the Global Asset Allocation Fund's Total Fund Operating
Expenses to 1.75%. The total expenses for the Underlying Funds, currently
estimated to be 1.25%, will depend on the actual expenses of the Underlying
Funds and how the Fund's assets are allocated among the Underlying Funds.
** Estimated expenses of the Fund (excluding expenses related to the Underlying
Funds and after reimbursement) is 0.30%; estimated expenses related to the
Underlying Funds is 1.25%.
</FN>
</TABLE>
Example of Expenses for the Funds
<TABLE>
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Growth Fund $14 $43 $74 $162
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund $9 $27 $47 $105
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund $13 $39 $68 $150
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund $15 $47 $82 $179
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund $18 $55 $95 $206
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Opportunities Fund $19 $55 $95 $206
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund $19 $60 $103 $222
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund $19 $60 $103 $222
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund $17 $52 $90 $195
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Asia Fund $19 $55 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund $17 $54 $93 $203
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund $18 $57 $97 $212
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund $13 $41 $71 $157
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Asset Allocation Fund $18 $55 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Short Duration Government Bond Fund $6 $19 $33 $75
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund $6 $19 $33 $75
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund $6 $19 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund $6 $19 $34 $76
- --------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund $6 $19 $33 $74
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
This example is to show the effect of expenses. This example does not represent
past or future expenses or returns; actual expenses and returns may vary.
7
<PAGE>
<TABLE>
Financial Highlights
Selected Per Share Data and Ratios
The following financial information for the periods ended June 30, 1992
through June 30, 1996 was audited by Deloitte & Touche LLP, whose report, dated
August 16, 1996, appears in the 1996 Annual Report of the Funds. The information
for the period ended June 30, 1991 was audited by other independent accountants
whose report is not included herein.
<CAPTION>
GROWTH FUND MICRO CAP FUND
Selected Per Share Data for the Year or Period
Ended June 30: 1996 1995 1994(a) 1996 1995(b)#
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $ 19.16 $ 15.27 $ 12.00 $ 13.75 $ 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.17 0.12 0.04 (0.04) 0.09
Net realized and unrealized gain on investments 4.32 3.91 3.31++ 4.26 1.66
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 4.49 4.03 3.35 4.22 1.75
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.17) (0.07) (0.01) (0.04) --
Distributions from net realized capital gains (1.54) (0.07) -- (0.11) --
Distribution in excess of net realized capital gains -- -- (0.07) -- --
Distributions from capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.71) (0.14) (0.08) (0.15) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $ 21.94 $ 19.16 $ 15.27 $ 17.82 $ 13.75
- ------------------------------------------------------------------------------------------------------------------------------------
Total return** 24.85% 26.53% 27.98% 30.95% 14.58%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $ 926,382 $878,776 $ 149,103 $306,217 $162,949
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/loss to average net assets 0.78% 0.98% 1.09%+ (0.11)% 1.40%+
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.35% 1.50% 1.49%+ 1.75% 1.75%+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 118.14% 128.36% 110.65% 88.98% 36.81%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0596 N/A N/A $ 0.0573 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager -- -- $ 0.03 ($ 0.05) $ 0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager -- -- 1.79%+ 1.79% 2.07%+
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP FUND
Selected Per Share Data for the Year or Period
Ended June 30: 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $17.11 $15.15 $16.83 $12.90 $13.24
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.09) (0.10) (0.12) (0.11) (0.06)
Net realized and unrealized gain on investments 6.31 3.04 (0.47) 4.04 3.25
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 6.22 2.94 (0.59) 3.93 3.19
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- -- --
Distributions from net realized capital gains (1.78) (0.98) (1.09) -- (2.75)
Distribution in excess of net realized capital gains -- -- -- -- --
Distributions from capital -- -- -- -- (0.78)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.78) (0.98) (1.09) -- (3.53)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $21.55 $17.11 $15.15 $16.83 $12.90
- ------------------------------------------------------------------------------------------------------------------------------------
Total return** 39.28% 20.12% (1.59)% 30.47% 27.69%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $275,062 $202,399 $209,063 $219,968 $176,588
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/loss to average net assets (0.47)% (0.57)% (0.68)% (0.69)% (0.44)%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.24% 1.37% 1.35% 1.40% 1.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 80.00% 85.07% 95.22% 130.37% 80.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0529 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP
OPPORTUNITIES
SMALL CAP FUND FUND
Selected Per Share Data for the Year or Period
Ended June 30: 1991 1990(c) 1996(d)#
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value-- beginning of year $10.05 $10.62 $12.00
- ----------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.06) (0.07) 0.02
Net realized and unrealized gain on investments 3.27 2.71 3.78++
- ----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 3.21 2.64 3.80
- ----------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- --
Distributions from net realized capital gains (0.02) (0.02) --
Distribution in excess of net realized capital gains -- -- --
Distributions from capital -- -- --
- ----------------------------------------------------------------------------------------------------------
Total distributions (0.02) (0.02) --
- ----------------------------------------------------------------------------------------------------------
Net asset value-- end of year $13.24 $13.24 $15.80
- ----------------------------------------------------------------------------------------------------------
Total return** 31.97% 24.89% 31.67%
- ----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ----------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $27,181 $27,181 $136,140
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income/loss to average net assets (0.47)% (0.45)%+ 0.23%+
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.50% 1.45%+ 1.50%+
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 194.63% 188.16% 81.29%
- ----------------------------------------------------------------------------------------------------------
Average commission rate paid+++ N/A N/A $0.0578
- ----------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager -- -- ($0.04)
- ----------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager -- -- 2.16%+
- ----------------------------------------------------------------------------------------------------------
<FN>
(a) The Growth Fund's Class R Shares commenced operations on September 30,
1993.
(b) The Micro Cap Fund's Class R Shares commenced operations on December 30,
1994.
(c) The Small Cap Fund's Class R Shares became available for investment by the
public on July 13, 1990.
(d) The Small Cap Opportunities Fund's Class R Shares commenced operations on
December 29, 1995.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Per share numbers have been calculated using the average share method,
which more appropriately represent the per share data for the period since
the use of the undistributed income method did not accord with results of
operations.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME FUND INTERNATIONAL GROWTH
FUND
Selected Per Share Data for the Year or Period
Ended June 30: 1996 1995(a) 1996(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value-- beginning of year $13.38 $12.00 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.43 0.31 0.02
Net realized and unrealized gain/(loss) on investments 2.82 1.38 3.29
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 3.25 1.69 3.31
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.42) (0.31) --
Distributions from net realized capital gains (0.12) -- --
Distribution in excess of net realized capital gains -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.31) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $16.09 $13.38 $15.31
- ------------------------------------------------------------------------------------------------------------------------------------
Total return** 24.56% 14.26% 27.58%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $19,312 $6,383 $18,303
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 3.03% 4.06%+ 0.26%+
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets, excluding interest expense 0.85% 0.84%+ 1.65%+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 89.77% 29.46% 238.91%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0423 N/A $0.0176
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $0.34 $0.13 ($0.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager, including interest expense 1.45% 3.16%+ 2.91%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL GLOBAL OPPORTUNITIES
Selected Per Share Data for the Year or Period SMALL CAP FUND FUND
Ended June 30: 1996 1995 1994(c) 1996 1995 1994(d)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value-- beginning of year 11.75 $12.02 $12.00 $13.25 $12.92 $12.00
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.03 0.12 0.00# (0.06) 0.13 0.01
Net realized and unrealized gain/(loss) on investments 3.10 (0.39) 0.02 3.84 0.70 0.91
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 3.13 (0.27) 0.02 3.78 0.83 0.92
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.02) (0.00)# -- (0.07) -- --
Distributions from net realized capital gains -- -- -- -- (0.50) --
Distribution in excess of net realized capital gains -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.02) (0.00) -- (0.07) (0.50) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year 14.86 $11.75 $12.02 $16.96 $13.25 $12.92
- -----------------------------------------------------------------------------------------------------------------------------------
Total return** 26.68% (2.23)% 0.17% 28.64% 6.43% 7.67
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $41,640 $28,516 $34,555 $28,496 $13,677 $12,504
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss)
to average net assets 0.20% 0.95% 0.04%+ (0.56)% 1.03% 0.02%+
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
excluding interest expense 1.90% 1.90% 1.90%+ 1.90% 1.90% 1.90%+
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 177.36% 156.13% 123.50% 163.80% 118.75% 67.22%
- -----------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0123 N/A N/A $0.0235 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager ($0.08) $0.05 ($0.02) ($0.16) ($0.01) ($0.05)
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager, including interest expense 2.76% 2.50% 2.32%+ 3.10% 2.99% 2.75%+
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 1.96% 1.91% 1.99%+ 2.05% 1.91% 1.99%+
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GLOBAL COMMUNICATIONS
Selected Per Share Data for the Year or Period FUND
Ended June 30: 1996 1995 1994 1993(e)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value-- beginning of year $15.42 14.20 $12.45 $12.00
- --------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) (0.20) (0.03) (0.05) 0.00#
Net realized and unrealized gain/(loss) on investments 2.83 1.28 1.80++ 0.45
- --------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 2.63 1.25 1.75 0.45
- --------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- --
Distributions from net realized capital gains -- -- -- --
Distribution in excess of net realized capital gains -- (0.03) -- --
- --------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.03) -- --
- --------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $18.05 $15.42 $14.20 $12.45
- --------------------------------------------------------------------------------------------------------------------
Total return** 17.06% 8.83% 14.06% 3.75%
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) 206,671 $209,644 $234,886 $4,670
- --------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss)
to average net assets (1.01)% (0.10)% (0.46)% (0.05)%+
- --------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
excluding interest expense 1.90% 1.90% 1.90% 1.90%+
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 103.73% 50.17% 29.20% 0.00%
- --------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0129 N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager ($0.22) ($0.07) ($0.06) ($0.04)
- --------------------------------------------------------------------------------------------------------------------
Expense ratio before
deferral of fees by Manager, including interest expense 2.11% 2.09% 2.04% 8.96%+
- --------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 2.01% 1.91% 1.94% --
- --------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Equity Income Fund's Class R Shares commenced operations on September
30, 1994.
(b) The International Growth Fund's Class R Shares commenced operations on
July 3, 1995.
(c) The International Small Cap Fund's Class R Shares commenced operations on
September 30, 1993.
(d) The Global Opportunities Fund's Class R Shares commenced operations on
September 30, 1993.
(e) The Global Communications Fund's Class R Shares commenced operations on
June 1, 1993.
** Total return represents aggregate total return for the periods indicated +
Annualized.
++ 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.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
EMERGING MARKETS
FUND
Selected Per Share Data for the Year or Period
Ended June 30 1996 1995++ 1994 1993 1992(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $13.17 $13.68 $11.07 $9.96 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.08 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss) on investments 0.94 0.25## 2.92 1.05 (0.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 1.02 0.28 2.89 1.12 (0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- (0.01) --
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- (0.42) (0.28) (0.00)# --
Distributions in excess of net realized capital gains -- (0.37) -- -- --
Distributions from capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (0.79) (0.28) (0.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $14.19 $13.17 $13.68 $11.07 $9.96
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return** 7.74% 1.40% 26.10% 11.27% (0.40)%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $994,378 $998,083 $654,960 $206,617 $54,625
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net
assets 0.58% 0.23% (0.14)% 0.66% 1.70%+
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding 1.72% 1.80% 1.85% 1.90% 1.90%+
interest expense
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 109.92% 92.09% 63.79% 21.40% 0.19%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0007 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager -- -- -- $0.06 $0.01
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense -- -- -- 1.93% 2.80%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SELECT 50 ASSET ALLOCATION
FUND FUND
--------- -------------------------------------
Selected Per Share Data for the Year or Period
Ended June 30: 1996(b) 1996 1995 1994(c)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value-- beginning of year $12.00 $16.33 $12.24 $12.00
- -------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.06 0.26 0.25 0.06
Net realized and unrealized gain/(loss) on investments 4.45 3.54 4.11 0.18
- -------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 4.51 3.80 4.36 0.24
- -------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.04) (0.25) (0.17) --
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- (0.55) (0.10) --
Distributions in excess of net realized capital gains (0.01)
Distributions from capital -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.05) (0.80) (0.27) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $16.46 $19.33 $16.33 $12.24
- -------------------------------------------------------------------------------------------------------------------
Total Return** 37.75% 23.92% 35.99% 2.00%
- -------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $77,955% $132,511 $60,234 $1,548
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.42%+ 1.85% 3.43% 2.54%+
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest
expense 1.80%+ 1.30% 1.30% 1.30%+
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover 105.98% 225.91% 95.75% 190.94%
- -------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0097 $0.0595 N/A N/A
- -------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager $0.02 $0.24 $0.19 $(0.11)
- -------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense 2.11%+ 1.55% 2.07% 9.00%+
- -------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- 1.42% 1.31% 1.43%+
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT GOVERNMENT BOND FUND
--------------------------------------------------------
Selected Per Share Data for the Year or Period
Ended June 30: 1996 1995 1994 1993(d)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value-- beginning of year $9.95 $9.80 $10.23 $10.00
- ---------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) 0.60 0.62 0.61 0.33
Net realized and unrealized gain/(loss) on investments (0.04) 0.16 (0.34) 0.23
- ---------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 0.56 0.78 0.27 0.56
- ---------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.59) (0.62) (0.56) (0.33)
Distributions in excess of net investment income (0.00)# -- (0.07) --
Distributions from net realized capital gains -- -- -- --
Distributions in excess of net realized capital gains -- -- (0.07) --
Distributions from capital -- (0.01) -- (0.00)#
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (0.59) (0.63) (0.70) (0.33)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $9.92 $9.95 $9.80 $10.23
- ---------------------------------------------------------------------------------------------------------------------
Total Return** 5.74% 8.28% 2.49% 5.66%
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $22,681 $17,093 $21,937 $22,254
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 5.88% 6.41% 5.93% 6.02%+
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets excluding interest expense 0.60% 0.47% 0.25% 0.22%+
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover 349.62% 284.23% 603.07% 213.22%
- ---------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees and
absorption of expenses by Manager $0.52 $0.54 $0.51 $0.27
- ---------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense 2.31% 2.23% 1.75% 2.07%+
- ---------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense 1.55% 1.38% 0.71% --
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Emerging Markets Fund's Class R Shares commenced operations on March
1, 1992.
(b) The Select 50 Fund's Class R Shares commenced operations on October 2,
1995.
(c) The Asset Allocation Fund's Class R Shares commenced operations on March
31, 1994.
(d) The Short Government Bond Fund's Class R Shares commenced operations on
December 18, 1992.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ Per shares numbers have been calculated using the average shares method,
which more appropriately represents the per share data for the period
since the use of the undistributed income method did not accord with the
results of operations.
# Amount represents less than $0.01 per share.
## The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INTERMEDIATE
BOND FUND
Selected Per Share Data for the Year or Period Ended June 30: 1996 1995 1994(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value-- beginning of year $12.04 $11.79 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.54 0.44 0.41
Net realized and unrealized gain/(loss) on investments 0.19 0.25 (0.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 0.73 0.69 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.54) (0.44) (0.41)
Dividends in excess of net investment income -- -- --
Distributions from net realized capital gains -- (0.00)# --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.44) (0.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $12.23 $12.04 $11.79
- ------------------------------------------------------------------------------------------------------------------------------------
Total return** 6.11% 6.03% 1.65%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $13,948 $5,153 $11,556
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 4.34% 3.71% 3.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets, excluding interest 0.61% 0.56% 0.23%
expense
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 58.11% 37.93% 77.03%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $0.43 $0.34 $0.25
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.43% 1.41% 1.63%
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT RESERVE FUND
Selected Per Share Data for the Year or Period
Ended June 30: 1996 1995 1994 1993(b)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value-- beginning of year $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.052 0.049 0.029 0.024
Net realized and unrealized gain/(loss) on investments 0.000## 0.000## 0.000## 0.000##
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 0.052 0.049 0.029 0.024
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.052) (0.049) (0.029) (0.024)
Dividends in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.052) (0.049) (0.029) (0.024)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value-- end of year $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------------------------
Total return** 5.28% 4.97% 2.96% 2.41%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $439,423 $258,956 $211,129 $124,795
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 5.17% 4.92% 2.99% 2.96%+
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets, excluding interest
expense 0.60% 0.60% 0.60% 0.38%+
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $0.050 $0.047 $0.028 $0.013
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 0.74% 0.79% 0.71% 0.77%+
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- 0.63% -- --
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE
MONEY FUND
Selected Per Share Data for the Year or Period
Ended June 30: 1996 1995(c)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value-- beginning of year $1.00 $1.00
- -------------------------------------------------------------------------------------------------
Net investment income 0.030 0.027
Net realized and unrealized gain/(loss) on investments 0.000## .000##
- -------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 0.030 0.027
- -------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.030) (0.027)
Dividends in excess of net investment income -- (0.000)##
Distributions from net realized capital gains -- --
- -------------------------------------------------------------------------------------------------
Total distributions (0.030) (0.027)
- -------------------------------------------------------------------------------------------------
Net asset value-- end of year $1.00 $1.00
- -------------------------------------------------------------------------------------------------
Total return** 3.03% 2.68%
- -------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data
- -------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $98,134 $64,780
- -------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 2.99% 3.55%+
- -------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets, excluding interest
expense 0.59% 0.33%+
- -------------------------------------------------------------------------------------------------
Portfolio turnover -- --
- -------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $0.028 $0.023
- -------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 0.80% 0.86%+
- -------------------------------------------------------------------------------------------------
Expense ratios including interest expense -- --
- -------------------------------------------------------------------------------------------------
<FN>
(a) The California Tax-Free Intermediate Bond Fund's Class R Shares commenced
operations on July 1, 1993.
(b) The Government Reserve Fund's Class R Shares commenced operations on
September 14, 1992.
(c) The California Tax-Free Money Fund's Class R Shares commenced operations
on September 30, 1994.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
# Amount represents less than $0.01 per share.
## Amount represents less than $0.001 per share.
</FN>
</TABLE>
11
<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" beginning on page 18. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 21. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 23. CERTAIN TERMS USED IN THE PROSPECTUS ARE
DEFINED IN THE GLOSSARY FOUND AT THE END OF THIS PROSPECTUS.
<CAPTION>
SUMMARY COMPARISON OF FUNDS
Equity Funds
Domestic Equity Funds
Anticipated Maximum Typical Market
Equity Debt Capitalization of
Fund Name Exposure Exposure Focus Portfolio Companies
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery Growth Fund 65-100% 35% Growth Over $1 Billion
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund 65-100% 35% Micro-Cap Less than $600 Million
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund 80-100% 35% Small-Cap Less than $1 Billion
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund 65-100% 35% Small-Cap Less than $1 Billion
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund 65-100% 35% Large-Cap Dividend Over $1 Billion
==================================================================================================================================
International Funds
Montgomery International Small Cap Fund 65-100% 35% Foreign Small-Cap Less than $1 Billion
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund 65-100% 35% Foreign Growth Over $1 Billion
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Asia Fund 65-100% 35% Asian Growth Any size
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund 65-100% 35% Foreign Emerging Growth Any size
==================================================================================================================================
Global Funds
Montgomery Global Opportunities Fund 65-100% 35% Worldwide Growth Over $1 Billion
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund 65-100% 35% Worldwide Communication Any size
==================================================================================================================================
Multi-Strategy Funds
Montgomery Select 50 Fund 65-100% 35% Worldwide Growth Any size
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund 20-80% 20-80% Balanced Any size
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Asset Allocation Fund 10-95% 100% Worldwide Balanced Any size
==================================================================================================================================
Fixed Income Funds
Montgomery Short Duration Government Bond Fund 0% 100% Income N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund 0% 100% Income N/A
==================================================================================================================================
Tax-Free Funds
Montgomery Federal Tax-Free Money Fund 0% 100% Federal Tax-Free Income N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate
Bond Fund 0% 100% California Tax-Free Income N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund 0% 100% California Tax-Free Income N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Montgomery Growth Fund (the "Growth Fund")
The investment objective of the Growth Fund is capital appreciation which, under
normal conditions it seeks by investing at least 65% of its total assets in
equity securities of domestic companies. Although such companies may be of any
size, the Fund targets companies having total market capitalizations of $1
billion or more. The Fund emphasizes investments in common stock but also
invests in other types of equity securities and equity derivative securities.
Current income from dividends, interest and other sources is only incidental.
The Fund also may invest up to 35% of its total assets in highly rated debt
securities. See "Portfolio Securities." The 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.
12
<PAGE>
The Growth Fund seeks growth at a reasonable value, identifying companies with
sound fundamental value and potential for substantial growth. The Fund selects
its investments based on a combination of quantitative screening techniques and
fundamental analysis. The Fund initially identifies a universe of investment
candidates by screening companies based on changes in rates of growth and
valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
Montgomery Micro Cap Fund (the "Micro Cap Fund")
The investment objective of the Micro Cap Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in equity securities of domestic companies that have potential for rapid growth
and are micro-capitalization companies, which the Fund currently considers to be
companies having market capitalizations that would place them in the smallest
10% of market capitalizations for domestic companies as measured by the Wilshire
5000 Index. Currently, these companies have market capitalizations of $600
million and less. Current income from dividends, interest and other sources is
only incidental. The Micro Cap Fund generally invests the remaining 35% of its
total assets in a similar manner but may invest those in other equity securities
and in debt instruments, including foreign securities. Any debt securities
purchased by this Fund must be highly rated debt securities. See "Portfolio
Securities."
The Micro Cap Fund seeks to identify potential rapid growth companies at the
early stages of the companies' developments, such as at the introduction of new
products, favorable management changes, new marketing opportunities or increased
market share for existing product lines. Early identification of potential
investments is a key to the Fund's investment style. Emphasis is placed on
in-house research, which includes discussions with company management.
