<PAGE>
Semiannual Report December 31, 1997
=========================
----------
The
Montgomery
Funds
----------
[PICTURES OF OWLS APPEARS HERE] Invest
wisely.(R)
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Semiannual Report
- --------------------
December 31, 1997
===============
C O N T E N T S
---------------
Portfolio Highlights and Investments
Montgomery U.S. Equity Funds
----------------------------
Growth Fund................................................................ 5
Small Cap Opportunities Fund............................................... 9
Small Cap Fund............................................................. 13
Micro Cap Fund............................................................. 17
Equity Income Fund......................................................... 21
Montgomery International
and Global Equity Funds
-----------------------
International Growth Fund.................................................. 24
International Small Cap Fund............................................... 27
Emerging Markets Fund...................................................... 31
Emerging Asia Fund......................................................... 37
Latin America Fund......................................................... 40
Global Opportunities Fund.................................................. 43
Global Communications Fund................................................. 46
Montgomery Multi-Strategy Funds
-------------------------------
Select 50 Fund............................................................. 49
U.S. Asset Allocation Fund................................................. 52
Global Asset Allocation Fund............................................... 54
Montgomery U.S. Fixed-Income
and Money Market Funds
----------------------
Total Return Bond Fund..................................................... 56
Short Duration Government
Bond Fund.................................................................. 59
California Tax-Free
Intermediate Bond Fund..................................................... 62
Government Reserve Fund.................................................... 66
California Tax-Free Money Fund............................................. 66
Federal Tax-Free Money Fund................................................ 66
Financial Statements
--------------------
Statements of Assets and Liabilities....................................... 76
Statements of Operations................................................... 82
Statements of Changes in Net Assets........................................ 86
Transactions in Shares with a Beneficial Interest........................... 90
Statements of Cash Flows................................................... 93
Financial Highlights....................................................... 94
Notes to Financial Statements.............................................. 102
Tax Information............................................................ 114
The Montgomery Funds represents a growing family of no-load mutual funds
providing a comprehensive range of equity, fixed-income and global investment
opportunities.
We currently manage more than $4.9 billion in the Funds on behalf of over
300,000 individual investors, helping them meet their financial goals through a
combination of professional portfolio management and high-quality customer
service.
The Montgomery Funds
101 California Street
San Francisco, CA 94111
(800) 572-FUND [3863]
------------------------
www/montegomeryfunds.com
------------------------
<PAGE>
--------------------
The Montgomery Funds
--------------------
Semiannual Report
--------------------
December 31, 1997
C H A I R M A N' S L E T T E R
January 1998
Dear Fellow Montgomery Funds Shareholder:
Without a doubt, the past several months have been difficult for most investors.
The turmoil that began in Asia spilled over into the United States and other
developed markets in late 1997. As investors in the Montgomery Funds ourselves,
we understand on a very personal level how disappointing the markets may have
been in last year's second half. But we are pleased with how well most of our
Funds performed in this turbulent environment and with their performance so far
in 1998.
And as we've said many times in the past, out of volatility often comes
opportunity. Uncertain environments tend to foster a herd mentality that can
leave individual stocks, sectors or even entire markets oversold. The scorched
earth policy that some investors seemed to be employing in the fourth quarter,
for example, created opportunities for our portfolio managers to buy securities
that they thought were mispriced. In some cases, the rewards were almost
immediate, as a number of these securities quickly recovered before the fourth
quarter ended.
As we enter 1998, investors face a number of big picture questions. To what
degree will Asia's problems slow global demand? Will the U.S. economy continue
to thrive as it enters its eighth year of expansion? Will inflation crop up or
will deflation take hold? Can U.S. corporations continue to deliver the
tremendous profit gains they've achieved over the past several years? If these
questions weigh heavily on investors' minds, the markets could remain volatile
in 1998.
Now more than ever, we think that only a discerning eye will recognize the
opportunities and pitfalls that could lie ahead. It's a perspective that we
believe can only be gained through years of experience in different market
environments; through independent research into companies, sectors and
countries; and through disciplined investment strategies that don't change with
every shift in market sentiment but rather stay focused on the long term. Those
beliefs underlie everything we do, all in service of our overriding goal: to
continually earn your confidence and help you meet your long-term financial
goals. We hope that you gain more insight into our unique philosophy, strategies
and outlook in the following pages.
Thank you for investing with us.