The Micro Cap Fund is currently closed to new investors. The Manager may,
however, reopen and close the Micro Cap Fund to new investors from time to time
at its discretion. If this Fund is closed, shareholders who maintain open
accounts with the Fund may make additional investments in the Fund. Once a
shareholder's account is closed, additional investments in the Fund may not be
possible.
Montgomery Small Cap Fund (the "Small Cap Fund")
The investment objective of the Small Cap Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in equity securities of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion. The Small Cap Fund generally invests the remaining 35% of its
total assets in a similar manner but may invest those assets in companies having
total market capitalizations of $1 billion or more.
Generally, the Small Cap Fund invests at least 80% of its total assets in common
stock. It also may invest in other types of equity securities and equity
derivative securities but limits to 5% of its total assets any single other type
of security. Any debt securities purchased by this Fund must be highly rated
debt securities. See "Portfolio Securities." Current income from dividends,
interest and other sources is only incidental.
The Small Cap Fund seeks to identify potential growth companies at an early
stage or a transitional point of the companies' developments, such as the
introduction of new products, favorable management changes, new marketing
opportunities or increased market share for existing product lines. Using
fundamental research, the Fund targets businesses having positive internal
dynamics that can outweigh unpredictable macro-economic factors, such as
interest rates, commodity prices, foreign currency rates and overall stock
market volatility. The Fund searches for companies with potential to gain market
share within their respective industries; achieve and maintain high and
consistent profitability; produce increases in quarterly earnings; and provide
solutions to current or impending problems in their respective industries or
society at large. Early identification of potential investments is a key to the
Fund's investment style. Heavy emphasis is placed on in-house research, which
includes discussions with company management. The Fund also draws on the
expertise of brokerage firms, including Montgomery Securities and regional firms
that closely follow smaller capitalization companies within their geographic
regions.
The Small Cap Fund has been closed to new investors since March 6, 1992.
Shareholders who maintain open accounts with this Fund may make additional
investments. Once your account is closed, additional investments in this Fund
may not be possible. An Account may be considered closed and subject to
redemption by this Fund if the value of the shares remaining after a transfer or
redemption falls below $1,000. This Fund may resume sales of shares to new
investors at some future date, but it has no present intention to do so.
Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities Fund")
The investment objective of the Small Cap Opportunities Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of small-capitalization domestic
companies, which the Fund currently considers to be companies having total
market capitalizations of less than $1 billion. The Small Cap Opportunities
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<PAGE>
Fund generally invests the remaining 35% of its total assets in a similar manner
but may invest those assets in domestic and foreign companies having total
market capitalizations of $1 billion or more. This Fund invests primarily in
common stock. It also may invest in other types of equity securities and equity
derivative securities. Any debt securities purchased by the Fund must be highly
rated debt securities. See "Portfolio Securities." Current income from
dividends, interest and other sources is only incidental.
This Fund seeks to identify potential growth companies at an early stage or a
transitional point of their developments, such as the introduction of new
products, favorable management changes, new marketing opportunities or increased
market share for existing product lines. Using fundamental research, the Fund
targets businesses having positive internal dynamics that can outweigh
unpredictable macro-economic factors, such as interest rates, commodity prices,
foreign currency rates and overall stock market volatility. The Fund searches
for companies with potential to gain market share within their respective
industries; achieve and maintain high and consistent profitability; produce
increases in quarterly earnings; and provide solutions to current or impending
problems in their respective industries or society at large. Early
identification of potential investments is a key to the Fund's investment style.
Heavy emphasis is placed on in-house research, which includes discussions with
company management. The Fund also draws on the expertise of brokerage firms,
including Montgomery Securities and regional firms that closely follow smaller
capitalization companies within their geographic regions.
Montgomery Equity Income Fund (the "Equity Income Fund")
The investment objective of the Equity Income Fund is to provide current income
and capital appreciation primarily through investments in equity securities of
domestic companies, with the goal that the Fund provide a significantly greater
yield than the average yield offered by the stocks of the S&P 500 and a low
level of price volatility. Under normal market conditions, the Equity Income
Fund will invest at least 65% of the value of its total assets in
income-producing equity securities of domestic companies, which include common
stocks, preferred stocks and other securities, and debt securities convertible
into common stocks.
The Fund's equity investments emphasize common stock of U.S. corporations that
regularly pay dividends. The Fund normally invests in companies having a total
market capitalization of more than $1 billion, targeting companies with
favorable long-term fundamental characteristics with current relative yields at
the upper end of their historical ranges. The Fund initially identifies a
universe of investment candidates by screening companies based on relative yield
and targeting companies with a minimum yield of 140% of the average yield of the
S&P 500. The Fund uses this relative yield strategy to assist in identifying
undervalued securities. The companies are usually in the maturing stages of
development or operating in slower growth areas of the economy, and have
conservative accounting, strong cash flows to maintain dividends, low financial
leverage and market leadership. The Fund usually holds companies for a period of
two to four years, resulting in relatively low turnover. The Fund will usually
begin to reduce its position in a company as the price moves up and yield drops
to the lower end of its historical range. In addition, the Fund will usually
reduce or sell its holdings in a company that reduces or eliminates its
dividend, or upon a significant fundamental change impairing a company's ability
to pay dividends. See "Portfolio Securities."
Although the Fund normally invests more than 65% of its assets in
income-producing equity securities as described above, under normal market
conditions it may invest up to 35% of its total assets in debt instruments,
emphasizing cash equivalents in an effort to provide income at money market
rates while minimizing the risk of decline in value. The Fund attempts to
achieve low price volatility through its investment in mature companies and by
investing in cash and cash equivalents. In addition, the Fund may invest up to
20% of its total assets in the equity or debt securities of foreign issuers. See
"Portfolio Securities."
Montgomery International Small Cap Fund (the "International Small Cap Fund")
The investment objective of the International Small Cap Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of less than $1 billion. The Fund generally
invests the remaining 35% of its total assets in a similar manner but may invest
those assets in companies having market capitalizations of $1 billion or more,
or in debt securities, including up to 5% of its total assets in debt securities
rated below investment grade. See "Portfolio Securities" and "Risk
Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research,
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. See "Risk Considerations."
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<PAGE>
Montgomery International Growth Fund (the "International Growth Fund")
The investment objective of the International Growth Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations over $1 billion. This Fund generally invests
the remaining 35% of its total assets in a similar manner but may invest those
assets in equity securities of U.S. companies, in lower-capitalization companies
or in debt securities, including up to 5% of its total assets in debt securities
rated below investment grade. See "Portfolio Securities" and "Risk
Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth, return on
capital, balance sheet, financial and accounting policies, overall financial
strength, industry sector, competitive advantages and disadvantages, research,
product development and marketing, new technologies or services, pricing
flexibility, quality of management, and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will use a strategic allocation of assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
Montgomery Emerging Asia Fund (the "Emerging Asia Fund")
The investment objective of the Montgomery Emerging Asia Fund is long term
capital appreciation which, under normal conditions it seeks by investing at
least 65% of its total assets in equity securities of companies that have their
principal activities in emerging Asia. The Fund currently considers the
following to be emerging Asian countries: Bangladesh, China, Hong Kong, India,
Indonesia, Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka,
Taiwan and Thailand. The Fund, however, does not expect to invest in Japanese
securities. In the future, the Fund may invest in other countries in Asia when
their markets become sufficiently developed. Under normal conditions, the Fund
maintains investments in at least three emerging Asian countries at all times
and invests no more than one-third of its total assets in any one emerging Asian
country. As part of the remaining 35% of its total assets, the Fund may invest
in more developed Asian countries, such as Japan and Hong Kong, that may serve
defensive purposes in an Asian portfolio. Alternatively, companies in more
developed Asian markets may have significant operations in emerging Asian
countries.
The Fund considers a company to be an emerging Asian company if its securities
are principally traded in the capital market of an emerging 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. The return of
Hong Kong to Chinese dominion will affect the entire Pacific region. For
information on risks, see "Portfolio Securities," "Risk Considerations" and the
Statement of Additional Information.
The Fund invests primarily in common stock but also may invest in other types of
equity and equity derivative securities. It may invest up to 35% of its total
assets in high yield debt securities, including up to 5% in high yield debt
securities rated below investment grade (also known as "junk bonds"). See
"Portfolio Securities" and "Risk Considerations." During the two-to three-month
period following commencement of the Fund's operations, the Fund may have its
assets invested substantially in cash and cash equivalents.
The Fund may invest in certain debt securities issued by the governments of
emerging Asian countries that are, or may be eligible for, conversion into
investments in emerging Asian companies under debt conversion programs sponsored
by such governments. If such securities are convertible to equity investments,
the Fund deems them to be equity derivative securities.
See "Portfolio Securities."
Montgomery Emerging Markets Fund (the "Emerging Markets Fund")
The investment objective of the Emerging Markets Fund is capital appreciation
which, under normal conditions it seeks by investing at least 65% of its total
assets in equity securities of Emerging Market Companies. Under normal
conditions, the Emerging Markets Fund maintains investments in at least six
emerging market countries at all times and invests no more than 35% of its total
assets in any one emerging market country. The Manager currently regards the
following to be emerging
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<PAGE>
market countries: Latin America (Argentina, Brazil, Chile, Colombia, Costa Rica,
Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay, Venezuela); Asia
(Bangladesh, China, India, Indonesia, Korea, Malaysia, Pakistan, the
Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam); southern and
eastern Europe (Czech Republic, Greece, Hungary, Poland, Portugal, Russia,
Turkey); the Middle East (Israel, Jordan); and Africa (Egypt, Ghana, Ivory
Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia, Zimbabwe). In the future,
the Fund may invest in other emerging market countries.
This Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean-variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percent of assets to invest in each country to
maximize expected returns for a given risk level. The Fund's aims are to invest
in those countries that are expected to have the highest risk/reward trade-off
when incorporated into a total portfolio context. This "top-down" country
selection is combined with "bottom-up" fundamental industry analysis and stock
selection based on original research and publicly available information and
company visits.
This Fund invests primarily in common stock but also may invest in other types
of equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
This Fund may invest in certain debt securities issued by the governments of
emerging market countries that are, or may be eligible for, conversion into
investments in Emerging Market Companies under debt conversion programs
sponsored by such governments. If such securities are convertible to equity
investments, the Fund deems them to be equity derivative securities.
Montgomery Global Opportunities Fund (the "Opportunities Fund")
The investment objective of the Opportunities Fund is capital appreciation.
Under normal conditions, the Opportunities Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
companies, which may be of any size, throughout the world. While the
Opportunities Fund emphasizes common stocks of those companies having total
market capitalizations of more than $1 billion, it also may invest in other
types of equity securities and equity derivative securities.
The Opportunities Fund may invest up to 35% of its total assets in debt
securities, including up to 5% in debt securities rated below investment grade.
The Opportunities Fund invests in companies that, in the opinion of the Manager,
have potential for above-average, long-term growth in sales and earnings on a
sustained basis and that are reasonably priced. The Manager considers a number
of factors in evaluating potential investments, including a company's per-share
sales and earnings growth; return on capital; balance sheet; financial and
accounting policies; overall financial strength; industry sector; competitive
advantages and disadvantages; research, product development, and marketing;
development of new technologies; service; pricing flexibility; quality of
management; and general operating characteristics.
The Opportunities Fund may invest substantially in securities denominated in one
or more foreign currencies. Under normal conditions, the Opportunities Fund
invests in at least three different countries, which may include the U.S., but
no country, other than the U.S., may represent more than 40% of its assets. A
significant portion of the Opportunities Fund's assets are invested in the
securities of foreign issuers because many attractive investment opportunities
are outside the U.S. The Manager uses its financial expertise and research
capabilities in markets located throughout the world in attempting to identify
securities providing the greatest potential for long-term capital appreciation.
For information on risks, see "Portfolio Securities" and "Risk Considerations."
Montgomery Global Communications Fund (the "Communications Fund")
The investment objective of the Communications Fund is capital appreciation.
Under normal conditions, the Communications Fund seeks to achieve its investment
objective by investing at least 65% of its total assets in equity securities of
communications companies, which may be of any size, throughout the world. For
this purpose, the Fund defines a "communications company" as a company engaged
in the development, manufacture or sale of communications equipment or services
that derived at least 50% of either its revenues or earnings from these
activities, or that devoted at least 50% of its assets to these activities,
based on the company's most recent fiscal year.
Communications companies range from companies concentrating on established
technologies to companies primarily engaged in creating or developing new
technologies. They include companies that develop, manufacture, sell or provide
communications equipment and services (including equipment and services for
data, voice and image transmission); broadcasting (including television and
radio, satellite, microwave and cable television and narrowcasting); mobile
communications and cellular phones and paging; electronic mail; local and wide
area networking and linkage of word and data processing systems; publishing and
information systems; electronic components and equipment; print media; computer
equipment; videotext and teletext; and new technologies combining television,
telephones and computer systems. Over time, communication products and services
change because the global communications industry is changing rapidly due to new
technology and other developments.
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The Communications Fund's portfolio management believes that world-wide demand
for components, products, media and systems to collect, store, retrieve,
transmit, process, distribute, record, reproduce and use information will
continue to grow in the future. It also believes that the global trend appears
to be toward lower costs and higher efficiencies resulting from combining
communications systems with computers and, accordingly, the Fund may invest in
companies engaged in the development of methods for using new technologies to
communicate information as well as companies using established communications
technologies.
The Communications Fund may invest up to 35% of its total assets in debt
securities, including up to 5% in debt securities rated below investment grade.
The Communication Fund invests in companies that, in the opinion of the Manager,
have potential for above-average, long-term growth in sales and earnings on a
sustained basis and that are reasonably priced. The Manager considers a number
of factors in evaluating potential investments, including a company's per-share
sales and earnings growth; return on capital; balance sheet; financial and
accounting policies; overall financial strength; industry sector; competitive
advantages and disadvantages; research, product development, and marketing;
development of new technologies; service; pricing flexibility; quality of
management; and general operating characteristics.
The Communications Fund may invest substantially in securities denominated in
one or more foreign currencies. Under normal conditions, the Communications Fund
invests in at least three different countries, which may include the U.S., but
no country, other than the U.S., may represent more than 40% of its assets. A
significant portion of the Communications Fund's assets are invested in the
securities of foreign issuers because many attractive investment opportunities,
including many of the world's communications companies, are outside the U.S. The
Manager uses its financial expertise and research capabilities in markets
located throughout the world in attempting to identify securities providing the
greatest potential for long-term capital appreciation. For information on risks,
see "Portfolio Securities" and "Risk Considerations."
Montgomery Select 50 Fund (the "Select 50 Fund")
The investment objective of the Select 50 Fund is capital appreciation which,
under normal conditions it seeks by investing at least 65% of its total assets
in at least 50 different equity securities of companies of all sizes throughout
the world.
This Fund invests primarily in 10 equity securities from each of the Manager's
five different equity disciplines. These five disciplines, which may be adjusted
from time to time, include U.S. Growth Equity, U.S. Smaller Capitalization
Companies, U.S. Equity Income, International and Emerging Markets. See
"Management of the Funds." The Manager's equity teams select those securities
based on the potential for capital appreciation.
This Fund generally invests the remaining 35% of its total assets in equity
securities with the potential for capital appreciation but may invest those
assets in other equity securities or in debt securities, including up to 5% of
its total assets in debt securities rated below investment grade. See "Portfolio
Securities," "Risk Considerations" and the Appendix in the Statement of
Additional Information.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries which may include the U.S., but no country, other than the
U.S., may represent more than 40% of its total assets. The Manager uses its
financial expertise and research capabilities in markets throughout the world in
attempting to identify those countries, currencies and companies in which this
Fund may invest. See "Risk Considerations."
Montgomery Asset Allocation Fund (the "Asset Allocation Fund")
The investment objective of the Asset Allocation Fund is to seek high total
return, while also seeking to reduce risk, through a strategic or active
allocation of assets among domestic stocks, debt instruments and cash or cash
equivalents, coupled with active management of the individual investments in
each asset class. This Fund adjusts the proportion of its investments in each of
these categories as needed to respond to current market conditions, maintaining
from 20 to 80% of total assets in stocks, 20 to 80% of total assets in debt
instruments of any remaining maturity, and 0 to 50% of total assets in cash or
cash equivalents. The Manager will implement its allocation strategy with the
use of a quantitative risk model and computer optimization program. The Manager
may temporarily increase the Fund's cash allocation from its set strategy in
order to meet anticipated redemptions. The Manager seeks to reduce risk through
investment in high-grade debt instruments and cash or cash equivalents. Under
normal conditions, at least 65% of the Fund's total assets are invested in
securities issued by domestic issuers.
The debt instruments in which this Fund invests include U.S. government
securities and other highly rated debt securities. This Fund expects that, under
normal circumstances, the dollar-weighted average maturity of its debt
instruments (or period until next interest rate reset date) may be longer than
three years (see "Duration" discussion below).
The equity securities in which this Fund may invest include common stocks that,
in the opinion of the Manager, have the potential for above-average capital
appreciation as well as warrants, rights and options. The Manager selects equity
securities of issuers exhibiting positive trends in revenue and earnings that,
in the opinion of the Manager, are sustainable. Among the
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Fund's equity investments, the Fund may invest up to 35% of its total assets in
foreign equity securities of various countries, primarily those listed on
foreign exchanges.
Montgomery 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 the Fund will not invest directly in securities but
will instead invest in a diversified group of five funds from The Montgomery
Funds family (each, an "Underlying Fund") which 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 Anticipate Range of Underlying
Focus Asset Allocation Fund
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Domestic Stocks 5% to 40% Montgomery Growth Fund
- ---------------------------------------------------------------------------------------------------------------------
International Developed Markets Stocks 5% to 40% Montgomery International Growth Fund
- ---------------------------------------------------------------------------------------------------------------------
Emerging Markets Stocks 0% to 15% Montgomery Emerging Markets Fund
- ---------------------------------------------------------------------------------------------------------------------
U.S. Dollar Denominated Debt Instruments 10% to 70% Montgomery Short Government Bond Fund and other
general investment grade bond funds advised by the
Manager
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 0% to 100% Montgomery 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.
Montgomery Short Duration Government Bond Fund (formerly called the Short
Government Bond Fund) (the "Short Bond Fund")
The investment objective of the Short Bond Fund is to provide maximum total
return consistent with preservation of capital and prudent investment
management. Total return consists of interest and dividends from underlying
securities, capital appreciation realized from the purchase and sale of
securities, and income from futures and options. Under normal conditions, the
Fund seeks to achieve its objective by investing at least 65% of the value of
its total assets in U.S. government securities. The Fund seeks to maintain an
average portfolio effective duration comparable to or less than that of
three-year U.S. Treasury notes. Because the Manager seeks to manage interest
rate risk by limiting effective duration, the Fund may invest in securities of
any maturity.
This Fund is designed primarily for investors who seek higher yields than money
market funds generally offer and are willing to accept nominal fluctuation in
the value of the Fund's shares but who are not willing to accept the greater
fluctuations that long-term bond funds might entail. This Fund is not an
appropriate investment for investors whose primary investment objective is
absolute principal stability. Because the values of the securities in which this
Fund invests generally change with interest rates, the value of its shares will
fluctuate, unlike the value of the shares of a money market fund seeking to
maintain a stable net asset value per share of $1.00.
The Fund also may invest up to 35% of its total assets in cash, commercial paper
and high-grade liquid debt securities, including corporate debt instruments and
privately issued mortgage-related and asset-backed securities that are
considered highly rated debt securities. The Fund also may invest in other
investment companies investing primarily in U.S. government securities of
appropriate duration. See "Portfolio Securities."
Duration of the Asset Allocation Fund and the Short Bond Fund. The Short Bond
Fund and the Asset Allocation Fund expect that, under normal circumstances, the
dollar-weighted average maturity (or period until the next interest rate reset
date) of their portfolio securities may be longer than three years but the
maturity of individual securities may be up to 30 years. However, of these two
Funds, only the Short Bond Fund seeks to maintain an average portfolio effective
duration comparable to or less than that of three-year U.S. Treasury notes.
Montgomery Government Reserve Fund (the "Reserve Fund")
The investment objective of the Reserve Fund is current income consistent with
liquidity and preservation of capital, which under normal conditions it seeks by
investing exclusively in U.S. government securities, repurchase agreements for
U.S.
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<PAGE>
government securities and other money market funds investing in U.S. government
securities and those repurchase agreements. This Fund seeks to maintain a stable
net asset value per share of $1.00 in compliance with Rule 2a-7 under the
Investment Company Act, and pursuant to procedures adopted under such Rule, the
Reserve Fund limits its investments to those U.S. government securities that the
Board of Trustees determines present minimal credit risks and have remaining
maturities, as determined under the Rule, of 397 calendar days or less. The Fund
also maintains a dollar-weighted average maturity of the securities in its
portfolio of 90 days or less.
Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund")
Montgomery California Tax-Free Intermediate Bond Fund (the "California
Intermediate Bond Fund")
Montgomery California Tax-Free Money Fund (the "California Money Fund")
The investment objective of the Federal Money Fund is to maintain a stable net
asset value while maximizing current income exempt from federal income tax
consistent with liquidity and preservation of capital. The investment objective
of the California Intermediate Bond Fund is to provide maximum current income
exempt from federal income and California personal income taxes consistent with
preservation of capital and prudent investment management, and that of the
California Money Fund is to maintain a stable net asset value while maximizing
current income exempt from federal and California personal income taxes
consistent with liquidity and preservation of capital. Under normal conditions,
the Federal Money Fund seeks to achieve its objective by investing at least 80%
of its net assets in municipal securities, the interest from which is, in the
opinion of counsel to the issuer, exempt from federal income tax. Under normal
conditions, the California Money Fund seeks to achieve its objective by
investing at least 80% of its net assets in municipal securities and at least
65% of net assets in debt securities, the interest from which is, in the opinion
of counsel to the issuer, also exempt from California personal income taxes
("California municipal securities"). Under normal conditions, the California
Intermediate Bond Fund seeks to achieve its objective by investing at least 80%
of its net assets in California municipal securities. The 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 this Fund's share value but who are not
willing to accept the greater fluctuations that long-term tax-free bond funds
might entail. This Fund is not an appropriate investment for investors whose
primary investment objective is absolute principal stability. Because the value
of the securities in which this Fund invests generally changes with interest
rates, the value of its shares will fluctuate unlike shares of a money market
fund, which seeks to maintain a stable net asset value per share of $1.00.
Consequently, this Fund seeks to reduce such fluctuations by managing the
effective duration, and thus the interest risk, of its portfolio. (Effective
duration is an indicator of a security's sensitivity to interest rate change.
See "Duration" above.) Under normal conditions, the average dollar-weighted
portfolio maturity of the California Intermediate Bond Fund is expected to stay
within a range of 5 to 10 years. However, this Fund may invest in securities of
any maturity. This Fund is not suitable for investors who cannot benefit from
the tax-exempt character of its dividends, such as IRAs, qualified retirement
plans or tax-exempt entities.
At least 80% of the value of the California Intermediate Bond Fund's net assets
must consist of California municipal securities that at the time of purchase are
rated within the four highest ratings of municipal securities (AAA to BBB)
assigned by S&P, (Aaa to Baa) assigned by Moody's, or (AAA to BBB) assigned by
Fitch; or have S&P's short-term municipal rating of SP-2 or higher, or a
municipal commercial paper rating of A-2 or higher; Moody's short-term municipal
securities rating of MIG-2 or higher, or VMIG-2 or higher, or a municipal
commercial paper rating of P-2 or higher; or have Fitch's short-term municipal
securities rating of FIN-2 or higher, or a municipal commercial paper rating of
Fitch-2 or higher; or if unrated by S&P, Moody's or Fitch, are deemed by the
Manager to be of comparable quality, using guidelines approved by the Board (but
not to exceed 20% of this Fund's net assets). Debt securities rated in the
lowest category of investment grade debt may have speculative characteristics;
changes in economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than is the case with
higher grade bonds. However, there is no assurance that any municipal issuers
will make full payments of principal and interest or remain solvent. For a
description of the ratings, see the Appendix in the Statement of Additional
Information. See also "Risk Considerations."
Under normal conditions, the California Intermediate Bond Fund and the
California Money Fund seek to invest in California municipal securities to the
greatest extent practicable, but they may, however, invest in other municipal
securities if in such Fund's opinion, suitable California municipal securities
are not available. The California Intermediate Bond Fund may invest up to 20%,
and the Federal Money and California Money Funds may invest up to 35%, of their
respective total assets in cash, U.S. government securities, and obligations of
U.S. possessions, commercial paper and other debt securities, including
corporate debt instruments or instruments the interest from which is subject to
the federal alternative minimum tax for individuals. Additionally, the
California Intermediate Bond Fund may invest up to 20% and the California Money
Fund may invest 35%, of their respective total assets in municipal securities
other than California municipal securities. For the California Intermediate Bond
Fund, these other securities must be highly rated debt securities. From time to
time, the California Intermediate Bond and the California Money Funds may invest
more than 25% of their total assets in private activity bonds and industrial
development bonds of issuers located in California.
The Federal Money and California Money Funds seek to maintain a stable net asset
value per share of $1.00 in compliance with Rule 2a-7 under the Investment
Company Act and, pursuant to procedures adopted under such Rule, limit their
investments to those securities that the Board determines present minimal credit
risks and have remaining maturities, as
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<PAGE>
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 the Funds may invest. Investors in
the Global Asset Allocation Fund should note the portfolio securities of the
Global Asset Allocation Fund consists of the portfolio securities of each of the
Underlying Funds.
Equity Securities
The Domestic Equity, Select 50, International and Global Funds emphasize
investments in common stock, and common stock may constitute up to 80% of the
Asset Allocation Fund's portfolio. These Funds may also invest in other types of
equity securities (such as preferred stocks or convertible securities) and
equity derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The Domestic Equity, Select 50, Asset Allocation, International and Global Funds
may invest in ADRs, EDRs and GDRs and convertible securities which the Manager
regards as a form of equity security. Each such Fund may also invest up to 5% of
its net assets in warrants, including up to 2% of net assets for those not
listed on a securities exchange.
Privatizations
The Select 50, International and Global Funds believe that foreign governmental
programs of selling interests in government-owned or controlled enterprises
("privatizations") may represent opportunities for significant capital
appreciation, and these Funds may invest in privatizations. The ability of U.S.
entities, such as these Funds, to participate in privatizations may be limited
by local law, or the terms for participation may be less advantageous than for
local investors. There can be no assurance that privatization programs will be
successful.
Special Situations
The Select 50, International and Global Funds believe that carefully selected
investments in joint ventures, cooperatives, partnerships, private placements,
unlisted securities and similar vehicles (collectively, "special situations")
could enhance their capital appreciation potential. These Funds also may invest
in certain types of vehicles or derivative securities that represent indirect
investments in foreign markets or securities in which it is impracticable for
the Funds to invest directly. Investments in special situations may be illiquid,
as determined by the Manager based on criteria reviewed by the Board. These
Funds do not invest more than 15% of their net assets in illiquid investments,
including special situations.
Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the International and Global Funds to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment companies' portfolio securities and are subject to
limitations under the Investment Company Act. The International and Global Funds
also may incur tax liability to the extent they invest in the stock of a foreign
issuer that is a "passive foreign investment company" regardless of whether such
"passive foreign investment company" makes distributions to the Funds. See the
Statement of Additional Information.
The Select 50, International, Global, Asset Allocation, Equity Income and Fixed
Income Funds do not intend to invest in other investment companies unless, in
the Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, these Funds bear their ratable share of
that investment company's expenses, including advisory and administration fees.
The Manager has agreed to waive its own management fee with respect to the
portion of these Funds' assets invested in other open-end (but not closed-end)
investment companies.
Debt Securities
The Select 50, International and Global Funds may purchase debt securities that
complement their objective of capital appreciation through anticipated favorable
changes in relative foreign exchange rates, in relative interest rate levels, or
in the creditworthiness of issuers. Debt securities may constitute up to 80% of
the Asset Allocation Fund's and 35% of the Equity Income Fund's total assets. In
selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy which may be changed by the Board, each Fund
will not invest more than 5% of its total assets in debt securities rated lower
than investment grade, and the Allocation and Equity Income Funds will not
invest more than 5% of their total assets in debt securities rated lower than
highly rated debt securities. Subject to this limitation, each of these Funds
may invest in any debt security, including securities in default. After its
purchase by a Fund a debt security may cease to be rated or its rating may be
reduced below that required for purchase by
20
<PAGE>
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 International, Global, Allocation and Equity Income
Funds may invest in external (i.e., to foreign lenders) debt obligations issued
by the governments, governmental entities and companies of emerging market
countries. The percentage distribution between equity and debt will vary from
country to country based on anticipated trends in inflation and interest rates;
expected rates of economic and corporate profits growth; changes in government
policy; stability, solvency and expected trends of government finances; and
conditions of the balance of payments and terms of trade.
U.S. Government securities
All Funds may invest in fixed rate and floating or variable rate U.S. government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. Government. Other securities issued by U.S. Government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, while
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Funds' shares. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
Mortgage-Related Securities and Derivative Securities
The Fixed-Income Funds and the Asset Allocation Fund may invest in
mortgage-related securities. A mortgage-related security is an interest in a
pool of mortgage loans and is considered a derivative security. Most
mortgage-related securities are pass-through securities, which means that
investors receive payments consisting of a pro rata share of both principal and
interest (less servicing and other fees), as well as unscheduled prepayments, as
mortgages in the underlying mortgage pool are paid off by the borrowers. Certain
mortgage-related securities are subject to high volatility. These funds use
these derivative securities in an effort to enhance return and as a means to
make certain investments not otherwise available to the Funds. See "Hedging and
Risk-Management Practices" for a discussion of other reasons why these Funds
invest in derivative securities.
Agency Mortgage-Related Securities.
Investors in the Reserve, Tax-Free, Short Bond and Asset Allocation Funds should
note that the dominant issuers or guarantors of mortgage-related securities
today are GNMA, FNMA and the FHLMC. GNMA creates pass-through securities from
pools of government guaranteed or insured (Federal Housing Authority or Veterans
Administration) mortgages. FNMA and FHLMC issue pass-through securities from
pools of conventional and federally insured and/or guaranteed residential
mortgages. The principal and interest on GNMA pass-through securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. FNMA guarantees full and timely payment of all interest and
principal, and FHLMC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. Securities from FNMA and
FHLMC are not backed by the full faith and credit of the U.S. Government but are
generally considered to offer minimal credit risks. The yields provided by these
mortgage-related securities have historically exceeded the yields on other types
of U.S. government securities with comparable "lives" largely due to the risks
associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
The Fixed Income Funds consider GNMA, FNMA and FHLMC-issued pass-through
certificates, CMOs and other mortgage-related securities to be U.S. government
securities for purposes of their investment policies. However, the Money Market
Funds do not invest in stripped mortgage securities, and the Short Bond Fund
limits its stripped mortgage securities investments to 10% of total assets. The
liquidity of IOs and POs issued by the U.S. Government or its agencies and
instrumentalities and backed by fixed-rate mortgage-related securities will be
determined by the Manager under the direct supervision of the Trust's Pricing
Committee and reviewed by the Board, and all other IOs and POs will be deemed
illiquid for purposes of the Fixed Income Funds' limitation on illiquid
securities. The Allocation and Short Bond Funds may invest in derivative
securities known as "floaters" and "inverse floaters," the values of which vary
in response to interest rates. These securities may be illiquid and their values
may be very volatile.
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<PAGE>
Privately Issued Mortgage-Related Securities/Derivatives. The Short Bond Fund
and the Asset Allocation Fund may invest in mortgage-related securities offered
by private issuers, including pass-through securities for pools of conventional
residential mortgage loans; mortgage pay-through obligations and mortgage-backed
bonds, which are considered to be obligations of the institution issuing the
bonds and are collateralized by mortgage loans; and bonds and CMOs
collateralized by mortgage-related securities issued by GNMA, FNMA, FHLMC or by
pools of conventional mortgages, multi-family or commercial mortgage loans.
Private issuer mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than U.S. Government and
agency mortgage-related securities because they offer no direct or indirect
governmental guarantees. However, many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal. The Short Bond Fund may purchase some mortgage-related securities
through private placements that are restricted as to further sale. See "Illiquid
Securities." The value of these securities may be very volatile.
Structured Notes and Indexed Securities. The Funds may invest in structured
notes and indexed securities. Structured notes are debt securities, the interest
rate or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk. See "The Funds' Investment Objectives and
Policies - Duration."
Variable Rate Demand Notes
The Fixed Income and the Asset Allocation Funds may invest in variable rate
demand notes ("VRDNs").
Zero Coupon Bonds
The Fixed Income and Asset Allocation Funds may invest in zero coupon bonds.
Zero coupon bond prices are highly sensitive to changes in market interest
rates. The original issue discount on the zero coupon bonds must be included
ratably in the income of the Fixed Income and Asset Allocation Funds as the
income accrues even though payment has not been received. These Funds
nevertheless intend to distribute an amount of cash equal to the currently
accrued original issue discount, and this may require liquidating securities at
times they might not otherwise do so and may result in capital loss. See "Tax
Information" in the Statement of Additional Information.
Asset-Backed Securities, Custodial Receipts, Participation Interests and Tender
Option Bonds
Each Fund may invest up to 5% (25% in the case of the Allocation and Short Bond
Funds) of its total assets in asset-backed securities. Like mortgage-related
securities, these securities are subject to the risk of prepayment. See "Risk
Considerations." The California Intermediate Bond Fund may invest in custodial
receipts. The Tax-Free Funds may invest in participation interests and tender
option bonds.
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<PAGE>
Other Investment Practices
<TABLE>
The table below and the following sections summarize certain investment
practices of the Funds, each of which may involve certain special risks. The
Glossary section at the end of this Prospectus briefly describes each of the
investment techniques summarized below. The Statement of Additional Information,
under the heading "Investment Objectives and Policies of the Funds," contains
more detailed information about certain of these practices, including
limitations designed to reduce risks.
===================================================================================================================================
<CAPTION>
C
A
G L
O I
V F
T
T
R A
E X
S I G S -
M N L E F F
A G T O S R E R
L G L E I B H V D E C
L L O R N A O E E E A
O B N T L R R L
C B A A E T T A I I
A A L T R E A A O L N F
P L I N M S S G T T
C O A E S S O A T E T
E O O O N T E R E E V L A R A
Q P P M A I M G T T E X M X
U P P M L O E I R R - E -
I O O U N R N A A N E F D F
T S R M R N S A G G S L L M T R I R
Y M T I T I M L I E L L E U E A E
A U C U C A N M L O O N R E T E
G I L N R N A L G G A E C C T N E
R N L I O I T L R R C A A M M
O C T T I O A K T T T B B O B O
W O C I C I O C W S E I I O O N O N
T M A E A E N A T I T 5 O O N N E N E
H E P S P S S P H A S 0 N N D D Y D Y
- ------------------------------------ -----------------------------------------------------------------------------------------------
<S> <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/
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions x/1 * x/1
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed 10% x/ x/ x/ * x/ x/ x/
of total fund assets
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ * x/ x/
one-third of total fund assets
- -----------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement 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/2 x/
- -----------------------------------------------------------------------------------------------------------------------------------
Securities lending not to x/ x/ x/ x/ x/ x/ * x/ x/ x/
exceed 10% of total fund assets
- -----------------------------------------------------------------------------------------------------------------------------------
Securities lending not to x/ x/ x/ x/ x/ x/ x/ * x/ x/
exceed 30% of total fund assets
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued and forward x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/3 * x/3 x/ x/
commitment securities
- -----------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts 6 x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ *
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ * x/ x/
and currencies 4
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ *
indices 4
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered call options 4 x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ * x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Write covered put options 4 x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ * x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate futures
contracts 5 x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ * x/ x/
- -----------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ * x/ x/
on futures
- -----------------------------------------------------------------------------------------------------------------------------------
Equity swaps x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ *
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited x/ *
to 5% of fund's net assets)
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited * x/ x/ x/
to 10% of fund's net assets)
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ x/ * x/ x/
to 15% of fund's net assets)
===================================================================================================================================
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<PAGE>
<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 security, a Fund may experience
delay or difficulty in exercising its rights to realize upon the security,
may incur a loss if the value of the security declines and may incur
disposition costs in liquidating the security.
2 The Manager will not use leverage for the Short Bond Fund if, as a result,
the Fund's portfolio duration would not be comparable to or less than that
of three-year U.S. Treasury notes.
3 The Fund also may enter into forward commitments to sell high-grade liquid
debt securities it does not own at the time of entering such commitments.
4 A Fund will not enter into any options on securities, securities indices
or currencies or related options (including options on futures) if the sum
of the initial margin deposits and premiums paid for any such option or
options would exceed 5% of its total assets, and it will not enter into
options with respect to more than 25% of its total assets.
5 A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indices and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
6 A Fund that may invest in forward currency contracts may not invest more
than one-third of its assets in such contracts.
* 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 5% of its total assets (excluding, in the case of
the Short Bond Fund, fully collateralized reverse repurchase agreements and
dollar roll transactions), except that the Growth, Small Cap Opportunities,
International Growth, Select 50, Asset Allocation, Equity Income, International
Small Cap, Emerging Asia and Opportunities Funds may not purchase securities if
such borrowings exceed 10% of their total assets.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate to
further the Fund's investment objective or when it appears that a position of
the desired size cannot be accumulated. Portfolio turnover generally involves
some expense to a Fund, including brokerage commissions, dealer mark-ups and
other transaction costs, and may result in the recognition of capital gains that
may be distributed to shareholders. See "Financial Highlights" for portfolio
turnover information. The annual portfolio turnover rate for the Emerging Asia
Fund is expected to be approximately 125%. Even when portfolio turnover exceeds
100% for a Fund that Fund does not regard portfolio turnover as a limiting
factor. Portfolio turnover in excess of 100% is considered high, increases
brokerage costs incurred by a Fund and may cause recognition of gain by
shareholders.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds (except the
Money Funds) may employ certain risk management practices using certain
derivative securities and techniques (known as Derivatives). Markets in some
countries currently do not have instruments available for hedging transactions.
To the extent that such instruments do not exist, the Manager may not be able to
hedge its investment effectively in such countries. Furthermore, a Fund engages
in hedging activities only when the Manager deems it to be appropriate and does
not necessarily engage in hedging transactions with respect to each investment.
Hedging transactions involve certain risks. While a Fund may benefit from the
use of hedging positions, unanticipated changes in interest rates or securities
prices may result in poorer overall performance for a Fund than if it had not
entered into a hedging position. If the correlation between a hedging position
and a portfolio position is not properly protected, the desired protection may
not be obtained and the Fund may be exposed to risk of financial loss. In
addition, a Fund pays commissions and other costs in connection with such
investments.
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
24
<PAGE>
investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The California Money, Federal Money, Equity Income, Select 50, Emerging Asia,
Micro Cap and Small Cap Opportunities Funds have reserved the right, if approved
by the Board, to convert in the future to a "feeder" fund that would invest all
of its assets in a "master" fund having substantially the same investment
objective, policies and restrictions. At least 30-days' prior written notice of
any such action would be given to all shareholders if and when such a proposal
is approved, although no such action has been proposed as of the date of this
Prospectus.
Risk Considerations
The following describes certain risks involved with investing in the Funds.
Investors in the Global Asset Allocation Fund should note the risks involved
with each Underlying Fund because the Global Asset Allocation Fund is a
fund-of-funds.
Small Companies
The Small Cap, Small Cap Opportunities, Micro Cap and International Small Cap
Funds emphasize, and the Select 50, other International, Growth, Allocation and
Global Funds may make investments in, smaller companies that may benefit from
the development of new products and services. Such smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, more mature issuers. Such smaller companies may have limited product
lines, markets or financial resources, and their securities may trade less
frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.
Foreign Securities
The Domestic Equity, Select 50, Asset Allocation, International and Global Funds
have the right to purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks of loss inherent in domestic
investments. The Select 50, International and Global Funds, particularly the
Emerging Asia Fund and Emerging Markets Fund, may invest in securities of
companies domiciled in, and in markets of, so-called "emerging market
countries." These investments may be subject to higher risks than investments in
more developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts. Additional risk factors,
including use of domestic and foreign custodian banks and depositories, are
described elsewhere in the Prospectus and in the Statement of Additional
Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments in other countries are generally greater than in the U.S. Foreign
markets have different clearance and settlement procedures from those in the
U.S., and certain markets have experienced times when settlements did not keep
pace with the volume of securities transactions. The inability of a Fund to make
intended security purchases due to settlement difficulties could cause it to
miss attractive investment opportunities. Inability to sell a portfolio security
due to settlement problems could result in loss to the Fund if the value of the
portfolio security declined or result in claims against the Fund. In certain
countries, there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. The securities markets of many of the countries in which these Funds may
invest may also be smaller, less liquid, and subject to greater price volatility
than those in the U.S.
Because certain foreign securities may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions between currencies. A change in the value of a foreign currency
against the U.S. dollar results in a corresponding change in the U.S. dollar
value of a Fund's securities denominated in the currency. Such changes also
affect the Fund's income and distributions to shareholders. A Fund may be
affected either favorably or unfavorably by changes in the relative rates of
exchange between the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
25
<PAGE>
Some countries in which one of these Funds may invest also may have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Fund. The Fund may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Lower Quality Debt
The Select 50, International and Global Funds are authorized to invest in
medium-quality (rated or equivalent to BBB by S&P or Fitch's or Baa by Moody's)
and in limited amounts of high-risk debt securities below investment grade
quality. Medium quality debt securities have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than with higher
grade debt securities.
As an operating policy, which may be changed by the Board without shareholder
approval, these Funds do not invest more than 5% of their total assets in debt
securities below investment grade, also known as "junk bonds". The Board may
consider a change in this operating policy if, in its judgment, economic
conditions change such that a higher level of investment in high-risk, lower
quality debt securities would be consistent with the interests of these Funds
and their shareholders. Unrated debt securities are not necessarily of lower
quality than rated securities but may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Manager to determine, to the
extent reasonably possible, that the planned investment is sound. From time to
time, these Funds may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Diversification
Diversifying a fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less diversified
funds may be more sensitive to changes in the market value of a single issuer or
industry. The Select 50 Fund may present greater risk than is usually associated
with widely diversified mutual funds because it may invest in the securities of
as few as 50 issuers. Therefore, the Select 50 Fund is not appropriate as your
sole investment.
Concentration in Communications Industry
The Communications Fund concentrates its investments in the global
communications industry. Consequently, the Fund's share value may be more
volatile than that of mutual funds not sharing this concentration. The value of
the Fund's shares may vary in response to factors affecting the global
communications industry, which may be subject to greater changes in governmental
policies and regulation than many other industries, and regulatory approval
requirements may materially affect the products and services. Because this Fund
must satisfy certain diversification requirements in order to maintain its
qualification as a regulated investment company within the meaning of the Code,
this Fund may not always be able to take full advantage of opportunities to
invest in certain communications companies.