Sincerely,
/s/ R. Stephen Doyle
R. Stephen Doyle
Chairman and Chief Executive Officer
================================================================================
"As we've said many times in the past, out of volatility often comes
opportunity.. Now more than ever, we think that only a discerning eye will
recognize the opportunities and pitfalls that could lie ahead. "
- --------------------------------------------------------------------------------
[LOGO OF THE MONTGOMERY FUNDS APPEARS HERE]
1
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Semiannual Report
- --------------------
December 31, 1997
STOCK AND BOND MARKET OVERVIEW
U.S. Stocks
After a blazing first half, the U.S. market slowed in the latter part of 1997 as
the Asian crisis sparked a so-called flight to quality. Investors turned away
from market segments that they thought would be especially vulnerable to
declining Asian demand. The shares of companies that produce basic materials--
such as steel, petrochemicals and paper--declined sharply. Oil-related companies
also faced an unfavorable supply/demand situation. A variety of other sectors
came under especially intense selling pressure. Shares of certain technology
companies (such as semiconductor equipment manufacturers) were among the hardest
hit, as investors had considered Asia integral to these companies' near-term
sales and long-term growth plans. Investors also sold off smaller--cap stocks,
even though most U.S. small companies have little to no direct exposure to Asia.
While the large-cap S&P 500 Index gained 2.85% during the turbulent fourth
quarter, the small-cap Russell 2000 Index dropped 3.4%.
On the positive side, several long-overlooked areas had a renaissance in the
second half. Utilities, food manufacturers, retailers and pharmaceutical
companies gained new favor from investors who thought they could deliver
predictable, if somewhat sedate, earnings.
S&P 500 INDEX
RANGE 7/21/97 TO 1/21/98
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
DATE PRICE VOLUME DATE PRICE VOLUME DATE PRICE VOLUME
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
F F 1/ 2 975.00 312MLN F 12/12 953.39 503MLN
T T 1/ 1 T 12/11 954.94 558MLN
W 1/21 968.99 W 12/31 970.43 345MLN W 12/10 969.79 556MLN
T 1/20 978.60 516MLN T 12/30 970.84 366MLN T 12/ 9 975.78 600MLN
M 1/19 M 12/29 953.36 327MLN M 12/ 8 982.37 384MLN
F 1/16 961.51 552MLN F 12/26 936.46 121MLN F 12/ 5 H983.79 447MLN
T 1/15 950.73 483MLN T 12/25 T 12/ 4 973.10 480MLN
W 1/14 957.94 521MLN W 12/24 932.70 214MLN W 12/ 3 976.77 513MLN
T 1/13 952.12 548MLN T 12/23 939.12 375MLN T 12/ 2 971.68 467MLN
M 1/12 939.21 599MLN M 12/22 953.70 410MLN M 12/ 1 974.77 474MLN
F 1/ 9 927.69 640MLN F 12/19 946.78 715MLN F 11/28 955.40 145MLN
T 1/ 8 956.04 517MLN T 12/18 955.30 515MLN T 11/27
W 1/ 7 964.00 528MLN W 12/17 965.54 489MLN W 11/26 951.64 369MLN
T 1/ 6 966.58 501MLN T 12/16 968.04 489MLN T 11/25 950.82 469MLN
M 1/ 5 977.07 450MLN M 12/15 963.39 529MLN M 11/24 946.67 405MLN
- -----------------------------------------------------------------------------
</TABLE>
S&P 500 INDEX
RANGE 7/21/97 TO 1/21/98
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
DATE PRICE VOLUME DATE PRICE VOLUME DATE PRICE VOLUME
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
F 11/21 963.09 498MLN F 10/31 914.62 515MLN F 10/10 966.98 336MLN
T 11/20 953.98 478MLN T 10/30 903.68 605MLN T 10/ 9 970.62 393MLN
W 11/19 944.59 401MLN W 10/29 919.16 668MLN W 10/ 8 973.84 443MLN
T 11/18 938.23 420MLN T 10/28 921.85 1.04BLN T 10/ 7 983.12 451MLN
M 11/17 946.20 485MLN M 10/27 L876.98 608MLN M 10/ 6 972.69 393MLN
F 11/14 928.35 526MLN F 10/24 941.64 636MLN F 10/ 3 965.03 521MLN
T 11/13 916.66 557MLN T 10/23 950.69 556MLN T 10/ 2 960.46 427MLN
W 11/12 905.96 531MLN W 10/22 968.49 485MLN W 10/ 1 955.41 592MLN
T 11/11 923.78 390MLN T 10/21 972.28 490MLN T 9/30 947.28 430MLN
M 11/10 921.13 440MLN M 10/20 955.61 438MLN M 9/29 953.34 351MLN
F 11/ 7 927.51 500MLN F 10/17 944.16 606MLN F 9/26 945.22 391MLN
T 11/ 6 938.03 418MLN T 10/16 955.25 547MLN T 9/25 937.91 425MLN
W 11/ 5 942.76 456MLN W 10/15 965.72 509MLN W 9/24 944.48 502MLN
T 11/ 4 940.76 435MLN T 10/14 970.28 398MLN T 9/23 951.93 419MLN
M 11/ 3 938.99 456MLN M 10/13 968.10 258MLN M 9/22 955.43 387MLN
- -----------------------------------------------------------------------------
</TABLE>
S&P 500 INDEX
RANGE 7/21/97 TO 1/21/98
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
DATE PRICE VOLUME DATE PRICE VOLUME DATE PRICE VOLUME
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
F 9/19 950.51 521MLN F 8/29 899.47 312MLN F 8/ 8 933.54 491MLN
T 9/18 947.29 456MLN T 8/28 903.67 417MLN T 8/ 7 951.19 479MLN
W 9/17 943.00 485MLN W 8/27 913.70 416MLN W 8/ 6 960.32 479MLN
T 9/16 945.64 522MLN T 8/26 913.02 397MLN T 8/ 5 952.37 405MLN
M 9/15 919.77 371MLN M 8/25 920.16 322MLN M 8/ 4 950.30 362MLN
F 9/12 923.91 421MLN F 8/22 923.54 441MLN F 8/ 1 947.14 410MLN
T 9/11 912.59 481MLN T 8/21 925.05 459MLN T 7/31 954.29 440MLN
W 9/10 919.03 436MLN W 8/20 939.35 435MLN W 7/30 952.29 433MLN
T 9/ 9 933.62 427MLN T 8/19 926.01 478MLN T 7/29 942.29 426MLN
M 9/ 8 931.20 359MLN M 8/18 912.49 451MLN M 7/28 936.45 357MLN
F 9/ 5 929.05 420MLN F 8/15 900.81 434MLN F 7/25 938.79 419MLN
T 9/ 4 930.87 420MLN T 8/14 924.77 421MLN T 7/24 940.28 461MLN
W 9/ 3 927.86 437MLN W 8/13 922.02 521MLN W 7/23 936.56 494MLN
T 9/ 2 927.58 387MLN T 8/12 926.53 434MLN T 7/22 933.98 457MLN
M 9/ 1 M 8/11 937.00 440MLN M 7/21 912.94 390MLN
- -----------------------------------------------------------------------------
</TABLE>
S&P 500 INDEX
RANGE 7/21/97 TO 1/21/98
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
DATE PRICE VOLUME DATE PRICE VOLUME DATE PRICE VOLUME
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
F 7/18 915.30 513MLN F 6/27 887.30 350MLN F 6/ 6 858.01 371MLN
T 7/17 931.61 531MLN T 6/26 883.68 372MLN T 6/ 5 843.43 351MLN
W 7/16 936.59 W 6/25 888.99 458MLN W 6/ 4 L840.11 369MLN
T 7/15 925.76 494MLN T 6/24 896.34 429MLN T 6/ 3 845.48 419MLN
M 7/14 918.38 400MLN M 6/23 878.62 378MLN M 6/ 2 846.36 347MLN
F 7/11 916.68 410MLN F 6/20 898.70 523MLN
T 7/10 913.78 441MLN T 6/19 897.99 425MLN
W 7/ 9 907.54 491MLN W 6/18 889.06 390MLN
T 7/ 8 918.75 386MLN T 6/17 894.42 417MLN
M 7/ 7 912.20 393MLN M 6/16 893.90 323MLN
F 7/ 4 F 6/13 893.27 452MLN
T 7/ 3 916.92 288MLN T 6/12 883.48 463MLN
W 7/ 2 904.03 414MLN W 6/11 869.57 400MLN
T 7/ 1 891.03 411MLN T 6/10 865.27 422MLN
M 6/30 885.14 394MLN M 6/ 9 862.91 380MLN
- -----------------------------------------------------------------------------
</TABLE>
THE S&P 500 INDEX PERFORMANCE:
July 1 to December 31, 1997
Slower going at high altitudes After racking up huge gains in the first half of
1997, the S&P 500 lost some momentum in the second half, slowed by Asia's
economic crisis and uncertainty about the U.S. economy's direction.
As the new year began, the economy's direction was once again the focus of
attention. At the end of 1997, the United States was still enjoying one of its
longest periods of economic expansion ever, while inflation remained subdued. In
fact, the persistent decline of inflation over the past several years has led
some market participants to argue that deflation is under way. They pointed to
Asia's slowdown, which may have a deflationary impact worldwide, as another step
in this direction. At the same time, however, there has been some evidence that
wage pressures are increasing. And with the U.S. unemployment rate at an
extremely low 4.7%, some investors think that wage pressures will only grow in
coming quarters. These two conflicting views could fuel continued stock market
volatility in 1998, though we believe that this environment may create
opportunities for investors who concentrate on company fundamentals and remain
focused on the long term.