Concentration in Securities of Emerging Asian Companies
The Emerging Asia Fund concentrates its investments in companies that have their
principal activities in emerging Asian countries. Consequently, the Fund's share
value may be more volatile than that of investment companies not sharing this
geographic concentration. The value of the Fund's shares may vary in response to
political and economic factors affecting issuers in emerging Asian countries.
Although the Fund normally does not expect to invest in Japanese companies, some
emerging Asian economies are directly affected by Japanese capital investment in
the region and by Japanese consumer demands. Many of the emerging Asian
countries are developing both economically and politically. Emerging 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 Asia may not have firmly established product markets, may lack depth of
management, or may be more vulnerable to political or economic developments such
as nationalization of their own industries.
26
<PAGE>
Interest Rates
The market value of debt securities that are interest-rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate change. Changes in the ability
of an issuer to make payments of interest and principal and in the market's
perception of its creditworthiness also affect the market value of that issuer's
debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that the Fixed Income Funds, and the Asset Allocation
Fund, to the extent it retains the same percentage of debt securities, may have
to reinvest the proceeds of prepayments at lower interest rates than those of
their previous investments. If this occurs, a Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable duration, although they may have a comparable risk of
decline in market value in periods of rising interest rates. To the extent that
the Fixed Income Funds or the Asset Allocation Fund purchase mortgage-related
securities at a premium, unscheduled prepayments, which are made at par, result
in a loss equal to any unamortized premium. Duration is one of the fundamental
tools used by the Manager in managing interest rate risks including prepayment
risks. See "Duration" in the Glossary.
Tax-Free Funds
Investing in Municipal Securities. Because the California Intermediate Bond and
the California Money Funds invest primarily in California municipal securities,
their performance may be especially affected by factors pertaining to the
California economy and other factors specifically affecting the ability of
issuers of California municipal securities to meet their obligations. As a
result, the value of the Funds' shares may fluctuate more widely than the value
of shares of a portfolio investing in securities relating to a number of
different states. The Federal Money Fund also may invest a portion of its
portfolio in California municipal securities. Investors in the Federal Money
Fund should note that the types of risks of investing in California municipal
securities exist in varying degrees for municipal securities of other states.
Non-diversified Portfolio. The California Intermediate Bond Fund is a
"non-diversified" investment company under the Investment Company Act. This
means that, with respect to 50% of its total assets, it may not invest more than
5% of its total assets in the securities of any one issuer (other than the U.S.
Government). The balance of its assets may be invested in as few as two issuers.
Thus, up to 25% of the Fund's total assets may be invested in the securities of
any one issuer. For purposes of this limitation, a security is considered to be
issued by the governmental entity (or entities) the assets and revenues of which
back the security, or, with respect to an industrial development bond, that is
backed only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a guaranteed
security also may be considered to be an issuer in connection with such
guarantee. By investing in a portfolio of municipal securities, a shareholder in
the California Intermediate Bond Fund enjoys greater diversification than an
investor holding a single municipal security. However, the investment return on
a non-diversified portfolio typically is dependent upon the performance of a
smaller number of issuers relative to the number of issuers held in a
diversified portfolio. If the financial condition or market assessment of
certain issuers changes, this Fund's policy of acquiring large positions in the
obligations of a relatively small number of issuers may affect the value of its
portfolio to a greater extent than if its portfolio were fully diversified.
Management Of The Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees that establishes its Funds' policies and supervises and reviews
their management. Day-to-day operations of the Funds are administered by the
officers of the Trusts and by the Manager pursuant to the terms of an investment
management agreement with each Fund.
Montgomery Asset Management, L.P., is the Funds' Manager. The Manager, a
California limited partnership, was formed in 1990 as an investment adviser
registered as such with the SEC under the Investment Advisers Act of 1940, as
amended, and since then has advised private accounts as well as the Funds. Its
general partner is Montgomery Asset Management, Inc., and its sole limited
partner is Montgomery Securities, the Funds' Distributor. Under the Investment
Company Act, both Montgomery Asset Management, Inc. and Montgomery Securities
may be deemed control persons of the Manager. Although the operations and
management of the Manager are independent from those of Montgomery Securities,
the Manager may draw upon the research and administrative resources of
Montgomery Securities in its discretion and consistent with applicable
regulations.
27
<PAGE>
Portfolio Managers
Montgomery Growth Fund
Montgomery Micro Cap Fund
Montgomery Small Cap Opportunities Fund
Roger W. Honour is a managing director and senior portfolio manager. Prior to
joining Montgomery Asset Management in June 1993, Mr. Honour spent one year as
vice president and portfolio manager at Twentieth Century Investors in Kansas
City, Missouri. From 1990 to 1992, he served as vice president and portfolio
manager at Alliance Capital Management. From 1978 to 1990, Mr. Honour was a vice
president with Merrill Lynch Capital Markets.
Kathryn M. Peters is a portfolio manager. From 1993 to 1995, Ms. Peters was an
associate in the investment banking division of Donaldson, Lufkin & Jenrette in
New York. At Donaldson, Lufkin & Jenrette, Ms. Peters 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 buy-out group of Marine Midland
Bank.
Andrew Pratt, CFA, is a portfolio manager. He joined Montgomery Asset Management
from Hewlett-Packard Company, where he was an equity analyst, managed a
portfolio of small capitalization technology companies, and researched private
placement and venture capital investments. From 1983 through 1988, he worked in
the Capital Markets Group at Fidelity Investments in Boston, Massachusetts.
Montgomery Equity Income Fund
John H. Brown, CFA, is a managing director and senior portfolio manager.
Preceding his arrival at the Manager in May 1994, Mr. Brown was an analyst and
portfolio manager at Merus Capital Management in San Francisco, California from
June 1986.
Montgomery Small Cap Fund
Stuart O. Roberts is a managing director and senior portfolio manager. For the
five years preceding this Fund's inception in 1990, Mr. Roberts was a portfolio
manager and analyst at Founders Asset Management in Denver, Colorado, where he
managed three public mutual funds.
Jerome C. (Cam) Philpott, CFA, is a portfolio manager. 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. Mr. Kidwell joined the Manager in
1991 from the position he held since 1989 as the sole general partner and
portfolio manager of Oasis Financial Partners, an affiliate of the Distributor
that invested in savings and loans. Before then, he covered the savings and loan
industry for Dean Witter Reynolds from 1987 to 1989.
Montgomery Global Opportunities Fund
Montgomery Global Communications Fund
Montgomery International Small Cap Fund
Montgomery International Growth Fund
John D. Boich is a managing director and senior portfolio manager. From 1990 to
1993, he was vice president and portfolio manager at The Boston Company
Institutional Investors Inc. From 1989 to 1990, he was the founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, Mr. Boich worked as a financial adviser with Prudential-Bache
Securities and E.F. Hutton & Company.
Oscar A. Castro is a managing director and senior portfolio manager. Before
joining the Manager, he was vice president/portfolio manager at G.T. Capital
Management, Inc. from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, he was deputy portfolio manager/analyst at Templeton International.
For the background and business experience of Dr. Bryan L. Sudweeks, who is a
Portfolio Strategist for the International Growth Fund, see the discussion under
the Montgomery Emerging Markets Fund and Montgomery Emerging Asia Fund.
Montgomery Emerging Markets Fund
Montgomery Emerging Asia Fund
28
<PAGE>
Josephine S. Jimenez, CFA, is a managing director and senior portfolio manager.
From 1988 through 1991, Ms. Jimenez worked at Emerging Markets Investors
Corporation/Emerging Markets Management in Washington, D.C. as senior analyst
and portfolio manager.
Bryan L. Sudweeks, Ph.D., CFA, is a managing director and senior portfolio
manager. Before joining the Manager, he was a senior analyst and portfolio
manager at Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, he was a Professor of International Finance and
Investments at George Washington University and served as Adjunct Professor of
International Investments from 1988 until May 1991.
Frank Chiang is a portfolio manager. From 1993 until joining the Manager in
1996, Mr. Chiang was managing director and portfolio manager at TCW Asia Ltd. in
Hong Kong.
Angeline Ee is a portfolio manager. From 1990 until joining the Manager in July
1994, Ms. Ee was an Investment Manager with AIG Investment Corp. in Hong Kong.
From June 1989 until September 1990, Ms. Ee was a co- manager of a portfolio of
Asian equities and bonds at Chase Manhattan Bank in Singapore.
Montgomery Select 50 Fund
The Manager currently divides its equity portfolio management into a number of
specific disciplines. Five of those disciplines are represented in the Select 50
Fund. These five disciplines, which may be adjusted from time to time, include
U.S. Growth Equity, U.S. Smaller Capitalization Companies, U.S. Equity Income,
International and Emerging Markets. The portfolio management teams responsible
for these disciplines are described throughout this "Portfolio Managers"
section.
Kevin T. Hamilton, Chairman of the Manager's Investment Oversight Committee and
a managing director, is responsible for coordinating and implementing the
investment decisions of the Manager's Equity teams and making investment
decisions relating to the allocation of assets among the Underlying Funds of the
Global Asset Allocatin Fund. The portfolio management teams responsible for the
different disciplines used in the Select 50 Fund are described throughout this
"portfolio managers" section. From 1985 until joining the Manager in February
1991, Mr. Hamilton was a senior vice president responsible for investment
oversight at Analytic Investment Management in Irvine, California.
Montgomery Asset Allocation Fund
William C. Stevens is the portfolio manager for the fixed-income and cash
components of the Fund's portfolio. The Manager's growth equity team manages the
equity component of the Fund's portfolio, whose current key members are Roger W.
Honour, Andrew Pratt and Kathryn M. Peters. That team and Mr. Stevens determine
the Fund's strategic allocations. For the background and business experience of
Roger W. Honour, Andrew Pratt and Kathryn M. Peters, see the discussion of the
Growth Fund above, and for William C. Stevens, see the discussion under the
Fixed Income Funds below.
Montgomery Global Asset Allocation Fund
The Global Asset Allocation Fund invests its assets in five separate Funds,
representing five different investment disciplines. Kevin T. Hamilton is
responsible for selecting the Funds to be included in the fund-of-fund
structure, and also for coordinating and implementing the investment decisions
of the Global Asset Allocation Fund. For the background and business experience
of Kevin T. Hamilton, see the discussion under Montgomery Select 50 Fund above.
Montgomery Short Government Bond Fund
Montgomery Government Reserve Fund
Montgomery Federal Tax-Free Money Fund
Montgomery California Tax-Free Intermediate Bond Fund
Montgomery California Tax-Free Money Fund
William C. Stevens is a managing director and a senior portfolio manager. At
Barclays de Zoete Wedd Securities from 1991 to 1992, he started its CMO and
asset-backed securities trading. Mr. Stevens traded stripped mortgage securities
and mortgage-related interest rate swaps for the First Boston Corporation from
1990 to 1991, and while with Drexel Burnham Lambert from 1984 to 1990 was
responsible for the origination and trading of all derivative mortgage-related
securities.
Peter D. Wilson is a portfolio manager. 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.
Management Fees and Other Expenses
29
<PAGE>
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.
The management fees for the Domestic Equity, Select 50, Asset Allocation,
International and Global Funds are higher than for most mutual funds.
<TABLE>
<CAPTION>
Average Daily Net Assets Management Fee
(Annual Rate)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Opportunities Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund First $250 million 1.25%
Over $250 million 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
Over $1 billion 0.90%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Asset Allocation Fund First $500 million 0.80%
Over $500 million 0.65%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Global Asset Allocation Fund All amounts 0.20%*
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Short Government Bond Fund First $500 million 0.50%
Over $500 million 0.40%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
Over $500 million 0.20%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Intermediate Bond Fund First $500 million 0.50%
Over $500 million 0.40%
- -------------------------------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
* 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 Allocation Funds pays seven one-hundredths of
one percent (0.07%) of average daily net assets (0.06% of average daily net
assets over $500 million); each of the Small Cap, Small Cap Opportunities,
Select 50, Micro Cap, Emerging Markets, International Small Cap,
30
<PAGE>
International Growth and Communications Funds pays seven one-hundredths of one
percent (0.07%) of average daily net assets (0.06% of daily net assets over $250
million); each of the Short, Reserve and Tax-Free Funds pays five one-hundredths
of one percent (0.05%) of average daily net assets (0.04% of average daily net
assets over $500 million and the Reserve Fund over $250 million). In the case of
the Global Asset Allocation Fund, the Administrator does not charge a fee for
performing administrative services for the Global Asset Allocation Fund although
it charges a fee for such services performed for the Underlying Funds, which
ultimately are borne indirectly by shareholders of 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 recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to that Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
For certain Funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses at or below the lesser of the
maximum allowable by applicable state expense limitations or the following
percentages of each Fund's average net assets: the Growth Fund, one and
five-tenths of one percent (1.50%); the Equity Income Fund, eighty-five
one-hundredths of one percent (0.85%); the Small Cap Fund, one and four-tenths
of one percent (1.40%); the Small Cap Opportunities Fund, one and five-tenths of
one percent (1.50%); the Micro Cap Fund, one and seventy-five one-hundredths of
one percent (1.75%); the International Growth Fund, one and sixty-five
one-hundredths of one percent (1.65%); the Select 50 Fund, one and eight-tenths
of one percent (1.80%); the Emerging Markets, International Small Cap,
Communications and Opportunities Funds, one and nine-tenths of one percent
(1.90%); the Asset Allocation Fund, one and three-tenths of one percent (1.30%);
the 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 two years (three
years for the Asset Allocation Fund), provided that the Fund is able to effect
such reimbursement and remain in compliance with applicable expense limitations.
The Manager generally seeks reimbursement for the oldest reductions and waivers
before payment by the Funds for fees and expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay to increase the return to that Fund's investors. If the Manager
performs a service or assumes an operating expense for which a Fund is obligated
to pay and the performance of such service or payment of such expense is not an
obligation of the Manager under the Investment Management Agreement, the Manager
is entitled to seek reimbursement from that Fund for the Manager's costs
incurred in rendering such service or assuming such expense. The Manager also
may compensate broker-dealers and other intermediaries that distribute a Fund's
shares as well as other service providers of shareholder and administrative
services. The Manager may also sponsor seminars and educational programs on the
Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to, reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Funds receive prompt execution at competitive prices, the Manager also may
consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. It is anticipated that Montgomery Securities
may act as one of the Funds' brokers in the purchase and sale of portfolio
securities and, in that capacity, will receive brokerage commissions from the
Funds. The Funds will use Montgomery Securities as its broker only when, in the
judgment of the Manager and pursuant to review by the Boards, Montgomery
Securities will obtain a price and execution at least as favorable as that
available from other qualified brokers. See "Execution of Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
31
<PAGE>
How To Contact The Funds
For information on the Funds or your account, call a Montgomery Shareholder
Service Representative at:
(800) 572-3863
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
Regular Mail Express Mail or Overnight Service
The Montgomery Funds The Montgomery Funds
c/o DST Systems, Inc. c/o DST Systems, Inc.
P.O. Box 419073 1004 Baltimore St.
Kansas City, MO 64141-6073 Kansas City, MO 64105
Visit the Montgomery World Wide Web Site at:
www.xperts.montgomery.com/1
How To Invest In The Funds
The Funds' shares are offered directly to the public, with no sales load, at
their next-determined net asset value after receipt of an order with payment.
The Funds' shares are offered for sale by Montgomery Securities, the Funds'
Distributor, 600 Montgomery Street, San Francisco, California 94111, (800)
572-3863, and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, Montgomery Securities or certain administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders and payment for the Money Funds
must be received by 12:00 noon, New York time. Orders for Fund shares received
after the Funds' cutoff times will be purchased at the next-determined net asset
value after receipt of the order. Shares of the Fixed Income Funds will not be
priced on a national bank holiday.
The minimum initial investment in each Fund is $1,000 ($5,000 for the Micro Cap
Fund) (including IRAs) and $100 ($500 for the Micro Cap Fund) for subsequent
investments. The Manager or the Distributor, in its discretion, may waive these
minimums. The Funds do not accept third party checks or cash investments. Checks
must be in U.S. dollars and, to avoid fees and delays, drawn only on banks
located in the U.S. Purchases may also be made in certain circumstances by
payment of securities. See the Statement of Additional Information for further
details.
Initial Investments
Minimum Initial Investment (including IRAs): $1,000
Minimum Initial Investment for the Micro Cap Fund (including IRAs): $5,000
Initial Investments by Check
o Complete the Account Application. Tell us in which Fund(s) you want to
invest and make your check payable to The Montgomery Funds.
o A charge may be imposed on checks that do not clear.
Initial Investments by Wire
o Call the Transfer Agent to tell them you intend to make your initial
investment by wire. Provide the Transfer Agent with your name, dollar amount
to be invested and Fund(s) in which you want to invest. They will provide
you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire instructions
to ensure accurate handling of your investment.
32
<PAGE>
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For Credit to: (shareholder(s) name)
Shareholder Account Number: (shareholder(s) account number)
Name of Fund: (Montgomery Fund name)
o Your bank may charge a fee for any wire transfers.
o The Funds and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Subsequent Investments
Minimum Subsequent Investment (including IRAs): $100
Minimum Subsequent Investment for the Micro Cap Fund (including IRAs): $500
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check with
written instructions indicating the Fund name and account number to which
your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agent's affiliated bank by using the bank wire information under "Initial
Investments by Wire."
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To make
a purchase, call the Transfer Agent at (800) 572-3863 before the Fund cutoff
time.
o Shares of the Money Funds and shares for IRAs may not be purchased by phone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
o You should do one of the following to ensure payment is received in time:
o Transfer funds directly from your bank account by sending a letter and a
voided check or deposit slip (for a savings account) to the Transfer
Agent.
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o Send a check by overnight or 2nd day courier service.
o Instruct your bank to wire funds to the Transfer Agent's affiliated bank
by using the bank wire information under the section titled "Initial
Investments by Wire."
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount is
each Fund's subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your Montgomery
account application or your letter of instruction. Investments will
automatically be transferred into your Montgomery account from your checking
or savings account.
o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your account application or your letter of instruction, the
20th of each month will be selected.
o You should allow 20 business days for this service to become effective.
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 is each Fund's subsequent investment
minimum.
o You may automatically deposit a designated amount of your paycheck directly
into a Montgomery Fund account.
o Please call the Transfer Agent to receive instructions to establish 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 at any time
by the Funds upon 30- days' written notice or at any time by you by written
notice to the Funds. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next-determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by a Fund. The Funds and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Funds employ
34
<PAGE>
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include recording certain telephone calls, sending a
confirmation and requiring the caller to give a special authorization number or
other personal information not likely to be known by others. The Fund and
Transfer Agent may be liable for any losses due to unauthorized or fraudulent
telephone transactions only if such reasonable procedures are not followed.
Retirement Plans
Except for the Tax-Free Funds, shares of the Funds are available for purchase by
any retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and IRAs.
Certain of the Funds are available for purchase through administrators for
retirement plans. Investors who purchase shares as part of a retirement plan
should address inquiries and seek investment servicing from their plan
administrators. Plan administrators may receive compensation from the Funds for
performing shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How To Redeem An Investment In The Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the Fixed Income Funds). The
redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, Montgomery Securities or
other securities dealers. Payment of redemption proceeds is made promptly
regardless of when redemption occurs and normally within three days after
receipt of all documents in proper form, including a written redemption order
with appropriate signature guarantee. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instructions. The Funds may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. Shares tendered
for redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. Procedures for
requesting a redemption are set forth below.
Redeeming by Written Instruction
o Write a letter giving your name, account number, the name of the Fund from
which you wish to redeem and the dollar amount or number of shares you wish
to redeem.
o Signature guarantee your letter if you want the redemption proceeds to go to
a party other than the account owner(s), your predesignated bank account or
if the dollar amount of the redemption exceeds $50,000. Signature guarantees
may be provided by an eligible guarantor institution such as a commercial
bank, an NASD member firm such as a stock broker, a savings association or
national securities exchange. Contact the Transfer Agent for more
information.
o If you do not have a predesignated bank account and want to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees in the Manager's discretion.
Redeeming by Check
o Checkwriting is available on the Government Reserve, Federal Money,
California Money, California Intermediate Tax-Free Bond and Short Government
Bond Funds.
35
<PAGE>
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.
o Checks should not be used to close accounts with fluctuating net asset
values (California Intermediate Tax-Free Bond and Short Government Bond
Funds).
o Checks will be returned to you at the end of each month.
o Checkwriting privileges may not be available for Montgomery Securities
brokerage accounts.
o A charge may be imposed for any stop payments requested.
Redeeming By Telephone
o Unless you have declined telephone redemption privileges on your account
application, you may redeem shares up to $50,000 by calling the Transfer
Agent before the Fund cutoff time.
o If you included bank wire information on your account application or made
subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at least two business days for redemption proceeds to be
credited to your bank account. If you want to wire your redemption proceeds
to arrive at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with a
guaranteed signature.
o Telephone redemption privileges may be cancelled after an account is opened
by instructing the Transfer Agent in writing. Your request will be processed
upon receipt. This service is not available for IRA accounts.
By establishing telephone redemption privileges, a shareholder authorizes the
Funds and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization. When a shareholder appoints a designee on the
Account Application or by other written authorization, the shareholder agrees to
be bound by the telephone redemption instructions given by the shareholder's
designee. The Funds may change, modify or terminate these privileges at any time
upon 60-days' notice to shareholders. The Funds will not be responsible for any
loss, damage, cost or expense arising out of any transaction that appears on the
shareholder's confirmation after 30 days following mailing of such confirmation.
See discussion of Fund telephone procedures and liability under "Telephone
Transactions."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
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<PAGE>
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, each Fund will
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000
($5,000 for the Micro Cap Fund). If a Fund decides to make an involuntary
redemption, the shareholder will first be notified that the value of the
shareholder's account is less than the minimum level and will be allowed 30 days
to make an additional investment to bring the value of that account at least to
the minimum investment required to open an account before the Fund takes any
action.