International Equities
The ripples that began in Asia at the very start of the second half turned into
a global tsunami before the year was out. On July 2, Thailand devalued its
currency (the baht) after having pegged it to a basket of hard currencies,
including the U.S. dollar, for several years. Several neighboring countries,
including Malaysia, Indonesia and the Philippines, soon followed suit with
competitive devaluations of their own. The currency declines were the
culmination of problems that had been brewing for some time. Because of the
currency peg, Southeast Asian corporations were able to amass heavy U.S.
dollar-denominated debts at low U.S. interest rates rather than pay the higher
domestic interest rates of their home currencies. A great deal of these
artificially cheap loans backed high-risk, financially unsound investments,
especially in the real-estate market. Their precarious situation collapsed with
the currency devaluations.
In the absence of decisive government actions to address these problems,
Southeast Asian stock markets plummeted in late summer and fell still farther in
October and November. North Asian markets were initially spared from the
sell-offs, but investors began to lose confidence in them too, when the extent
of Southeast Asia's crisis and its potential impact on north Asia became
clearer. As Asia's largest stock market outside of Japan, China/Hong Kong was
driven down sharply by investors seeking liquidity. Taiwan, Singapore and India
also felt repercussions, even though many observers believe
2
<PAGE>
------------------------------
The Montgomery Funds
------------------------------
Semiannual Report
------------------------------
D e c e m b e r 3 1, 1 9 9 7
that their economies do not have the same structural flaws plaguing South Korea
and Southeast Asian nations. In time this volatility spilled over into other
emerging markets. Investors became concerned that countries such as Brazil and
Russia would also devalue their currencies. By December, however, some of these
markets had begun to recover.
European bourses, like the United States, encountered volatility in the second
half but still turned in a solid performance for the year. Denmark, the
Netherlands, Germany, Switzerland and Italy posted especially strong gains in
1997, though the dollar's strength diminished U.S. investors' returns from these
markets. European shares continued to advance on positive news about the
European Economic & Monetary Union (EMU), which has prompted deregulation on the
macroeconomic level and restructuring on the corporate level throughout the
Continent. We believe that these trends may gain still more momentum in 1998.
U.S. Bonds
The two major trends that pressured global stock markets during the second half
of 1997--Asia's economic crisis and the potential for deflation--helped to
support the U.S. bond market. The fourth quarter was an especially strong period
for bonds; over that stretch, the Lehman Brothers Aggregate Bond Index
outperformed the bellwether S&P 500. Asia's turmoil sent investors from around
the world in search of defensive investments, particularly U.S. Treasuries. The
demand for Treasuries was so intense, in fact, that it drove the yield on the
bellwether 30-year bond to a historic low.
Not all bond sectors rallied as strongly, however. Investors who were concerned
about Asia's impact on U.S. companies sold off corporate bonds across the credit
spectrum. Gains in the municipal bond market were also a bit muted, reflecting
heavy new issuance in that sector.
In addition, interest rates did not decline evenly across the board. Investors
responded to the growing consensus about deflation by driving down medium- and
long-term rates. The Fed, in contrast, kept short-term rates steady. In the
raging debate about the economy's direction, this disparity--known as a
"flattening yield curve"--seemed to indicate a difference of opinion between
investors and the Federal Reserve. Given the possibility of slackening demand at
a time when global capacity has increased markedly, we believe that deflation is
a possibility. If it does occur, it may be favorable for fixed-income
investments--especially in relation to equities. Past episodes of deflation have
tended to support the bond market while putting some pressure on stocks. Only
time will tell if this scenario becomes reality.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
DATE YIELD DATE YIELD DATE YIELD
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
F 10/31 6.15 F 10/10 6.43 F 9/19 6.38
T 10/30 6.14 T 10/ 9 6.35 T 9/18 6.40
W 10/29 6.20 W 10/ 8 6.37 W 9/17 6.40
T 10/28 6.29 T 10/ 7 6.23 T 9/16 6.41
M 10/27 6.13 M 10/ 6 6.26 M 9/15 6.57
F 10/24 6.27 F 10/ 3 6.29 F 9/12 6.59
T 10/23 6.31 T 10/ 2 6.29 T 9/11 6.69
W 10/22 6.42 W 10/ 1 6.32 W 9/10 6.66
T 10/21 6.41 T 9/30 6.40 T 9/ 9 6.63
M 10/20 6.42 M 9/29 6.38 M 9/ 8 6.61
F 10/17 6.44 F 9/26 6.37 F 9/ 5 6.64
T 10/16 6.39 T 9/25 6.40 T 9/ 4 6.61
W 10/15 6.40 W 9/24 6.32 W 9/ 3 6.60
T 10/14 6.36 T 9/23 6.38 T 9/ 2 6.56
M 10/13 6.43 M 9/22 6.35 M 9/ 1 6.61
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
DATE YIELD DATE YIELD DATE YIELD
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
F 8/29 6.61 F 8/ 8 6.63 F 7/18 6.53
T 8/28 6.57 T 8/ 7 6.53 T 7/17 6.49
W 8/27 6.65 W 8/ 6 6.48 W 7/16 6.48
T 8/26 6.64 T 8/ 5 6.49 T 7/15 6.54
M 8/25 6.67 M 8/ 4 6.48 M 7/14 6.56
F 8/22 6.65 F 8/ 1 6.45 F 7/11 6.53
T 8/21 6.62 T 7/31 6.30 T 7/10 6.56
W 8/20 6.54 W 7/30 6.32 W 7/ 9 6.56
T 8/19 6.51 T 7/29 6.38 T 7/ 8 6.58
M 8/18 6.52 M 7/28 6.40 M 7/ 7 6.58
F 8/15 6.55 F 7/25 6.45 F 7/ 4 6.63
T 8/14 6.55 T 7/24 6.44 T 7/ 3 6.63
W 8/13 6.63 W 7/23 6.44 W 7/ 2 6.71
T 8/12 6.67 T 7/22 6.42 T 7/ 1 6.74
M 8/11 6.64 M 7/21 6.54 M 6/30 6.78
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
DATE YIELD DATE YIELD DATE YIELD
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
F F 12/12 5.92 F 11/21 6.03
T T 12/11 5.99 T 11/20 6.06
W 12/31 5.92 W 12/10 6.07 W 11/19 6.04
T 12/30 5.97 T 12/ 9 6.12 T 11/18 6.07
M 12/29 5.92 M 12/ 8 6.14 M 11/17 6.07
F 12/26 5.90 F 12/ 5 6.08 F 11/14 6.11
T 12/25 5.91 T 12/ 4 6.05 T 11/13 6.10
W 12/24 5.91 W 12/ 3 6.01 W 11/12 6.10
T 12/23 5.87 T 12/ 2 6.04 T 11/11 6.14
M 12/22 5.89 M 12/ 1 6.04 M 11/10 6.14
F 12/19 5.92 F 11/28 6.05 F 11/ 7 6.16
T 12/18 5.93 T 11/27 6.05 T 11/ 6 6.18
W 12/17 6.00 W 11/26 6.05 W 11/ 5 6.22
T 12/16 5.96 T 11/25 6.06 T 11/ 4 6.25
M 12/15 5.97 M 11/24 6.07 M 11/ 3 6.21
- -------------------------------------------------------------------------
</TABLE>
Downwardly Mobile After some volatility at the start of the second half, the
yield on the bellwether 30-year bond dropped precipitously in the late fall and
early winter. In fact, it briefly fell below 6% to a historic low, driven by
concerns about Asia's troubles and by the prospect of deflation.
3
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Performance Summary
- --------------------
December 31, 1997
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/97
<TABLE>
<CAPTION>
Fund name (Fund number) Inception date One year Three years Five years Since inception
Montgomery U.S. Equity Funds
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Growth Fund (284) 9/30/93 24.16% 22.66% -- 25.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund (645) 12/29/95 16.45% -- -- 26.36%
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Fund (276)* 7/13/90 23.86% 25.71% 17.33% 21.47%
- ------------------------------------------------------------------------------------------------------------------------------------
Micro Cap Fund (294)* 12/30/94 27.05% 24.87% -- 24.85%
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund (293) 9/30/94 26.10% 26.35% -- 23.74%
- ------------------------------------------------------------------------------------------------------------------------------------
Montgomery International and Global Equity Funds
====================================================================================================================================
International Growth Fund (296) 7/3/95 10.15% -- -- 17.18%
- ------------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund (283) 9/30/93 (0.78%) 8.42% -- 5.46%
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund (277) 3/1/92 (3.14%) (0.36%) 7.69% 6.61%
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Asia Fund (648) 9/30/96 (28.30%) -- -- (10.71%)
- ------------------------------------------------------------------------------------------------------------------------------------
Latin America Fund (652)+ 6/30/97 -- -- -- (6.46%)
- ------------------------------------------------------------------------------------------------------------------------------------
Global Opportunities Fund (285) 9/30/93 11.05% 16.10% -- 13.23%
- ------------------------------------------------------------------------------------------------------------------------------------
Global Communications Fund (280) 6/1/93 15.83% 13.51% -- 12.39%
- ------------------------------------------------------------------------------------------------------------------------------------
Montgomery Multi-Strategy Funds
====================================================================================================================================
Select 50 Fund (295) 10/2/95 29.27% -- -- 30.01%
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Asset Allocation Fund (291) 3/31/94 19.01% 21.22% -- 22.39%
- ------------------------------------------------------------------------------------------------------------------------------------
Global Asset Allocation Fund (649) 1/2/97 11.17% -- -- 11.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Montgomery U.S. Fixed-Income and Money Market Funds
====================================================================================================================================
Total Return Bond Fund (650)+ 6/30/97 -- -- -- 6.46%
- ------------------------------------------------------------------------------------------------------------------------------------
Short Duration Government Bond Fund (279) 12/18/92 6.97% 7.84% 6.51% 6.56%
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund (281) 7/1/93 7.50% 7.77% -- 5.67%
- ------------------------------------------------------------------------------------------------------------------------------------
As of 12/31/97 One-day yield Seven-day yield
- ------------------------------------------------------------------------------------------------------------------------------------
Government Reserve Fund (278) 9/14/92 5.70% 5.32%
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax-Free Money Fund (292) 9/30/94 3.77% 3.39%
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Tax-Free Money Fund (647) 7/15/96 3.88% 3.47%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Closed to new investors.