Exchange Privileges And Restrictions
You may exchange shares from another Fund with the same registration, taxpayer
identification number and address. An exchange may result in a recognized gain
or loss for income tax purposes. See the discussion of Fund telephone procedures
and limitations of liability under "Telephone Transactions."
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange fee) after
your request is received. Your request is subject to the Funds' cut-off
times.
o Exchange purchases must meet the minimum investment requirements of the Fund
you intend to purchase.
o You may exchange for shares of a Fund only in states where that Fund's
shares are qualified for sale and only for Funds offered by this prospectus.
o You may not exchange for shares of a Fund that is not open to new
shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make more
than four exchanges out of any one fund during a twelve-month period. The
Fund may also refuse an exchange into a Fund from which you have redeemed
shares within the previous 90 days (accounts under common control and
accounts with the same taxpayer identification number will be counted
together). Exchanges out of the Fixed Income Funds are exempt. A
shareholder's exchanges may be restricted or refused if a Fund receives, or
the Manager anticipates, simultaneous orders affecting significant portions
of that Fund's assets and, in particular, a pattern of exchanges coinciding
with a "market timing" strategy. The Trusts reserve the right to refuse
exchanges by any person or group if, in the Manager's judgment, a Fund would
be unable to effectively invest the money in accordance with its investment
objective and policies, or would otherwise be potentially adversely
affected. Although the Trusts attempt to provide prior notice to affected
shareholders when it is reasonable to do so, they may impose these
restrictions at any time. The exchange limit may be modified for accounts in
certain institutional retirement plans to conform to plan exchange limits
and U.S. Department of Labor regulations (for those limits, see plan
materials). The Trusts reserve the right to terminate or modify the exchange
privileges of Fund shareholders in the future.
Automatic Transfer Service ("ATS")
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<PAGE>
You may elect systematic exchanges out of the Fixed Income Funds into any other
Fund. The minimum exchange is $100 ($500 for the Micro Cap Fund). Periodically
investing a set dollar amount into a Fund is also referred to as dollar-cost
averaging because the number of shares purchased will vary depending on the
price per share. Your account with the recipient Fund must meet the applicable
minimum of $1,000 or $5,000 for the Micro Cap Fund. Exchanges out of the Fixed
Income Funds are exempt from the four exchanges limit policy.
Directed Dividend Service
If you own shares of the Fixed Income Funds, you may elect to use your monthly
dividends to automatically purchase additional shares of another Fund. Your
account with the recipient Fund must meet the applicable minimum of $1,000 or
$5,000 for the Micro Cap Fund.
Brokers and Other Intermediaries
Investing through Montgomery Securities Brokerage Account (Money Funds Only)
Investors with Montgomery Securities brokerage accounts may instruct Montgomery
Securities automatically to purchase shares of a Money Fund when the free credit
balance in the investor's brokerage account (including deposits, proceeds of
sales of securities, and miscellaneous cash dividends and interest, but not
amounts held by Montgomery Securities as collateral for margin obligations to
Montgomery Securities) exceeds $100 on each day the NYSE is open for trading
other than national bank holidays. Upon request, a free credit balance in a
Montgomery Securities brokerage account also may be invested in shares of the
Money Funds following receipt by the Transfer Agent of investor instructions. If
such instructions are received after 12:00 noon, New York time, Fund shares will
be purchased at the next-determined asset value. Checkwriting privileges may not
be available for Montgomery Securities brokerage accounts. For the Money Market
Funds, the minimum initial investment through an investor's brokerage account
with Montgomery Securities is $100.
Investing through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from other selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged by these agents. Purchase orders through securities brokers,
dealers and other financial intermediaries are effected at the next-determined
net asset value after receipt of the order by such agent, provided the agent
transmits such order on a timely basis to the Transfer Agent so that it is
received by 4:00 p.m. (1:00 p.m. for the Money Funds), New York time, on days
that the Fund issues shares. Orders received after that time will be purchased
at the next-determined net asset value. To the extent that these agents perform
shareholder servicing activities for the Fund, they may receive fees from the
Fund for such services.
Automatic Redemption into Montgomery Securities Brokerage Account (Money Funds
Only)
If a shareholder wishes, the Transfer Agent will redeem shares of the selected
Money Fund automatically to satisfy debit balances in a shareholder's Montgomery
Securities brokerage account or to provide necessary cash collateral for a
shareholder's margin obligation to Montgomery Securities. Redemptions also may
be effected automatically to settle securities transactions with Montgomery
Securities if a shareholder's free credit balance on the day before settlement
is insufficient to settle the transactions. Each Montgomery Securities brokerage
account will, as of the close of business each day the NYSE is open for trading
and is not a national bank holiday, automatically be scanned for debits and
pending securities settlements, and, after application of any free credit
balances in the account to such debits and pending securities settlements, a
sufficient number of shares of the selected Money Fund, not to exceed the number
of shares in the shareholder's account, will be redeemed on the next day the
NYSE is open for trading to satisfy any remaining debits or amounts needed for
pending securities settlements.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
Montgomery Securities or selected securities brokers or dealers. Shareholders
should contact their securities broker or dealer for appropriate instructions
and for information concerning any transaction or service fee that may be
imposed by the broker or dealer. Shareholders are entitled to the net asset
value next determined after receipt of a redemption order by such broker-dealer,
provided the broker-dealer transmits such order on a timely basis to the
Transfer Agent so that it is received by 4:00 p.m., New York time (12:00 noon
for the Money Funds), on a day that the Fund redeems shares. Orders received
after that time are entitled to the net asset value next determined after
receipt.
How Net Asset Value Is Determined
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<PAGE>
The net asset value of each Fund is determined once daily as of 4:00 p.m. (12:00
noon for the Money Funds), New York time, on each day that the NYSE is open for
trading (except for bank holidays for the Fixed Income Funds). Per-share net
asset value is calculated by dividing the value of each Fund's total net assets
by the total number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the Manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Funds calculate their
net asset values may not be reflected unless the Manager, under supervision of
the Board, determines that a particular event would materially affect a Fund's
net asset value.
Dividends And Distributions
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Funds intend to distribute according to the following schedule:
<TABLE>
<CAPTION>
=================================================================================================================
Income Dividends Capital Gains
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity Funds (except Equity Declared and paid in the last Declared and paid in the last
Income Fund) quarter of each year* quarter of each year*
- -----------------------------------------------------------------------------------------------------------------
Equity Income Fund Declared and paid on or about the Declared and paid in the last
last business day of each quarter. quarter of each year*
- -----------------------------------------------------------------------------------------------------------------
Multi-Strategy Funds Declared and paid in the last Declared and paid in the last
quarter of each year* quarter of each year*
- -----------------------------------------------------------------------------------------------------------------
Fixed-Income Funds Declared daily and paid monthly Declared and paid in the last
on or about the last business day quarter of each year*
of each month
=================================================================================================================
<FN>
* Additional distributions, if necessary, may be made following each Fund's
fiscal year end (June 30) in order to avoid the imposition of tax on a Fund.
</FN>
</TABLE>
Unless investors request cash distributions in writing at least seven business
days before a distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional shares of the
applicable Fund and credited to the shareholder's account at the closing net
asset value on the reinvestment date.
Distributions Affect a Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of a Fund,
regardless of how long you have held the shares. Dividends and capital gains
awaiting distribution are included in each Fund's daily net asset value. The
share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December
39
<PAGE>
31, the Growth Fund declared a dividend in the amount of $0.50 per share. If the
Growth Fund's share price was $10.00 on December 30, the Fund's share price on
December 31 would be $9.50, barring market fluctuations.
"Buying a Dividend"
If you buy shares of a Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
Except for the newer Funds that intend to elect and qualify as soon as possible,
each of the Funds has elected and intends to continue to qualify to be treated
as a regulated investment company under Subchapter M of the Code, by
distributing substantially all of its net investment income and net capital
gains to its shareholders and meeting other requirements of the Code relating to
the sources of its income and diversification of assets. Accordingly, the Funds
generally will not be liable for federal income tax or excise tax based on net
income except to the extent their earnings are not distributed or are
distributed in a manner that does not satisfy the requirements of the Code. If a
Fund is unable to meet certain Code requirements, it may be subject to taxation
as a corporation. Funds investing in foreign securities also may incur tax
liability to the extent they invest in "passive foreign investment companies."
See "Portfolio Securities" and the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income (except income consisting of tax-exempt interest for the Tax-Free Funds)
and any excess of net short-term capital gain over net long-term capital loss
that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
The Federal Money Fund intends, and the California Money and California
Intermediate Bond Funds intend to continue, to qualify to pay "exempt-interest
dividends" to their shareholders by maintaining, as of the close of each quarter
of its taxable year, at least 50% of the value of its total assets in municipal
securities. If these Funds satisfy this requirement, distributions from net
investment income to shareholders will be exempt from federal income taxation to
the extent net investment income is represented by interest on municipal
securities. Distributions from other net investment income, such as market
discount on municipal securities, and from certain other investment practices,
such as certain transactions in options, will be ordinary income. Shareholders
generally will not incur any federal income tax on the amount of exempt-interest
dividends received by them from these Funds, whether taken in cash or reinvested
in additional shares. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's Social Security or railroad
retirement benefits are subject to federal income tax.
General Information
The Trusts
All of the Funds with the exception of the Asset Allocation Fund are series of
The Montgomery Funds, a Massachusetts business trust organized on May 10, 1990.
The Asset Allocation Fund is a series of The Montgomery Funds II, a Delaware
business trust organized on September 10, 1993. The Agreement and Declarations
of Trust of both Trusts permit their Boards
40
<PAGE>
to issue an unlimited number of full and fractional shares of beneficial
interest, $.01 par value, in any number of series. The assets and liabilities of
each series within either of the two Trusts are separate and distinct from each
other series.
This Prospectus relates only to the Class R shares of the Funds. The Funds offer
other classes of shares to eligible investors and may in the future designate
other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of its Trust,
votes separately on matters affecting only that Fund (e.g., approval of the
Investment Management Agreement); all series of each Trust vote as a single
class on matters affecting all series of that Trust jointly or that Trust as a
whole (e.g., election or removal of Trustees). Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in any election of
Trustees can, if they so choose, elect all of the Trustees of that Trust. While
the Trusts are not required and do not intend to hold annual meetings of
shareholders, such meetings may be called by each Trust's Board at its
discretion, or upon demand by the holders of 10% or more of the outstanding
shares of the Trust for the purpose of electing or removing Trustees.
Shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of Trustees pursuant to the provisions
of Section 16(c) of the Investment Company Act.
Performance Information
From time to time, the Funds may publish their total return, and, in the case of
certain Funds, current yield and tax equivalent yield in advertisements and
communications to investors. Total return information generally will include a
Fund's average annual compounded rate of return over the most recent four
calendar quarters and over the period from the Fund's inception of operations. A
Fund may also advertise aggregate and average total return information over
different periods of time. Each Fund's average annual compounded rate of return
is determined by reference to a hypothetical $1,000 investment that includes
capital appreciation and depreciation for the stated period according to a
specific formula. Aggregate total return is calculated in a similar manner,
except that the results are not annualized. Total return figures will reflect
all recurring charges against each Fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate that
reflects the change in value of a hypothetical account based on the income
received from the Fund during a 30-day period. It is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. In the case of the
California Money and California Intermediate Bond Funds, tax equivalent yield is
the yield that a taxable investment must generate in order to equal (after
applicable taxes are deducted) either Fund's yield for an investor in stated
federal income and California personal income tax brackets. For the Federal
Money Fund, tax equivalent yield is the yield that a taxable investment must
generate in order to equal (after applicable taxes are deducted) the Fund's
yield for an investor in stated federal income tax brackets. See "Performance
Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered as a representation of what an investor's total return or current
yield may be in any future period. The Funds' Annual Report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND.
Legal Opinion
The validity of shares offered by this Prospectus will be passed on by Heller,
Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California 94104.
Shareholder Reports and Inquiries
41
<PAGE>
During the year, the Funds will send you the following information:
o A Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and pre-authorized automatic investment, exchange and redemption services
(quarterly).
o A Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semi-annual reports are mailed approximately 60 days after June
30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o Annual updated prospectus is mailed to existing shareholders in October or
November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-3863 or (800) 572-FUND.
Backup Withholding
Tax identification number (TIN)
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. A shareholder who does not have a TIN should apply for
one immediately by contacting the local office of the Social Security
Administration or the IRS. Backup withholding could apply to payments made to a
shareholder's account while awaiting receipt of a TIN. Special rules apply for
certain entities. For example, for an account established under the Uniform
Gifts to Minors Act, the TIN of the minor should be furnished. If a shareholder
has been notified by the IRS that he or she is subject to backup withholding
because he or she failed to report all interest and dividend income on his or
her tax return and the shareholder has not been notified by the IRS that such
withholding will cease, the shareholder should cross out the appropriate item in
the Account Application. Dividends paid to a foreign shareholder's account by a
Fund may be subject to up to 30% withholding instead of backup withholding.
A shareholder that is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.
---------------------------------
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus, the Statement of Additional Information, or
in the Funds' official sales literature.
42
<PAGE>
Glossary
o Asset backed securities. Asset backed securities are secured by and payable
from, pools of assets, such as motor vehicle installment sales contracts,
installment loan contracts, leases of various types of real and personal
property and receivables from revolving credit (e.g., credit card)
agreements.
o Cash Equivalents. Cash equivalents are short-term, interest bearing
instruments or deposits and may include, for example, commercial paper,
certificates of deposit, repurchase agreements, bankers' acceptances, U.S.
Treasury bills, bank money market deposit accounts, master demand notes and
money market mutual funds. These consist of high-quality debt obligations,
certificates of deposit and bankers' acceptances rated at least A-1 by S&P
or Prime-1 by Moody's, or the issuer has an outstanding issue of debt
securities rated at least A by S&P or Moody's, or are of comparable quality
in the opinion of the Manager.
o Collateral assets include cash, letters of credit, U.S. government
securities or other high-grade liquid debt or equity securities (except that
instruments collateralizing loans by the Money Market Funds must be debt
securities rated in the highest grade). Collateral assets are separately
identified and rendered unavailable for investment or sale.
o Collateralized Mortgage Obligations (CMOs). Derivative mortgage-related
securities that separate the cash flows of mortgage pools into different
classes or tranches. Stripped mortgage securities are CMOs that allocate
different proportions of interest and principal payments on a pool of
mortgages. One class may receive all of the interest (the interest only or
"IO" class) while another may receive all of the principal (principal only
or "PO" class). The yield to maturity on any IO or PO class is extremely
sensitive not only to changes in interest rates but also to the rate of
principal payments and prepayments on underlying mortgages. In the most
extreme cases, an IO class may become worthless.
o Convertible security. A fixed-income security (a bond or preferred stock)
that may be converted at a stated price within a specified period of time
into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
o Covered call option. A call option is "covered" if the Fund owns the
underlying securities, has the right to acquire such securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option, or owns an offsetting call option.
o Covered put option. A put option is "covered" if the Fund has collateral
assets with a value not less than the exercise price of the option or holds
a put option on the underlying security.
o Custodial receipts. Custodial receipts represent rights to receive certain
future principal and interest payments on municipal securities deposited
with a custodian. Typically, two classes of receipts are issued in a private
placement. The interest rate of the first class is similar to that of the
underlying Municipal Security. The value of the second class may be quite
volatile.
o Depositary receipts include American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other
similar instruments. Depositary receipts are receipts typically issued in
connection with a U.S. or foreign bank or trust company and evidence
ownership of underlying securities issued by a foreign corporation.
o Derivatives include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts, swaps
and options on futures contracts on U.S. Government and foreign government
securities and currencies.
o Dollar roll transaction. A dollar roll transaction is similar to a reverse
repurchase agreement except it requires a Fund to repurchase a similar
rather than the same security.
o Duration. Traditionally, a debt security's "term to maturity" characterizes
a security's sensitivity to changes in interest rates. However, "term to
maturity" measures only the time until a debt security provides its final
payment, taking no account of pre-maturity payments. Most debt securities
provide interest ("coupon") payments in addition to a final ("par") payment
at maturity, and some securities have call provisions allowing the issuer to
repay the instrument in full before maturity date, each of which affect the
security's response to interest rate changes. "Duration" is considered a
more precise measure of interest rate risk than "term to maturity."
Determining duration may involve the Manager's estimates of future economic
parameters, which may vary from actual future values. Fixed-income
securities with effective durations of three years are more responsive to
interest rate fluctuations than those with effective durations of one year.
For example, if interest rates rise by 1%, the value of securities having an
effective duration of three years will generally decrease by approximately
3%.
o Emerging Market Companies. A company is considered to be an Emerging Market
Company if its securities are principally traded in the capital market of an
emerging market country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging market countries or
from sales made in such emerging market countries, regardless of where the
securities of such companies are principally traded; or it is organized
under the laws of, and with a principal office in, an emerging market
country. An emerging market country is one having an economy and market that
are or would be considered by the World Bank or the United Nations to be
emerging or developing.
o Equity derivative securities include, among other things, options on equity
securities, warrants and future contracts on equity securities.
o Equity swaps. Equity swaps allow the parties to exchange the dividend income
or other components of return on an equity investment (e.g., a group of
equity securities or an index) for a component of return on another
non-equity or equity investment. Equity swaps transitions may be volatile
and may present the Fund with counterparty risks.
A 1
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o FHLMC. The Federal Home Loan Mortgage Corporation.
o FNMA. The Federal National Mortgage Association.
o Forward currency contracts. A forward currency contract is a contract
individually negotiated and privately traded by currency traders and their
customers and creates an obligation to purchase or sell a specific currency
for an agreed-upon price at a future date. The Funds generally do not enter
into forward contracts with terms greater than one year. A Fund generally
enters into forward contracts only under two circumstances. First, if a Fund
enters into a contract for the purchase or sale of a security denominated in
a foreign currency, it may desire to "lock in" the U.S. dollar price of the
security by entering into a forward contract to buy the amount of a foreign
currency needed to settle the transaction. Second, if the Manager believes
that the currency of a particular foreign country will substantially rise or
fall against the U.S. dollar, it may enter into a forward contract to buy or
sell the currency approximating the value of some or all of a Fund's
portfolio securities denominated in such currency. A Fund will not enter
into a forward contract if, as a result, it would have more than one-third
of total assets committed to such contracts (unless it owns the currency
that it is obligated to deliver or has caused its custodian to segregate
Segregable Assets having a value sufficient to cover its obligations).
Although forward contracts are used primarily to protect a Fund from adverse
currency movements, they involve the risk that currency movements will not
be accurately predicted.
o Futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a Fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. Each Fund will have collateral assets equal to the purchase price of
the portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
o GNMA. The Government National Mortgage Association.
o Highly rated debt securities. Debt securities rated within the three highest
grades by Standard & Poor's Corporation ("S&P") (AAA to A), Moody's
Investors Services, Inc. ("Moody's") (Aaa to A) or Fitch Investor Services,
Inc. ("Fitch") (AAA to A), or in unrated debt securities deemed to be of
comparable quality by the Manager using guidelines approved by the Board of
Trustees. See the Appendix to the Statement of Additional Information for a
description of these ratings.
o Illiquid securities. The Funds treat any securities subject to restrictions
on repatriation for more than seven days and securities issued in connection
with foreign debt conversion programs that are restricted as to remittance
of invested capital or profit as illiquid. The Funds also treat repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on
formal markets for some period of time but for which an active informal
market exists, or securities that meet the requirements of Rule 144A under
the Securities Act of 1933 and that, subject to the review by the Board and
guidelines adopted by the Board, the Manager has determined to be liquid.
o Investment grade. Investment grade debt securities are those rated within
the four highest grades by S&P (at least BBB), Moody's (at least Baa) or
Fitch (at least Baa) or in unrated debt securities deemed to be of
comparable quality by the Manager using guidelines approved by the Board of
Trustees.
o Leverage. Some Funds may use leverage in an effort to increase return.
Although leverage creates an opportunity for increased income and gain, it
also creates special risk considerations. Leveraging also creates interest
expenses that can exceed the income from the assets retained.
o Municipal securities. Municipal securities are obligations issued by, or on
behalf of, states, territories and possessions of the U.S. and the District
of Columbia, and their political subdivisions, agencies, authorities and
instrumentalities, including industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S.
Government. Municipal securities are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from revenue derived from
a particular facility, class of facilities or the proceeds of a special
excise or other specific revenue source but not from the issuer's general
taxing power. Private activity bonds and industrial revenue bonds, in most
cases, are revenue bonds that do not carry the pledge of the credit of the
issuing municipality but generally are guaranteed by the corporate entity on
whose behalf they are issued. Notes are short-term instruments that are
obligations of the issuing municipalities or agencies sold in anticipation
of a bond sale, collection of taxes or other receipt of revenues.
o Options on securities, securities indices and currencies. A Fund may
purchase call options on securities which it intends to purchase (or on
currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the applicable currency). A Fund may purchase put
options on particular securities (or on currencies in which those securities
are denominated) in order to protect against a decline in the market value
of the underlying security below the exercise price less the premium paid
for the option (or an adverse movement in the applicable currency relative
to the U.S. dollar). Prior to expiration, most options are expected to be
sold in a closing sale transaction. Profit or loss from the sale depends
upon whether the amount received is more or less than the premium paid plus
transaction costs. A Fund may purchase put and call options on stock indices
in order to hedge against risks of stock market or industry-wide stock price
fluctuations.
o Participation interests. Participation interests are issued by financial
institutions and represent undivided interests in municipal securities.
Participation interests may have fixed, floating or variable rates of
interest. Some participation interests are subject to a "nonappropriation"
or "abatement" feature by which, under certain conditions, the issuer of the
underlying Municipal Security, without penalty, may terminate its payment
obligation. In such event, the Funds must look to the underlying collateral.
o Repurchase agreement. With a repurchase agreement, a Fund acquires a U.S.
Government security or other high-grade liquid debt instrument (for the
Money Market Funds, the instrument must be rated in the highest grade) from
a financial institution that simultaneously agrees to repurchase the same
security at a specified time and price.
A 2
<PAGE>
o Reverse dollar roll transactions. When a Fund engages in a reverse dollar
roll, it purchases a security from a financial institution and concurrently
agrees to resell a similar security to that institution at a later date at
an agreed-upon price.
o Reverse repurchase agreement. In a reverse repurchase agreement, a Fund
sells to a financial institution a security that it holds and agrees to
repurchase the same security at an agreed-upon price and date.
o S&P 500. Standard & Poor's 500 Composite Price Index.
o Securities lending. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with
collateral assets in an amount at least equal to the current market value of
the loaned securities, plus accrued interest. There is a risk of delay in
receiving collateral or in recovering the securities loaned or even a loss
of rights in collateral should the borrower fail financially.
o Tender option bonds. Tender option bonds are municipal securities that have
a relatively long maturity and bear interest at a fixed rate substantially
higher than the prevailing short-term tax-exempt rates, coupled with an
option to tender the securities at periodic intervals and in order to
receive the securities' face value. In return for the option, the holder of
the securities pays a fee in an amount that causes the municipal securities
to trade at face value when the option is issued. Effectively, the security
bears the short-term tax-exempt rate at the time the option was issued.
o U.S. government securities include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities.
o Variable rate demand notes. Variable rate demand notes ("VRDNs") are
instruments with rates of interest adjusted periodically or which "float"
continuously according to specific formulae and often have a demand feature
entitling the purchaser to resell the securities.
o A warrant typically is a long-term option that permits the holder to buy a
specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
o When-issued and forward commitment securities. The Funds may purchase U.S.
Government or other securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" or "delayed delivery" basis. The
price is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. When-issued securities and
forward commitments may be sold prior to the settlement date, but a Fund
will enter into when-issued and forward commitments only with the intention
of actually receiving or delivering the securities. No income accrues on
securities that have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery to a Fund. At the time a Fund enters
into a transaction on a when-issued or forward commitment basis, it supports
its obligation with collateral assets equal to the value of the when-issued
or forward commitment securities and causes the collateral assets to be
marked to market daily. There is a risk that the securities may not be
delivered and that the Fund may incur a loss.
o Zero coupon bonds. Zero coupon bonds are debt obligations that do not pay
current interest and are consequently issued at a significant discount from
face value. The discount approximates the total interest the bonds will
accrue and compound over the period to maturity or the first
interest-payment date at a rate of interest reflecting the market rate of
interest at the time of issuance.
A 3
<PAGE>
Investment Manager
Montgomery Asset Management, L.P.
101 California Street
San Francisco, California 94111
1-800-572-FUND
Distributor
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
1-415-627-2485
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-572-3863
Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
<PAGE>
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PART B
STATEMENT OF ADDITIONAL INFORMATION
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
-----------------
MONTGOMERY GROWTH FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
MONTGOMERY MICRO CAP FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY ASSET ALLOCATION FUND
MONTGOMERY GLOBAL ASSET ALLOCATION FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
101 California Street
San Francisco, California 94111
1-800-572-FUND
-----------------
STATEMENT OF ADDITIONAL INFORMATION
February 14, 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 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, L.P. (the "Manager") and their shares are distributed by Montgomery
Securities (the "Distributor"). This Statement of Additional Information
contains information in addition to that set forth in the combined prospectuses
for all Funds dated February 14, 1997 (with respect to the Class R shares),
dated November 12, 1996 (with respect to the Class P shares for various series)
and dated November 12, 1996 (with respect to the Class L 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.
B-1
<PAGE>
TABLE OF CONTENTS
Page
THE TRUSTS................................................................B-3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS...........................B-4
RISK FACTORS.............................................................B-24
INVESTMENT RESTRICTIONS..................................................B-31
DISTRIBUTIONS AND TAX INFORMATION........................................B-36
TRUSTEES AND OFFICERS....................................................B-42
INVESTMENT MANAGEMENT AND OTHER SERVICES.................................B-48
EXECUTION OF PORTFOLIO TRANSACTIONS......................................B-54
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...........................B-58
DETERMINATION OF NET ASSET VALUE.........................................B-60
PRINCIPAL UNDERWRITER....................................................B-63
PERFORMANCE INFORMATION..................................................B-64
GENERAL INFORMATION......................................................B-72
FINANCIAL STATEMENTS.....................................................B-80
Appendix A...............................................................B-81
B-2
<PAGE>
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 (other than the Montgomery Advisors Emerging Markets
Fund) offers three classes of shares (Class R, Class P and Class L).
This Statement of Additional Information pertains to eighteen series of
The Montgomery Funds: Montgomery Growth Fund (the "Growth Fund"), Montgomery
Equity Income Fund (the "Equity Income Fund"), Montgomery Small Cap Fund (the
"Small Cap Fund"), Montgomery Small Cap Opportunities Fund (the "Small Cap
Opportunities Fund"), Montgomery Micro Cap Fund (the "Micro Cap Fund"),
Montgomery Global Opportunities Fund (the "Opportunities Fund"), Montgomery
Global Communications Fund (the "Communications Fund"), Montgomery International
Growth Fund (the "International Growth Fund"), Montgomery International Small
Cap Fund (the "International Small Cap Fund"), Montgomery Emerging Asia Fund
(the "Emerging Asia Fund"), Montgomery Emerging Markets Fund (the "Emerging
Markets Fund"), Montgomery Select 50 Fund (the "Select 50 Fund"), Montgomery
Global Asset Allocation Fund (the "Global Asset Allocation Fund"), Montgomery
Short Duration Government Bond Fund (formerly called the "Montgomery Short
Government Bond Fund") (the "Short Fund"), Montgomery Government Reserve Fund
(the "Reserve Fund"), Montgomery Federal Tax-Free Money Fund (the "Federal Money
Fund"), Montgomery California Tax-Free Intermediate Bond Fund (the "California
Intermediate Bond Fund") and Montgomery California Tax-Free Money Fund (the
"California Money Fund"); as well as one series of The Montgomery Funds II,
Montgomery Asset Allocation Fund (the "Allocation Fund").
Throughout this Statement of Additional Information, certain Funds may
be referred to together using the following terms: the Small Cap, Small Cap
Opportunities, Micro Cap, Equity Income and Growth Funds as the "Domestic Equity
Funds"; the Emerging Asia, Emerging Markets, Advisors, International Small Cap
and International Growth Funds as the "International Funds"; the Opportunities
and Communications Funds as the "Global Funds"; the Select 50, Allocation and
Global Asset Allocation Funds as the "Multi-Strategy Funds";the Short, Reserve,
Federal Money, California Intermediate Bond and California Money Funds as the
"Fixed Income Funds"; the Federal Money, California Intermediate Bond and
California Money Funds as the "Tax-Free Funds"; the Reserve, Federal Money and
California 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
B-3
<PAGE>
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 achievement of each Fund's investment objective will depend upon
market conditions generally and on the Manager's analytical and portfolio
management skills.
The Global Asset Allocation Fund is a fund-of-funds. Other than U.S.
government securities, the Global Asset Allocation Fund does not own securities
of its own. Instead, the Global Asset Allocation Fund invests its assets in a
number of funds of The Montgomery Funds family (each, an "Underlying Fund").
Investors of the Global Asset Allocation Fund should therefore review the
discussion in this Statement of Additional Information that relates to each
Underlying Fund of the Global Asset Allocation Fund.
Portfolio Securities
Depositary Receipts. The Domestic Equity, Select 50, Allocation,
International and Global Funds 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 these Funds' investment policies, these Funds'
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 of the Equity Income, Select 50,
Allocation, International, Global, and Fixed Income Funds may invest up to 10%
of its total assets in securities issued by other investment companies investing
in securities in which the Fund can invest provided that such investment
companies invest in portfolio securities in a manner consistent with the Fund's
investment objective and policies, except for the Money Market Funds, which may
so invest up to 35% of their total assets (and, except for the Money Market
Funds, not in money market funds). Applicable provisions of the Investment
Company Act require that a Fund limit its investments so that, as determined
immediately after
B-4
<PAGE>
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.
In accordance with applicable regulatory provisions of the State of
California, the Manager has agreed to waive its management fee with respect to
assets of the Funds that are invested in other open-end investment companies.
U.S. Government Securities. Because the Short and Reserve Funds invest
a substantial portion, if not all, of their net assets, and the Equity Income
and Allocation Funds may invest a substantial portion 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 the Funds
will fluctuate inversely with interest rates. U.S. Government securities in
which the Funds may 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.
B-5
<PAGE>
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 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-
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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 ten 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. As set forth in the
Prospectus, the Allocation and Short Funds 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.
These Funds 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
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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, 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 the Allocation and Short Funds 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, these Funds 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 these Funds. 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
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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
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.
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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.
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
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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,
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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.
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 Market 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
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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. The Allocation and Fixed Income Funds 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 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
The Select 50, International and the Global Funds 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, these Funds will invest no more
than 5% of their 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 these Funds will
reflect these changes in market value.
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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 these Funds 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 these Funds.
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 these Funds to
achieve their investment objectives may, to the extent they invest in low-rated
debt securities, be more dependent upon such credit analysis than would be the
case if these Funds 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 company to make principal and interest payments on its debt
securities. If the issuer of low-rated debt securities defaults, these Funds 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, the
Select 50, International, Global, Equity Income and Allocation Funds 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. These Funds also may conduct their
foreign currency exchange transactions on a spot (i.e., cash) basis
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at the spot rate prevailing in the foreign currency exchange market.
The Funds (except the Money Market Funds) 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. The Select 50, International, Global and Allocation
Funds 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 these Funds 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. The Funds 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, the
Funds (except the Money Market Funds) 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 securities (such as U.S.
Government securities), securities
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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
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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 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. These Funds
may purchase put and call options on securities in which they have invested, on
foreign currencies represented in
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their portfolios and on any securities index based in whole or in part on
securities in which these Funds may invest. These Funds 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.
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 these 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
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underlying security is limited while the option is in effect unless the Fund
effects a closing purchase transaction.
These 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. 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
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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.
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Reverse Repurchase Agreements. The Domestic Equity, Select 50,
International, Opportunities, Allocation, Short, Reserve and Tax-Free Funds may
enter into reverse repurchase agreements, as set forth in the Prospectus. These
Funds typically will invest the proceeds of a reverse repurchase agreement in
money market 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. These Funds 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.
These 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. The Allocation, Short and California
Intermediate Bond Funds may enter into dollar roll transactions, as discussed in
the Prospectus. 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 10% (30% in the case of the Select 50, Global, International Growth, Equity
Income, Allocation, Short and California Intermediate Bond Funds) 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
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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.
When-Issued and Forward Commitment Securities. The Funds 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.
The Short Fund may seek to hedge investments or to realize additional
gains through forward commitments to sell high-
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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, this Fund must obtain the security which
it has made a commitment to deliver. If this 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, this Fund may incur a loss as a result of this
type of forward commitment if the price of the security increases between the
date this Fund enters into the forward commitment and the date on which it must
purchase the security it is committed to deliver. This 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 this 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. A Fund may invest up to 15% (10% for the Money
Market Funds and 5% for the Small Cap Fund) of its net assets 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 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
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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
Foreign Securities
Investors in the Select 50, International, Global and Allocation Funds
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 available information about foreign companies comparable to
the reports and ratings published regarding companies in the U.S. 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
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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
The Select 50, International and Global Funds, particularly the
Emerging Asia and Emerging Markets Funds, 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
The Select 50, International and Global Funds endeavor to buy and sell
foreign currencies 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
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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 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.
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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 financial services, among other industries, have been
severely affected. Since the start of 1994, however, California's economy has
been on a steady recovery. Employment grew significantly during 1994 and 1995,
especially in export-related industries, business services, electronics,
entertainment and tourism.
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. The 1993-94 Budget Act proposed to repay
the $2.8 billion deficit over two fiscal years, but as a result of the recession
the projected excess of revenues over expenditures did not materialize. The
accumulated budget deficit at June 30, 1994 was about $1.8 billion, and a second
two-year plan was implemented in 1994-95 to eliminate the budget deficit. An
additional consequence of the large budget deficits has been that the State
depleted its available cash resources and has had to use a series of external
borrowings to meet its cash needs, including borrowings extending into the next
fiscal year. The State anticipates that it will not have to resort to such
"cross-year" borrowing during the 1995-96 fiscal year.
The 1994-95 Budget Act recognized that the accumulated $2 billion
budget deficit could not be repaid in one year, and proposed a two-year solution
to eliminate the deficit with operating surpluses for 1994-95 and 1995-96. The
1994-95 Budget Act projected revenues and transfers of $41.9 billion (up $2.1
billion from 1993-94, and reflecting the Governor's forecast of an improving
economy), and expenditures of $40.9 billion (up $1.6
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billion from 1993-94). Principal features of the 1994-95 Budget Act included:
1. Receipt of about $760 million of federal aid for certain costs
related to refugees and undocumented immigrants. Only about $33 million of
this amount was received, with another approximately $98 million scheduled
to be received during 1995-96.
2. Reductions of about $1.1 billion in health and welfare costs. A 2.3
percent reduction in Aid to Families with Dependent Children has been
enjoined pending further litigation, however.
3. An increase in Proposition 98 funding for K-14 schools of $526
million.
4. Additional miscellaneous cuts and fund transfers of $755 million.
5. A further one-year suspension (for 1995) of the renter's personal
income tax credit.
The 1994-95 Budget Act contained no tax increases other than the
suspension of the renter's credit. As a result of the improving economy, the
California Department of Finance's final estimates for 1994-95 showed revenues
and transfers of $42.7 billion and expenditures of $42 billion.
The 1995-96 Budget Act was enacted on August 3, 1995, 34 days after the
start of the fiscal year.
The 1995-96 Budget Act projects General Fund revenues and transfers of
$44.1 billion, a 3.5 percent increase from 1994-95, and General Fund
expenditures of $43.4 billion, a 4 percent increase from 1994-95. Special Fund
revenues are estimated at $12.7 billion, and Special Fund expenditures of $13
billion have been appropriated. The 1995-96 Budget Act projects that the General
Fund will end the 1995-96 fiscal year with a slight surplus at June 30, 1996,
and that all of the accumulated budget deficits will have been repaid. Principal
features of the 1995-96 Budget Act include:
1. An increase in Proposition 98 funding for K-14 schools of about $1.2
billion.
2. Reductions in health and welfare costs of about $900 million (about
$500 million of which depends upon federal legislative approval).
3. A 3.5 percent increase for the University of California and the
California State University system.
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4. Receipt of an additional $278 million in federal aid for costs of
illegal immigrants, above commitments already made by the federal
government.
5. An increase of about 8 percent in General Fund support for the
Department of Corrections, reflecting estimates of an increased prison
population.
The Governor's proposed budget for 1996-97, released on January 10,
1996, updated the projections for 1995-96; revenues and transfers are estimated
to be $45 billion and expenditures to be $44.2 billion. As a result, the budget
reserve was projected to have a positive balance of about $50 million on June
30, 1996, with available cash (after payment of all obligations due) of about
$2.2 billion.
The Governor's proposed budget for 1996-97 projected General Fund
revenues and transfers of about $45.6 billion and requested total General Fund
appropriations of about $45.2 billion, which would leave a budget reserve of
about $400 million on June 30, 1997. The Governor's proposed budget renewed a
proposal, which had been rejected by the Legislature in 1995, for a 15 percent
cut in personal and corporate tax rates, phased in over a three-year period. On
the assumption that the proposed tax rate cut would be enacted, the Governor's
proposed budget shows a reduction in revenues of about $600 million for 1996-97.
The Governor's proposed budget also projects external cash flow borrowing of up
to $3.2 billion, to mature by June 30, 1997.
The foregoing discussion of the 1994-95, 1995-96 and 1996-97 fiscal
year budgets is based on the Budget Acts for those years, which include
estimates and projections of revenues and expenditures, and should not be
construed as a statement of fact. The assumptions used to construct a budget may
be affected by numerous factors, including future economic conditions in
California and the nation. There can be no assurance that the estimates will be
achieved.
Certain issuers of California Municipal Securities receive subventions
from the State which are eligible to be used to make payments on such
Securities. No prediction can be made as to what effect any decrease in
subventions may have on the ability of some issuers to make such payments.
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
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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 other taxes that have been
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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.
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.
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:
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
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Federal Money Fund). This investment restriction does not apply to the Global
Asset Allocation Fund 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 10% (30% in the case of the Select 50 Fund, Global Funds,
International Growth Fund, Equity Income Fund, Allocation Fund, Short Fund and
California Intermediate Bond Fund) 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) For the Growth Fund, Small Cap Opportunities Fund, Select 50
Fund, International Growth Fund, Equity Income Fund, Micro Cap Fund,
International Small Cap Fund, Opportunities Fund and Allocation Fund only:
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 (10% in
the case of the Growth Fund) 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, and no
additional investments may be made while any such borrowings are in excess of
10% of total assets.
(b) For the Small Cap Fund, Emerging Asia Fund, Emerging
Markets Fund, Communications Fund, Federal Money Fund, California Money Fund and
Reserve Fund only: Borrow money, except temporarily for extraordinary or
emergency purposes from a bank and then not in excess of 10% (one-third in the
case of the Communications Fund) 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, and no
additional investments may be made while any such borrowings are in excess of 5%
of total assets.
(c) For the Short Fund and California Intermediate Bond Fund
only: Borrow money, except temporarily for extraordinary or emergency purposes
from a bank or pursuant to reverse repurchase or dollar roll transactions 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, and no additional investments may be made while any borrowings
(excluding any permissible reverse repurchase agreements and dollar roll
transactions the Fund may enter into) are in excess of 5% of the Fund's total
assets.
(d) 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.
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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 (including interests in real estate limited
partnerships or issuers that qualify as real estate investment trusts under
federal income tax law) 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. As an operating policy which may be changed
without shareholder approval, the Funds may invest in real estate investment
trusts only up to 10% of their total assets.
7. Buy or sell interests in oil, gas or mineral exploration or
development leases and programs. (This does not preclude permissible investments
in marketable securities of issuers engaged in such activities.)
8. Except for the California Intermediate Bond and Money Market Funds,
invest more than 5% of the value of its total assets in securities of any issuer
which has not had a record, together with its predecessors, of at least three
years of continuous operation. (This is an operating policy which may be changed
without shareholder approval).
9. (a) 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.
(b) Invest in securities of other investment companies except
by purchase in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than the customary broker's commission,
or except when the purchase is part of a plan of merger, consolidation,
reorganization or acquisition. (This is an operating policy which may be changed
without shareholder approval.)
10. 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 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
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shareholder approval, consistent with the Investment Company Act, changes in
relevant SEC interpretations). Pursuant to state law restrictions, this
limitation has been modified to 5% for the Small Cap Fund.
11. 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.)
12. 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.
13. 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.
14. 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 Short Fund and
California Intermediate Bond Fund):
(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.)
15. (a) 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.)
(b) A Fund may not invest more than 25% of its net assets in
short sales, and the value of the securities of any one issuer in which a Fund
is short may not exceed the lesser of 2% of the value of the Fund's net assets
or 2% of the securities of any class of any issuer. In addition, short sales may
be made only in those securities that are fully listed on a national securities
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exchange. (This is an operating policy which may be changed without shareholder
approval.)
16. Invest in warrants, valued at the lower of cost or market, in
excess of 5% of the value of a Fund's net assets. Included in such amount, but
not to exceed 2% of the value of a Fund's net assets, may be warrants which are
not listed on the New York Stock Exchange or American Stock Exchange. Warrants
acquired by a Fund in units or attached to securities may be deemed to be
without value. This investment restriction does not relate to the Fixed Income
Funds. (This is an operating policy which may be changed without shareholder
approval.)
17. (a) Purchase or retain in a Fund's portfolio any security if any
officer, trustee or shareholder of the issuer is at the same time an officer,
trustee or employee of the Trust or of its investment adviser and such person
owns beneficially more than 1/2 of 1% of the securities and all such persons
owning more than 1/2 of 1% own more than 5% of the outstanding securities of the
issuer.
(b) 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.)
18. 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.
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
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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 previous years), while a distribution from capital gains,
will be distributed to shareholders with and as a part of income dividends. 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 previous 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.
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 election with respect to the
reinvestment of dividends and distributions by notifying the Transfer Agent in
writing, but any
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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) 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 prior years will be applied against capital
gains.
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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 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.
In the case of the Select 50, International and Global Funds, 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. In this case, shareholders will be informed 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
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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, 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.
The Select 50, International and Global Funds may be subject to foreign
withholding taxes on dividends and interest earned with respect to securities of
foreign corporations. These Funds may invest up to 10% of their 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, these Funds may be able to avoid
this tax by electing to be taxed currently on their share of the PFIC's income,
whether or not such income is actually distributed by the PFIC. These Funds will
endeavor to limit their 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, these Funds 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 years, at least 50% of the value of the total assets
of each of the California 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 Constitution or
laws of California or of the United States, 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 years, 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.
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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 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 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 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
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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
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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 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 Heller, Ehrman,
White & McAuliffe 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, except for Jerome S. Markowitz who is a Trustee of the Montgomery
Funds II) 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:
B-42
<PAGE>
R. Stephen Doyle, Chairman of the Board, Chief Executive
Officer, Principal Financial and Accounting Officer and
Trustee (Age 55).*
101 California Street, San Francisco, California 94111. Mr.
Doyle has been the Chairman and a Director of Montgomery Asset
Management, Inc., the general partner of the Manager, and
Chairman of the Manager since April 1990. Mr. Doyle is a
managing director of the investment banking firm of Montgomery
Securities, the Fund's Distributor, and has been employed by
Montgomery Securities since October 1983.