+Performance is cumulative and for a limited period of time.
Performance information is for Class R (Retail) shares only. The performance
figures provided do not reflect the effect of (i) any securities purchased or
sold by the Funds after December 31 but that were effective on December 31 or
(ii) any purchases or redemptions of Fund shares completed after December 31
that were effective on December 31. The performance figures for the Class R
shares shown above do not reflect the 0.25% Rule 12b-1 fees paid by the Class P
shares that would reduce performance. Past performance is no guarantee of future
results. Net asset value, investment return and principal value of an investment
will fluctuate, so an investor's shares, when redeemed, may be worth more or
less than their original cost.
Income from tax-free funds may be subject to the alternative minimum tax and/or
state and local taxes.
An investment in one of our money market funds is neither insured nor guaranteed
by the government. There can be no assurance that the money market funds will be
able to maintain a stable net asset value of $1 per share. Yield may fluctuate.
There are certain risks associated with investing in foreign markets, such as
currency fluctuations and political and economic instability. There are also
additional risks associated with investing in small-cap companies. Investors are
encouraged to read the prospectus carefully before investing.
4
<PAGE>
--------------------------------------
The Montgomery Funds
--------------------------------------
Growth Fund
--------------------------------------
P o r t f o l i o H i g h l i g h t s
(Unaudited)
I N V E S T M E N T R E V I E W
Q: How did the Fund perform for the six months and full year ended December 31,
1997?
A: The Montgomery Growth Fund was up 8.5% for the second half of 1997 and
finished the full year with a 24.2% return. Although this performance
represented strong absolute results, it returned less than the S&P 500. Our
focus on buying stocks of companies that we believe have the best forward
potential at the most reasonable prices has us positioned in companies that are
smaller, faster growing and less expensive than those in the S&P 500. Even so,
they went relatively unrewarded last year. So too did the shares of companies
sensitive to economic growth, which may represent the most overlooked and
underappreciated area of the current stock market.
Q: Before we get into specifics about the portfolio, what are your thoughts on
the U.S. and world economies going into 1998?
A: As we enter 1998 and in spite of the uncertainty created, we are still
waiting for the impact of Asia's financial crisis to show up in U.S. economic
data. Gross Domestic Product (GDP) for 1997 grew at a robust 3.9%, the fastest
growth since the current expansion began almost eight years ago. Inflation
continued to ease and the Federal Reserve has moved to a more balanced view of
economic risk. Most of the troubled countries in the Asia Pacific region have
begun to make progress toward restructuring their debts. It is likely, however,
that the economies in this region will be in retrenchment throughout 1998. There
is also evidence that the financial paralysis that has gripped Japan may be in
the process of important improvement with recent changes at the Ministry of
Finance. The behavior of China remains a wildcard, but most observers believe
that China will not devalue its currency this year. In the United States, the
financial markets are watching to determine if the growing lack of presidential
credibility will spill over into domestic and, more important, international
policy.
At this point, most economists expect 1998 U.S. GDP growth to be in the 2.5 to
3.0% range, coupled with inflation expectations (as measured by the Consumer
Price Index) of less than 2%. World growth expectations remain optimistic, with
any slowdown in the Asia Pacific region being offset by stronger growth out of
Europe.
Q: How do these economic growth estimates affect S&P 500 earnings expectations
and your outlook for the stock market this year?
A: Most top-down forecasters are looking for 1998 to be the seventh consecutive
year of S&P 500 earnings growth. Expectations are for growth of 6% in earnings
this year, a slowdown from the 10% gains in 1997. The stock market is already
selling at a historically high price/earnings multiple of almost 21 times those
expected earnings. Also, operating margins are nearing peak of cycle levels,
thus making it more difficult for companies to leverage revenue growth into
faster earnings growth. We believe, therefore, that 1998 will be a more
difficult year in terms of stock market returns, especially when compared with
the robust gains of the past three years.
=============================================
P O R T F O L I O M A N A G E M E N T
---------------------------------------------
Roger W. Honour......Senior Portfolio Manager
Andrew G. Pratt, CFA........Portfolio Manager
Kathryn M. Peters...........Portfolio Manager
=============================================
F U N D P E R F O R M A N C E
---------------------------------------------
Average annual total returns
for the period ended 12/31/97
---------------------------------------------
Montgomery Growth Fund
Since inception (9/30/93)..............25.67%
One year...............................24.16%
Three years............................22.66%
---------------------------------------------
S&P 500 Index
Since 9/30/93..........................22.11%
One year...............................33.35%
Three years............................31.13%
---------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTOGOMERY GROWTH(R)
Initial Investment: $10,000 Period: 09/30/93 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/93 12.00 $10,000 $ 0 $10,000
09/93 12.00 $10,000 $ 0 $10,000
10/93 12.48 $10,400 $ 0 $10,400
11/93 13.18 $10,983 $ 0 $10,983
12/93 14.12 $11,767 $ 67 $11,834
01/94 14.90 $12,417 $ 71 $12,488
02/94 15.09 $12,575 $ 72 $12,647
03/94 14.95 $12,458 $ 72 $12,530
04/94 15.49 $12,908 $ 74 $12,982
05/94 15.65 $13,042 $ 74 $13,116
06/94 15.27 $12,725 $ 73 $12,798
07/94 15.82 $13,183 $ 76 $13,259
08/94 16.62 $13,850 $ 79 $13,929
09/94 16.52 $13,767 $ 79 $13,846
10/94 17.12 $14,267 $ 81 $14,348
11/94 16.48 $13,733 $ 186 $13,919
12/94 16.93 $14,108 $ 201 $14,309
01/95 16.56 $13,800 $ 196 $13,996
02/95 17.20 $14,333 $ 204 $14,537
03/95 17.90 $14,917 $ 211 $15,128
04/95 18.02 $15,017 $ 213 $15,230
05/95 18.42 $15,350 $ 218 $15,568
06/95 19.16 $15,967 $ 226 $16,193
07/95 19.96 $16,633 $ 236 $16,869
08/95 20.02 $16,683 $ 237 $16,920
09/95 20.54 $17,117 $ 243 $17,360
10/95 20.21 $16,842 $ 239 $17,081
11/95 19.17 $15,975 $1,689 $17,664
12/95 19.20 $16,000 $1,692 $17,692
01/96 19.46 $16,217 $1,715 $17,932
02/96 20.23 $16,858 $1,783 $18,641
03/96 20.79 $17,325 $1,832 $19,157
04/96 21.60 $18,000 $1,904 $19,904
05/96 22.43 $18,692 $1,976 $20,668
06/96 21.94 $18,283 $1,934 $20,217
07/96 20.94 $17,450 $1,845 $19,295
08/96 21.75 $18,125 $1,917 $20,042
09/96 22.37 $18,642 $1,971 $20,613
10/96 20.51 $17,092 $3,885 $20,977
11/96 21.39 $17,825 $4,053 $21,878
12/96 20.15 $16,792 $4,475 $21,267
01/97 20.70 $17,250 $4,597 $21,847
02/97 20.50 $17,083 $4,553 $21,636
03/97 19.94 $16,617 $4,428 $21,045
04/97 20.77 $17,308 $4,613 $21,921
05/97 22.46 $18,717 $4,987 $23,704
06/97 23.07 $19,225 $5,123 $24,348
07/97 25.50 $21,250 $5,663 $26,913
08/97 25.19 $20,992 $5,594 $26,586
09/97 26.55 $22,125 $5,896 $28,021
10/97 25.34 $21,117 $5,627 $26,744
11/97 25.38 $21,150 $5,636 $26,786
12/97 21.89 $18,242 $8,163 $26,405
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
GROWTH FUND GROWTH FUND
LIPPER
GROWTH S&P 5000
AVE AVE
9/93-12/97 9/93-12/97
DATE RETURN VALUE DATE RETURN VALUE
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sep-93 $10,000 Sep-93 $10,000
Oct-93 $10,138 Oct-93 $10.207
Nov-93 $9,958 Nov-93 $10,109
Dec-93 $10,239 Dec-93 $10,232
Jan-94 $10,568 Jan-94 $10,579
Feb-94 $10,398 Feb-94 $10,292
Mar-94 $9,912 Mar-94 $9,844
Apr-94 $9,952 Apr-94 $9,970
May-94 $10,007 Jan-94 $10,133
Jun-94 $9,673 Jun-94 $9,885
Jul-94 $9,928 Jul-94 $10,210
Aug-94 $10,392 Aug-94 $10,627
Sep-94 $10,186 Sep-94 $10,368
Oct-94 $10,351 Oct-94 $10,600
Nov-94 $9,965 Nov-94 $10,215
Dec-94 $10,058 Dec-94 $10,366
Jan-95 $10,135 Jan-95 $10,635
Feb-95 $10,528 Feb-95 $11,049
Mar-95 $10,824 Mar-95 $11,374
Apr-95 $11,064 Apr-95 $11,709
May-95 $11,408 Jan-95 $12,176
Jun-95 $11,884 Jun-95 $12,459
Jul-95 $12,444 Jul-95 $12,872
Aug-95 $12,539 Aug-95 $12,904
Sep-95 $12,915 Sep-95 $13,448
Oct-95 $12,738 Oct-95 $13,400
Nov-95 $13,188 Nov-95 $13,987
Dec-95 $13,239 Dec-95 $14,257
Jan-96 $13,546 Jan-96 $14,742
Feb-96 $13,846 Feb-96 $14,879
Mar-96 $13,958 Mar-96 $15,022