Mark B. Geist, President (Age 43)
101 California Street, San Francisco, California 94111. Mr.
Geist has been the President and a Director of Montgomery
Asset Management, Inc. and President of the Manager since
April 1990. From October 1988 until March 1990, Mr. Geist was
a Senior Vice President of Analytic Investment Management.
From January 1986 until October 1988, Mr. Geist was a Vice
President with RCB Trust Co. Prior to January 1986, Mr. Geist
was the Pension Fund Administrator for St. Regis Co., a
manufacturing concern.
Jack G. Levin, Secretary (Age 49)
600 Montgomery Street, San Francisco, California 94111. Mr.
Levin has been Director of Legal and Regulatory Affairs for
Montgomery Securities since January 1983.
John T. Story, Executive Vice President (Age 56)
101 California Street, San Francisco, California 94111. Mr.
Story has been the Managing Director of Mutual Funds and
Executive Vice President of Montgomery Asset Management, L.P.
since January 1994. From December 1978 to January 1994, he was
Managing Director - Senior Vice President of Alliance Capital
Management.
David E. Demarest, Chief Administrative Officer (Age 42)
101 California Street, San Francisco, California 94111. Mr.
Demarest has been the Chief Administrative Officer since 1994.
From 1991 until 1994, he was Vice President of Copeland
Financial Services. Prior to joining Copeland, Mr. Demarest
was Vice President/Manager for the Overland Express Funds
Division for Wells Fargo Bank.
- --------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-43
<PAGE>
Mary Jane Fross, Treasurer (Age 44)
101 California Street, San Francisco, California 94111. Ms.
Fross is Manager of Mutual Fund Administration and Finance for
the Manager. From November 1990 to her arrival at the Manager
in 1993, Ms. Fross was Financial Analyst/Senior Accountant
with Charles Schwab, San Francisco, California. From 1989 to
November 1990, Ms. Fross was Assistant Controller of Bay Bank
of Commerce, San Leandro, California.
Roger W. Honour, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Mr.
Honour is a Managing Director and Senior Portfolio Manager for
the Manager. Roger Honour joined the Manager in June 1993 as
Managing Director and Portfolio Manager responsible for mid
and large capitalization growth stock investing. Prior to
joining Montgomery Asset Management, he was Vice President and
Portfolio Manager at Twentieth Century Investors from 1992 to
1993. Mr. Honour was a Vice President and Portfolio Manager at
Alliance Capital Management from 1990 to 1992. Mr. Honour was
a Vice President of Institutional Equity Research and Sales at
Merrill Lynch Capital Markets from 1980 to 1990.
Stuart O. Roberts, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Mr.
Roberts is a Managing Director and Portfolio Manager for the
Manager. For the five years prior to his start with the
Manager in 1990, Mr. Roberts was a portfolio manager and
analyst at Founders Asset Management.
Oscar A. Castro, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Mr.
Castro, CFA, is a Managing Director and Portfolio Manager for
the Manager. Before joining the Manager, he was vice
president/portfolio manager at G.T. Capital Management, Inc.
from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity
partnership. From 1987 to 1989, Mr. Castro was deputy
portfolio manager/analyst at Templeton International.
John D. Boich, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Mr.
Boich, CFA, is a Managing Director and Portfolio Manager.
Prior to joining the Manager, Mr. Boich was vice president and
portfolio manager at The Boston Company Institutional
Investors Inc. from 1990 to 1993. From 1989 to 1990, Mr. Boich
was the founder and co-manager of The Common Goal World Fund,
a global equity
B-44
<PAGE>
partnership. From 1987 to 1989, Mr. Boich worked as a
financial adviser with Prudential-Bache Securities and E.F.
Hutton & Company.
Josephine S. Jimenez, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Ms.
Jimenez, CFA, is a Managing Director and Portfolio Manager for
the Manager. From 1988 through 1991, Ms. Jimenez worked at
Emerging Markets Investors Corporation/Emerging Markets
Management in Washington, D.C. as senior analyst and portfolio
manager.
Bryan L. Sudweeks, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Dr.
Sudweeks, Ph.D., CFA, is a Managing Director and Portfolio
Manager for the Manager. Prior to joining the Manager, he was
a senior analyst and portfolio manager at Emerging Markets
Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, Dr. Sudweeks was a Professor of
International Finance and Investments at George Washington
University and also served as an Adjunct Professor of
International Investments from 1988 until May 1991.
William C. Stevens, Vice President (Age 40)
101 California Street, San Francisco, California 94111. Mr.
Stevens is a Portfolio Manager and Managing Director for the
Manager. At Barclays de Zoete Wedd Securities from 1991 to
1992, he was responsible for starting 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 with more than $10 billion in
total issuance.
John H. Brown, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Mr.
Brown, CFA, is a Senior Portfolio Manager and Managing
Director for the Manager. Preceding his arrival at the Manager
in May 1994, Mr. Brown was an analyst and portfolio manager at
Merus Capital Management in San Francisco, California from
June 1986.
John A. Farnsworth, Trustee (Age 55)
One California Street, Suite 1950, San Francisco, California
94111. Mr. Farnsworth is a partner of Pearson, Caldwell &
Farnsworth, Inc., an executive search consulting firm. From
May 1988 to September 1991, Mr.
B-45
<PAGE>
Farnsworth was the Managing Partner of the San Francisco
office of Ward Howell International, Inc., an 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 52)
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 47)
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. 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.
Jerome S. Markowitz, Trustee and Trustee-designate* (Age 57)
600 Montgomery Street, San Francisco, California 94111. Mr.
Markowitz was elected as a trustee of The Montgomery Funds II
and as a trustee-designate of The Montgomery Funds, effective
November 16, 1995. As a trustee- designate, Mr. Markowitz
attends meetings of the Board of Trustees of the Montgomery
Funds but is not eligible to vote. Mr. Markowitz has been the
Senior Managing Director of Montgomery Securities (the
Distributor) since January 1991. Mr. Markowitz joined
Montgomery Securities in December 1987.
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 Montgomery Securities will receive
commissions for executing portfolio transactions for the Funds. The Trustees who
are not affiliated with the Manager or the
B-46
<PAGE>
<TABLE>
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, 1996, and the aggregate
compensation paid to each of the Trustees during the fiscal year ended June 30,
1996 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
Jerome S. Markowitz None None -- None
John A. Farnsworth $25,000 $5,000 -- $32,500
Andrew Cox $25,000 $5,000 -- $32,500
Cecilia H. Herbert $25,000 $5,000 -- $32,500
<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 Allocation Fund) by
Montgomery Asset Management, L.P., the Manager, pursuant to an Investment
Management Agreement initially dated July 13, 1990; and to the Allocation Fund
pursuant to an Investment Management Agreement initially dated November 18, 1993
(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:
B-47
<PAGE>
<TABLE>
<CAPTION>
Fund Average Daily Net Annual
- ---- Assets Rate
----------------- ------
<S> <C> <C>
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
Montgomery Small Cap First $200 million 1.20%
Opportunities Fund Next $300 million 1.10%
Over $500 million 1.00%
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
Montgomery Global First $500 million 1.25%
Opportunities Fund Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global First $250 million 1.25%
Communications Fund Over $250 million 1.00%
Montgomery International First $250 million 1.25%
Small Cap Fund Over $250 million 1.00%
Montgomery International First $500 million 1.10%
Growth Fund Next $500 million 1.00%
Over $1 billion 0.90%
Montgomery Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Emerging Markets First $250 million 1.25%
Fund Over $250 million 1.00%
Montgomery Advisors Emerging First $300 million 1.20%
Markets Fund Next $700 million 1.00%
Over $1 billion 0.90%
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
Montgomery Asset Allocation First $500 million 0.80%
Fund Over $500 million 0.65%
Montgomery Global Asset All Amounts 0.20%*
Allocation Fund
Montgomery Short Duration First $500 million 0.50%
Government Bond Fund Over $500 million 0.40%
Montgomery Government Reserve First $250 million 0.40%
Fund Next $250 million 0.30%
Over $500 million 0.20%
B-48
<PAGE>
Montgomery Federal Tax-Free First $500 million 0.40%
Money Fund Over $500 million 0.30%
Montgomery California Tax- First $500 million 0.50%
Free Intermediate Bond Fund Over $500 million 0.40%
Montgomery California Tax- First $500 million 0.40%
Free Money Fund Over $500 million 0.30%
<FN>
* 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>
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 lesser of the maximum
allowable by applicable state expense limitations and the following percentages
of each Fund's average net assets (excluding Rule 12b-1 fees): Emerging Asia,
Emerging Markets, International Small Cap, 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%); 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 (1.75%)
(including total expenses of the Underlying Funds), the Short 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. Currently, the most
restrictive state limitation is two and one-half percent (2 1/2%) of the first
$30,000,000 of average net assets of a Fund, two percent (2%) of the next
$70,000,000, and one and one-half percent (1 1/2%) of the value of the remaining
average net assets. 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 two
years (three years for the Allocation Fund) 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, extraordinary
expenses such as litigation, and such other expenses as may be deemed excludable
with the prior written approval of any state securities commission
B-49
<PAGE>
imposing an expense limitation. The Manager may also, at its discretion from
time to time, pay for other Fund expenses from its own funds or reduce the
management fee of each Fund in excess of that required.
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
two-year period (three-year period for the Allocation Fund) following such
reduction subject to each Fund's ability to effect such reimbursement and remain
in compliance with applicable expense limitations. The Boards also considered
that any such management fee reimbursement will be accounted for on the
financial statements of each Fund as a contingent liability of that Fund and
will appear as a footnote to that Fund's financial statements until such time as
it appears that such Fund will be able to effect such reimbursement. At such
time as it appears probable that a Fund is able to effect such reimbursement,
the amount of reimbursement that such Fund is able to effect will be accrued as
an expense of that Fund for that current period.
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.
Fund Year or Period Ended June 30,
1996 1995 1994
---- ---- ----
Montgomery Growth Fund $8,336,529 $5,566,892 $ 290,908
Montgomery Equity Income $ 101,709 $ 12,589 NA
Fund
Montgomery Small Cap Fund $2,364,834 $2,095,945 $2,368,563
Montgomery Small Cap $ 217,603 NA NA
Opportunities Fund
Montgomery Micro Cap Fund $3,732,720 $ 703,124 NA
Montgomery Global $ 381,316 $ 226,283 $ 99,102
Opportunities Fund
Montgomery Global $3,186,649 $2,952,058 $2,261,713
Communications Fund
Montgomery International $ 611,587 $ 473,200 $ 300,614
Small Cap Fund
Montgomery International $ 97,137 NA NA
Growth Fund
Montgomery Emerging Asia NA NA NA
Fund
B-50
<PAGE>
Montgomery Emerging $10,262,601 $ 9,290,178 $ 5,678,053
Markets Fund
Montgomery Advisors $ 43,843 NA NA
Emerging Markets Fund
Montgomery Select 50 Fund $ 359,453 NA NA
Montgomery Asset $ 998,198 $ 150,882 $ 2,232
Allocation Fund
Montgomery Short Duration $ 93,531 $ 99,249 $ 117,470
Government Bond Fund
Montgomery Government $ 1,703,723 $ 1,440,964 $ 633,266
Reserve Fund
Montgomery Federal Tax- NA NA NA
Free Money Fund
Montgomery California Tax- $ 48,596 $ 43,889 $ 49,676
Free Intermediate Bond
Fund
Montgomery California Tax- $ 538,030 $ 149,574 NA
Free Money Fund
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 Manager 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.
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 Manager
at an annual rate of 0.25% of the Fund's aggregate
B-51
<PAGE>
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 Manager for its expenses in
connection with the promotion and distribution of those Classes.
The 12b-1 Plan provides that the Manager 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
Manager.
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 Article III, Section 26 of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., as such Section 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
B-52
<PAGE>
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 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
B-53
<PAGE>
of the Manager or a Fund, a better price and execution can otherwise be obtained
by using a broker for the transaction.
The International and Global 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 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
B-54
<PAGE>
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 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
B-55
<PAGE>
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.
In addition, on occasion, situations may arise in which legal and
regulatory considerations will preclude trading for the Funds' accounts by
reason of activities of Montgomery Securities or its affiliates. It is the
judgment of the Boards that the Funds will not be materially disadvantaged by
any such trading preclusion and that the desirability of continuing its advisory
arrangements with the Manager and the Manager's affiliation with Montgomery
Securities and other affiliates of Montgomery Securities outweigh any
disadvantages that may result from the foregoing.
The Manager's sell discipline for the Domestic Equity, Select 50,
Allocation, International and Global Funds' investment 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 the Select 50, International and Global Funds, 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.
Because Montgomery Securities is a member of the National Association
of Securities Dealers, Inc., it is sometimes entitled to obtain certain fees
when a Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage commissions for the benefit of
the Funds, any portfolio securities tendered by a Fund will be tendered through
Montgomery Securities if it is legally permissible to do so. In turn, the next
management fee payable to a Fund's Manager (an affiliate of Montgomery
Securities) under the Agreement will be reduced by the amount of any such fees
received by Montgomery Securities in cash, less any costs and expenses incurred
in connection therewith.
Subject to the foregoing policies, the Funds may use Montgomery
Securities as a broker to execute portfolio transactions. In accordance with the
provisions of Section 17(e)
B-55
<PAGE>
of the Investment Company Act and Rule 17e-1 promulgated thereunder, the Trust
has adopted certain procedures designed to provide that commissions payable to
Montgomery Securities are reasonable and fair compared to the commissions
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on securities or options exchanges
during a comparable period of time. In determining the commissions to be paid to
Montgomery Securities, it is the policy of the Funds that such commissions will
be, in the judgment of the Manager, (i) at least as favorable as those which
would be charged the Funds by other qualified unaffiliated brokers having
comparable execution capability, and (ii) at least as favorable as commissions
contemporaneously charged by Montgomery Securities on comparable transactions
for its most favored unaffiliated customers, except for (a) accounts for which
Montgomery Securities acts as a clearing broker for another brokerage firm, and
(b) any customers of Montgomery Securities considered by a majority of the
Trustees who are not interested persons to be not comparable to the Fund. The
Funds do not deem it practicable and in their best interests to solicit
competitive bids for commission rates on each transaction. However,
consideration is regularly given to information concerning the prevailing level
of commissions charged on comparable transactions by other qualified brokers.
The Boards review the procedures adopted by the Trusts with respect to the
payment of brokerage commissions at least annually to ensure their continuing
appropriateness, and determine, on at least a quarterly basis, that all such
transactions during the preceding quarter were effected in compliance with such
procedures.
The Trusts have also adopted certain procedures, pursuant to Rule 10f-3
under the Investment Company Act, which must be followed any time a Fund
purchases or otherwise acquires, during the existence of an underwriting or
selling syndicate, a security of which Montgomery Securities is an underwriter
or member of the underwriting syndicate. The Boards determine, on at least a
quarterly basis, that any such purchases made during the preceding quarter were
effected in compliance with such procedures.
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. For the year ended June 30, 1994, the Funds'
total securities transactions generated commissions of $586,092, of which $168
was paid to Montgomery Securities.
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, as stated above,
Montgomery Securities may act as one of the Funds' brokers in the purchase and
sale of portfolio securities, and other brokers who execute brokerage
transactions as described above may from time to time effect purchases of shares
of the Funds for their customers.
B-56
<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
B-58
<PAGE>
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.
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
B-59
<PAGE>
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), New York City time, 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, 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, Thanksgiving Day and Christmas, include January 2, Martin Luther King Day,
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.
B-60
<PAGE>
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 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
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<PAGE>
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
B-62
<PAGE>
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 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
B-63
<PAGE>
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 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:
YIELD=2[(a-b +1)6-1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursement).
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 46.24% (45.22%
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<PAGE>
beginning 1996). 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, 1996, were
as follows:
<CAPTION>
Tax-
Equiv. Tax-
Yield Effective Effective Current Equiv.
(7- Yield Yield* Yield Yield*
Fund day) (7-day) (7-Day) (30-day) (30-day)
- ---- ------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Montgomery Short NA NA NA 6.03% NA
Duration
Government Bond
Fund
Montgomery 4.97% 5.11% NA NA NA
Government
Reserve Fund
Montgomery NA NA NA NA NA
Federal Tax-Free
Money Fund
Montgomery NA NA NA 4.40% 8.18%
California Tax-
Free
Intermediate
Bond Fund
Montgomery 2.89% 2.94% 5.47% NA NA
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:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000.
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<PAGE>
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 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.
The average annual total return for each Fund for the periods indicated
was as follows:
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<PAGE>
<TABLE>
<CAPTION>
Year Inception*
Ended Through
Fund June 30, 1996 June 30, 1996
---- ------------- -------------
<S> <C> <C>
Montgomery Growth Fund 24.85% 29.17%
Montgomery Equity Income 24.56% 22.34%
Fund
Montgomery Small Cap Fund 39.28% 22.92%
Montgomery Small Cap NA 31.67%
Opportunities Fund
Montgomery Micro Cap Fund 30.95% 31.00%
Montgomery Select 50 Fund NA 37.75%
Montgomery Global
Opportunities Fund 28.64% 15.15%
Montgomery Global
Communications Fund 17.06% 14.25%
Montgomery International
Small Cap Fund 26.68% 8.16%
Montgomery International 27.58% 27.58%
Growth Fund
Montgomery Emerging Asia NA NA
Fund
Montgomery Emerging
Markets Fund 7.74% 10.26%
Montgomery Advisors NA 16.60%
Emerging Markets Fund
Montgomery Asset
Allocation Fund 23.92% 27.22%
Montgomery Short Duration
Government Bond Fund 5.74% 6.27%
Montgomery Government
Reserve Fund 5.28% 4.12%
Montgomery Federal Tax-
Free Money Fund NA NA
Montgomery California Tax-
Free Intermediate Bond
Fund 6.11% 4.60%
Montgomery California Tax-
Free Money Fund 3.03% 3.27%
<FN>
- ----------------
* Total return for periods of less than one year are aggregate, not
annualized, return figures. The dates of inception
</FN>
</TABLE>
B-67
<PAGE>
for the Funds were: Growth Fund, September 30, 1993; Small Cap Fund, July 13,
1990; Opportunities Fund, September 30, 1993; Global Communications Fund, June
1, 1993; International Small Cap Fund, September 30, 1993; Emerging Asia Fund,
September 30, 1996; Emerging Markets Fund, March 1, 1992; Allocation Fund, March
31, 1994; Short Duration Government Bond Fund, December 18, 1992; Government
Reserve Fund, September 14, 1992; California Intermediate Bond Fund, July 1,
1993; Equity Income and California Money Funds, September 30, 1994; Micro Cap
Fund, December 30, 1994; International Growth Fund, June 30, 1995; Select 50
Fund, October 27, 1995; Small Cap Opportunities Fund, December 29, 1995 and
Federal Tax-Free Money Fund, June 30, 1996.
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%
*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 performance information of the Navigator Asia
Pacific Fund (net of fees) was as follows:
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<PAGE>
Period Aggregate Total Return
------ ----------------------
(Net of fees)
-------------
3-months ended Sept. 30, 1996 -4.55%
Year to date ended Sept. 30, 1996 10.85%
One year ended Sept. 30, 1996 7.76%
Since inception 2.70%
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 developed world markets except for those in North
America),
B-69
<PAGE>
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. Largely inspired by its affiliate, Montgomery Securities --
which has established a tradition for specialized research in emerging growth
companies -- the Manager has developed its own tradition of intensive research.
The Manager has made intensive research one of the important characteristics of
the Montgomery Funds style.
B-70
<PAGE>
The portfolio managers for Montgomery's global and international 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 lower
capitalization businesses.
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 $7 billion
for retail and institutional investors) and total shareholders invested in the
Funds (currently around 225,000).
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
B-71
<PAGE>
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
419958, Kansas City, Missouri 64141, 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 Heller,
Ehrman, White & McAuliffe, 333 Bush 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 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.
B-72
<PAGE>
<TABLE>
As of January 31, 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:
<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. 18,150,360 36.70
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 3,989,897 8.07
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 700,717 6.07
Knoxville
620 Market Street, #300
Knoxville, TN 37902-2232
Charles Schwab & Co., Inc. 1,747,992 15.15
101 Montgomery Street
San Francisco, CA 94104-4122
Boston Safe Deposit & Trust Co. 760,440 6.59
Trust ADT Security Systems
Mutual Fund Operations
P.O. Box 3198
Pittsburg, PA 15230-3198
Global Opportunities Fund
Charles Schwab & Co., Inc. 662,163 37.31
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 123,893 6.98
For The Exclusive Benefit of Our
Customers - ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Wayne Boich 127,483 7.18
155 East Broad, No. 23
Columbus, OH 43215-3609
Global Communications Fund
Charles Schwab & Co., Inc. 4,016,753 43.54
101 Montgomery Street
San Francisco, CA 94104-4122
B-73
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
International Small Cap Fund
Charles Schwab & Co., Inc. 1,270,431 47.03
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp 204,169 7.56
for the Exclusive Use of Our
Customers
Attn: Mutual Funds
PO Box 3730
Church Street Station
New York, NY 10008-3730
Donaldson Lufkin Jenrette 142,864 5.29
Securities Corporation
Mutual Funds, 7th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052
International Growth Fund
Charles Schwab & Co., Inc. 324,458 16.84
101 Montgomery Street
San Francisco, CA 94104-4122
Stanley S. Schwartz TR 191,630 9.95
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
Emerging Markets Fund
Charles Schwab & Co., Inc. 30,470,980 44.84
101 Montgomery Street
San Francisco, CA 94014-4122
National Financial Services Corp. 5,143,166 7.57
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Allocation Fund
Charles Schwab & Co., Inc. 2,605,368 35.02
101 Montgomery St.
San Francisco, CA 94104-4122
B-74
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
National Financial Services Corp. 988,790 13.29
For the Exclusive Benefit of Our
Customers - Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Short Duration Government Bond Fund
Charles Schwab & Co., Inc. 1,550,401 37.53
101 Montgomery Street
San Francisco, CA 94104-4122
Donaldson, Lufkin & Jenrette 259,355 6.28
Securities Corp.
Mutual Funds Department, 5th Floor
P. O. Box 2052
Jersey City, NJ 07383-2052
KONIAG Inc. 421,240 10.20
c/o Montgomery Asset Management
Attn: Carl Obeck
600 Montgomery Street
San Francisco, CA 94111-2702
California Tax-Free Intermediate Bond
Fund
Charles Schwab & Co., Inc. 371,370 24.94
101 Montgomery Street
San Francisco, CA 94104-4122
Virginia L. Bowman Revocable Living 78,403 5.27
Trust dated 1/22/90
c/o Montgomery Securities
101 California Street
San Francisco, CA 94111-5802
Collier Kimball 115,005 7.72
Montgomery Asset Management
Attn: S. Wang
101 California Street
San Francisco, CA 94111-2702
Bruce L. Cronander 98,334 6.60
Montgomery Asset Management
Attn: S. Wang
101 California Street
San Francisco, CA 94111-2702
Government Reserve Fund
B-75
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Mary Miner, Trustee for Robert 86,606,489 19.27
Miner and Mary Miner Trust
U/A dated 2/29/84
1832 Baker Street
San Francisco, CA 94115-2011
Equity Income Fund
Charles Schwab & Co., Inc. 976,325 48.25
101 Montgomery Street
San Francisco, CA 94104-4122
Micro Cap Fund
Charles Schwab & Co., Inc. 6,397,173 36.68
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 966,670 5.54
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Select 50 Fund
Charles Schwab & Co., Inc. 1,506,015 24.28
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 610,592 9.84
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
FTC & Co. 340,085 5.48
Attn: DataLynx #118
P. O. Box 173736
Denver, CO 80217-3736
Small Cap Opportunities Fund
Charles Schwab & Co., Inc. 4,577,845 35.35
101 Montgomery Street
San Francisco, CA 94104-4122
B-76
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
National Financial Services Corp. 1,267,218 9.79
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
B-77
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Montgomery Federal Tax-Free Money Fund
Peter V. Sperling TTEE FBO 12,701,592 11.19
Peter V. Sperling Revocable Trust
DTD 01/31/95
Apollo Group Inc.
4615 East Elwood Street, 4th Floor
Phoenix, AZ 85040-1958
Thomas G. Hixon 6,212,607 5.47
165 Butler Drive
Ridgeland, MS 39157-9779
James Armstrong & JoAnn 8,564,123 7.55
Armstrong Community Property
8600 N. 64th Place
Paradise Valley, AZ 85253-1828
Guy Lammle & Rita Lammle TIC 7,002,443 6.17
10325 E. Celestial Drive
Scottsdale, AZ 85262-5116
Montgomery Emerging Asia Fund
Charles Schwab & Co., Inc. 366,276 22.27
101 Montgomery Street
San Francisco, CA 94104-4122
Montgomery Asset Management L.P. 83,490 5.08
Attn: Mary Jane Fross
101 California Street
San Francisco, CA 94111-5802
National Financial Services Corp. 211,577 12.86
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
</TABLE>
<TABLE>
As of January 31, 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
B-78
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Dreyfus Investment Services Corp. 1,014 21.04
FBO 649772181
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Dreyfus Investment Services Corp. 2,774 57.52
FBO 659049551
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Gruntal & Co. 356,905 7.40
FBO 210-08164-18
14 Wall Street
new York, NY 10005-2101
</TABLE>
B-79
<PAGE>
<TABLE>
<CAPTION>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
<S> <C> <C>
Equity-Income Fund
State Street Bank & Trust Co. Tr. 13,860 99.91
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
Small Cap Fund
State Street Bank & Trust Co. 143,435 65.18
U/A July 01, 1996
McClaren/Hart Employee Ret. Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. Tr. 35,197 15.99
U/A Dec. 01, 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. 41,430 18.83
U/A January 2, 1996
Warctek US Inc. Employee
Savings and Investment Plan
P.O. Box 1992
Boston, MA 02171
Small Cap Opportunities Fund
E*Trade Securities Inc. 348 100
A/C 7880-1618
Thomas S. Smogolski C/F
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3317
Emerging Markets Fund
Canada Life Ins. Co. Of America 196 17.66
Attn: Maria-Luz Manalo
330 University Avenue, SP12
Toronto Ontario M5G 1R8
Canada
State Street Bank & Trust Co. 224 20.17
U/A January 2, 1996
Wavetek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
Gruntal & Co. 139 12.52
FBO 210-18504-16
14 Wall Street
New York, 10005-2101
Gruntal & Co. 551 49.66
FBO 886-01542-13
14 Wall Street
New York, NY 10005-2101
</TABLE>
As of January 31, 1997, the Trustees and officers of the Trusts, as a
group, owned less than 1% of the outstanding shares of each Fund except the
Opportunities, Short and California Intermediate Bond Funds. As of January 31,
1997, the Trustees and officers of the Trusts, as a group, owned approximately
1.2 percent of the Opportunities Fund, 1.0 percent of the Short Fund and 4.9
percent of the California Intermediate Bond Fund.
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
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<PAGE>
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,
1996, for the Growth, Micro Cap, Small Cap, Small Cap Opportunities, Equity
Income, Opportunities, Communications, International Growth, International Small
Cap, Emerging Markets, Advisors, Select 50, Asset Allocation, Short, Reserve,
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,
1996 (the "Report"), are incorporated herein by reference to the Reports.
Attached to this Statement of Additional Information is certain
unaudited financial information for the Federal Money Fund as of or for the
period ended September 30, 1996.
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<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.
B-82
<PAGE>
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:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issuer.
4. The 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
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<PAGE>
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
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.
B-84
<PAGE>
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.
B-85
<PAGE>
---------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Portfolio Investments as of June 30, 1996;
Statements of Assets and Liabilities as of June 30,
1996; Statements of Operations For the Year Ended
June 30, 1996; Statement of Cash Flows for year
ended June 30, 1996; Statements of Changes in Net
Assets for the Year Ended June 30, 1996; Financial
Highlights for a Fund share outstanding throughout
each year, including the year ended June 30, 1996
for Montgomery Growth Fund, Montgomery Micro Cap
Fund, Montgomery Small Cap Fund, Montgomery Small
Cap Opportunities Fund, Montgomery Equity Income
Fund, Montgomery Asset Allocation Fund, Montgomery
Select 50 Fund, Montgomery Global Opportunities
Fund, Montgomery Global Communications Fund,
Montgomery International Small Cap Fund, Montgomery
International Growth Fund, Montgomery Emerging
Markets Fund, Montgomery Short Duration Government
Bond Fund, Montgomery Government Reserve Fund,
Montgomery California Tax-Free Intermediate Bond
Fund and Montgomery California Tax-Free Money Fund;
Notes to Financial Statements; Independent Auditors'
Report on the foregoing, all incorporated by
reference to the Annual Report to Shareholders of
the above-named funds.
(b) Exhibits:
(1)(A) Agreement and Declaration of Trust is incorporated by
reference to the Registrant's Registration Statement
as filed with the Commission on May 16, 1990
("Registration Statement").
(1)(B) Amendment to Agreement and Declaration of Trust is
incorporated by reference to Post-Effective
Amendment No. 17 to the Registration Statement as
filed with the Commission on December 30, 1993
("Post-Effective Amendment No. 17").
(1)(C) Amended and Restated Agreement and Declaration of Trust is
incorporated by reference to Post-Effective
Amendment No. 28 to the Registration Statement as
filed with the Commission on September 13, 1995
("Post-Effective Amendment No. 28").
(2) By-Laws are incorporated by reference to the Registration
Statement.
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5)(A) Form of Investment Management Agreement is incorporated
by reference to Pre-Effective Amendment No. 1 to the
Registration Statement as filed with the Commission
on July 5, 1990 ("Pre-Effective Amendment No. 1").
<PAGE>
(5)(B) Form of Amendment to Investment Management Agreement is
incorporated by reference to Post-Effective
Amendment No. 24 to the Registration Statement as
filed with the Commission on March 31, 1995
("Post-Effective Amendment No. 24").
(6)(A) Form of Underwriting Agreement is incorporated by
reference to Pre-Effective Amendment No. 1.
(6)(B) Form of Selling Group Agreement is incorporated by
reference to Pre-Effective Amendment No. 1.
(7) Benefit Plan(s) - Not applicable.
(8) Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 24.
(9)(A) Form of Administrative Services Agreement is incorporated
by reference to Post-Effective Amendment No. 15.
(9)(B) Form of Multiple Class Plan is incorporated by reference
to Post-Effective Amendment No. 28.
(9)(C) Form of Shareholder Services Plan is incorporated by
reference to Post-Effective Amendment No. 28.
(10) Consent and Opinion of Counsel as to legality of shares is
incorporated by reference to Pre-Effective Amendment
No. 1.
(11) Independent Auditors' Consent.
(12) Financial Statements omitted from Item 23 - Not applicable.
(13) Letter of Understanding re: Initial Shares is incorporated
by reference to Pre-Effective Amendment No. 1.
(14) Model Retirement Plan Documents are incorporated by
reference to Post-Effective Amendment No. 2 to the
Registration Statement as filed with the Commission
on March 4, 1991 ("Post-Effective Amendment No. 2").
(15) Form of Share Marketing Plan is incorporated by reference
to Post-Effective Amendment No. 28.
(16)(A) Performance Computation for Montgomery Short Government Bond
Fund is incorporated by reference to Post-Effective
Amendment No. 13.
(16)(B) Performance Computation for Montgomery Government Reserve
Fund is incorporated by reference to Post-Effective
Amendment No. 12.
(16)(C) Performance Computation for Montgomery California Tax-Free
Intermediate Bond Fund is incorporated by reference
to Post-Effective Amendment No. 17.
(16)(D) Performance Computation for the other series of Registrant
is incorporated by reference to Post-Effective
Amendment No. 2.
(27) Financial Data Schedule is incorporated by reference to Form
N-SAR filed for the period ended June 30, 1996.
C-2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Montgomery Asset Management, L.P., a California limited partnership, is
the manager of each series of the Registrant, of The Montgomery Funds II, a
Delaware business trust, and of The Montgomery Funds III, a Delaware business
trust. Montgomery Asset Management, Inc., a California corporation is the
general partner of Montgomery Asset Management, L.P., and Montgomery Securities
is its sole limited partner. The Registrant, The Montgomery Funds II and The
Montgomery Funds III are deemed to be under the common control of each of those
three entities.
<TABLE>
Item 26. Number of Holders of Securities
<CAPTION>
Number of Record Holders
Title of Class as of December 31, 1996
-------------- -----------------------
Shares of Beneficial
Interest, $0.01 par value
-------------------------
<S> <C>
Montgomery Small Cap Fund (Class R) 7,204
Montgomery Growth Fund (Class R) 59,109
Montgomery Emerging Markets 55,952
Fund (Class R)
Montgomery International Small Cap Fund (Class R) 2,538
Montgomery Global Opportunities Fund (Class R) 1,614
Montgomery Global Communications Fund (Class R) 16,531
Montgomery Equity Income Fund (Class R) 1,614
Montgomery Short Duration Government Bond Fund 1,280
(Class R)
Montgomery California Tax-Free 250
Intermediate Bond Fund (Class R)
Montgomery Government Reserve Fund (Class R) 11,180
Montgomery California Tax-Free 1,478
Money Fund (Class R)
Montgomery Micro Cap Fund (Class R) 12,145
Montgomery International Growth Fund (Class R) 831
Montgomery Select 50 Fund (Class R) 6,916
Montgomery Small Cap Opportunities Fund (Class R) 13,991
Montgomery Federal Tax-Free Money Fund (Class R) 497
Montgomery Technology Fund 0
Montgomery Emerging Asia Fund 1,207
C-3
<PAGE>
Montgomery Global Asset Allocation Fund 0
Montgomery Total Return Bond Fund 0
</TABLE>
Item 27. Indemnification
Article VII, Section 3 of the Agreement and Declaration of Trust
empowers the Trustees of the Trust, to the full extent permitted by law, to
purchase with Trust assets insurance for indemnification from liability and to
pay for all expenses reasonably incurred or paid or expected to be paid by a
Trustee or officer in connection with any claim, action, suit or proceeding in
which he or she becomes involved by virtue of his or her capacity or former
capacity with the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding by reason of the fact that such person is and other amounts or
was an agent of the Trust, against expenses, judgments, fines, settlement and
other amounts actually and reasonable incurred in connection with such
proceeding if that person acted in good faith and reasonably believed his or her
conduct to be in the best interests of the Trust. Indemnification will not be
provided in certain circumstances, however, including instances of willful
misfeasance, bad faith, gross negligence, and reckless disregard of the duties
involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to the Trustees, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable in the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
Montgomery Securities, which is a broker-dealer and the principal
underwriter of The Montgomery Funds, is the sole limited partner of the
investment manager, Montgomery Asset Management, L.P. ("MAM, L.P."). The general
partner of MAM, L.P. is a corporation, Montgomery Asset Management, Inc. ("MAM,
Inc."), certain of the officers and directors of which serve in similar
capacities for MAM, L.P. One of these officers and directors, Mr. R. Stephen
Doyle, also is a capital limited partner of Montgomery Securities, and Mr. Jack
G. Levin, Secretary of The Montgomery Funds, is a Managing Director of
Montgomery Securities. R. Stephen Doyle is the Chairman and Chief Executive
Officer of MAM, L.P.; Mark B. Geist is the President; John T. Story is the
Managing Director of Mutual Funds and Executive Vice President; David E.
Demarest is Chief Administrative Officer; Mary Jane Fross is Manager of Mutual
Fund Administration and Finance; and Josephine Jimenez, Bryan L. Sudweeks,
Stuart O. Roberts, John H. Brown, William C. Stevens, Roger Honour, Oscar Castro
and John Boich are Managing Directors of MAM, L.P. Information about the
individuals who function as officers of MAM, L.P. (namely, R. Stephen Doyle,
Mark B. Geist, John T. Story, David E. Demarest, Mary Jane Fross and the eight
Managing Directors) is set forth in Part B.
Item 29. Principal Underwriter.
(a) Montgomery Securities is the principal underwriter of The
Montgomery Funds, The Montgomery Funds II and The Montgomery
Funds III. Montgomery Securities acts as the principal
underwriter, depositor and/or investment adviser and/or
trustee for The Montgomery Funds, an investment company
registered under the Investment Company Act of 1940, as
amended, and for the following private investment partnerships
or trusts:
C-4
<PAGE>
Montgomery Bridge Fund Liquidating Trust
Montgomery Bridge Fund II, Liquidating Trust
Montgomery Bridge Investments Limited, Liquidating Trust
Montgomery Private Investments Partnership, Liquidating
Trust
Pathfinder Montgomery Fund I, L.P., Liquidating Trust
Montgomery Growth Partners, L.P.
Montgomery Small Cap Partners II, L.P.
Montgomery Small Cap Partners III, L.P.
Montgomery Capital Partners, L.P.
Montgomery Capital Partners II, L.P.
Montgomery Emerging Markets Fund Limited
Montgomery Emerging World Partners, L.P.
(b) The following information is furnished with respect to the
officers and general partners of Montgomery Securities:
<TABLE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
----------------- -------------------------- ---------------
<CAPTION>
<S> <C> <C>
Lewis W. Coleman Senior Managing Director None
J. Richard Fredericks Senior Managing Director None
Robert L. Kahan Senior Managing Director None
Kent A. Logan Senior Managing Director None
Jerome S. Markowitz Senior Managing Director Trustee Designate
Karl L. Matthies Senior Managing Director None
J. Sanford Miller Senior Managing Director None
Joseph M. Schell Senior Managing Director None
John K. Skeen Senior Managing Director None
Thomas W. Weisel Chairman and Chief Executive Officer None
Stephen T. Aiello Managing Director None
John A. Berg Managing Director None
Howard S. Berl Managing Director None
Charles R. Brama Managing Director None
Robert V. Cheadle Managing Director None
Jeffrey B. Child Managing Director None
C-5
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
----------------- -------------------------- ---------------
M. Allen Chozen Managing Director None
Frank J. Connelly Managing Director None
David K. Crossen Managing Director None
Glen C. Dailey Managing Director None
Michael G. Dorey Managing Director None
Dennis Dugan Managing Director None
Frank M. Dunlevy Managing Director None
William A. Falk Managing Director None
Paul G. Fox Managing Director None
Clark L. Gerhardt, Jr. Managing Director None
Seth J. Gersch Managing Director None
Robert G. Goddard Managing Director None
P. Joseph Grasso Managing Director None
James C. Hale, III Managing Director None
Wilson T. Hileman, Jr. Managing Director None
Brett A. Hodess Managing Director None
Ben Howe Managing Director None
Craig R. Johnson Managing Director None
Joseph A. Jolson Managing Director None
Scott C. Kovalik Managing Director None
Kurt H. Kruger Managing Director None
Guy A. Lampard Managing Director None
David S. Lehmann Managing Director None
Derek Lemke-von Ammon Managing Director None
Jack G. Levin, Esq. Managing Director Secretary
C-6
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
----------------- -------------------------- ---------------
Merrill S. Lichtenfeld Managing Director None
James F. McMahon Managing Director None
Michael G. Mueller Managing Director None
Bernard M. Notas Managing Director None
Bruce G. Potter Managing Director None
David B. Readerman Managing Director None
Rand Rosenberg Managing Director None
Alice S. Ruth Managing Director None
Richard A. Smith Managing Director None
Kathleen Smythe-de Urquieta Managing Director None
Peter B. Stoneberg Managing Director None
Thomas Tashjian Managing Director None
Thomas A. Thornhill, III Managing Director None
John Tinker Managing Director None
Otto V. Tschudi Managing Director None
Stephan P. Vermut Managing Director None
John W. Weiss Managing Director None
George W. Yandell, III Managing Director None
Ross Investments, Inc. General Partner None
LWC Investments, Inc. General Partner None
RLK Investments, Inc. General Partner None
Logan Investments, Inc. General Partner None
SEWEL Investments, Inc. General Partner None
MMJ Investments, Inc. General Partner None
Skeen Investments, Inc. General Partner None
C-7
<PAGE>
<FN>
* The principal business address of persons and entities listed is 600
Montgomery Street, San Francisco, California 94111.
The above list does not include limited partners or special limited
partners who are not Managing Directors of Montgomery Securities.
</FN>
</TABLE>
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 will be kept by the
Registrant's Transfer Agent, DST Systems, Inc., 1004 Baltimore, Kansas City,
Missouri 64105, except those records relating to portfolio transactions and the
basic organizational and Trust documents of the Registrant (see Subsections
(2)(iii), (4), (5), (6), (7), (9), (10) and (11) of Rule 31a-1(b)), which will
be kept by the Registrant at 101 California Street, San Francisco, California
94111.
Item 31. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to file a post-effective amendment
including financial statements of Montgomery Technology Fund, Montgomery Growth
& Income Fund, Montgomery Federal Tax-Free Money Fund, Montgomery Emerging Asia
Fund, Montgomery Global Asset Allocation Fund or Montgomery Total Return Bond
Fund, which need not be certified, within four to six months from the effective
date of Registrant's 1933 Act registration statement as to those series.
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
(d) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act of 1940, as amended, which requires the prompt convening
of a meeting of shareholders to elect trustees to fill existing vacancies in the
Registrant's Board of Trustees in the event that less than a majority of the
trustees have been elected to such position by shareholders. Registrant has also
undertaken promptly to call a meeting of shareholders for the purpose of voting
upon the question of removal of any Trustee or Trustees when requested in
writing to do so by the record holders of not less than 10 percent of the
Registrant's outstanding shares and to assist its shareholders in communicating
with other shareholders in accordance with the requirements of Section 16(c) of
the Investment Company Act of 1940, as amended.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Amendment pursuant to Rule 485(b) under
the Securities Act of 1933, as amended, and that the Registrantc has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco and State
of California on this 12th day of February, 1997.
THE MONTGOMERY FUNDS
By: R. Stephen Doyle*
-------------------------------
Chairman and Principal Executive
Officer
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<CAPTION>
<S> <C> <C>
R. Stephen Doyle* Officer; Principal February 12, 1997
- ----------------- Financial and Accounting
R. Stephen Doyle Officer; and Trustee
Andrew Cox * Trustee February 12, 1997
- ------------
Andrew Cox
Cecilia H. Herbert * Trustee February 12, 1997
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee February 12, 1997
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-----------------------------------------------
Julie Allecta, Attorney-in-Fact
pursuant to Power of Attorney previously filed.
</TABLE>
<PAGE>
Exhibit(s) Index
Exhibit No. Document Page No.
- ----------- -------- --------
(11) Independent Auditors' Consent
-----
Deloitte &
Touche LLP
- --------------------------------------------------------------------------------
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
The Montgomery Funds:
We consent to (a) the incorporation by reference in Post-Effective Amendment No.
47 to Registration Statement No. 33-34841 of The Montgomery Funds on Form N-1A
of our report dated August 16, 1996 incorporated by reference in the Combined
Statement of Additional Information and (b) the reference to us under the
caption "Financial Highlights" appearing in the Combined Prospectus which also
is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
February 11, 1997
- --------------
Deloitte Touche
Tohmatsu
International
- --------------