Apr-96 $14,378 Apr-96 $15,243
May-96 $14,739 Jan-96 $15,636
Jun-96 $14,553 Jun-96 $15,693
Jul-96 $13,717 Jul-96 $15,002
Aug-96 $14,175 Aug-96 $15,319
Sep-96 $14,980 Sep-96 $16,181
Oct-96 $15,129 Oct-96 $16,627
Nov-96 $16,072 Nov-96 $17,882
Dec-96 $15,827 Dec-96 $17,528
Jan-97 $16,659 Jan-97 $18,629
Feb-97 $16,472 Feb-97 $18,769
Mar-97 $15,737 Mar-97 $17,999
Apr-97 $16,365 Apr-97 $19,073
May-97 $17,524 Jan-97 $20,239
Jun-97 $18,206 Jun-97 $21,138
Jul-97 $19,728 Jul-97 $22,820
Aug-97 $19,045 Aug-97 $21,5?2
Sep-97 $20,103 Sep-97 $22,722
Oct-97 $19,345 Oct-97 $21,964
Nov-97 $19,705 Nov-97 $22,979
Dec-97 $19,929 Dec-97 $23,374
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
/1/ The Standard & Poor's 500 Index is composed of 500 widely held common stocks
listed on the NYSE, AMEX and OTC markets.
/2/ The Lipper Growth Funds Average universe consists of 379 funds.
5
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Growth Fund
- --------------------
Portfolio Highlights
=====================================
TOP TEN HOLDINGS
-------------------------------------
(as a percentage of total net assets)
Golden West Financial Corporation.....................4.1%
Nordstrom, Inc........................................4.0%
Avid Technology Inc...................................3.9%
Canadian National Railway Company.....................3.0%
Masco Corporation.....................................2.6%
Interstate Hotels Company.............................2.6%
International Paper Company...........................2.5%
Sybase Inc............................................2.3%
Ericsson (L.M.) Telephone Company, Class B, ADR.......2.3%
Amerada Hess Corporation..............................2.1%
=====================================
TOP FIVE INDUSTRIES
-------------------------------------
(as a percentage of total net assets)
Software Systems......................................6.9%
Retail Trade..........................................6.5%
Pulp and Paper........................................6.5%
Banks/Savings and Loans...............................6.2%
Telecommunications Equipment..........................5.5%
Q: What effect does that have on how the Montgomery Growth Fund is positioned
for the coming year?
A: As discussed above, if you owned "the market" as represented by the S&P 500,
you would be paying about 21 times expected earnings to capture only 6% expected
growth. By contrast, the Montgomery Growth Fund is currently paying 18 times
expected 1998 earnings to capture expected growth of 24%. In other words, we are
potentially buying four times the growth of the overall stock market but at a
more reasonable valuation. To do this we are buying some smaller companies that
we believe have much better profiles for forward growth, yet trade at lower
multiples of their growth rates. Although expected growth rates do not translate
directly into investment returns, we believe that they can serve as an important
indicator of investment potential. Also, as mentioned earlier, we believe that
some of the cycle-sensitive areas of the market represent good value, and many
of these companies are undergoing substantial restructuring and efficiency
realignment programs, with the expected result of improved shareholder returns.
Q: Would that explain the portfolio's overweighting in the pulp and paper
products sector?
A: Yes. This is an example of a group that is both extremely inexpensive by
today's stock market valuations and is, at the same time, generally undergoing
significant cost containment and business rationalization moves to improve
future profitability. Non-core and non-productive assets are being sold off,
repositioned or shut down. Capital structures are being made more efficient, new
revenue growth objectives are being initiated, asset utilization is being
improved and management's and directors' incentives are being aligned with those
of shareholders through required stock ownership. Plant capacity additions in
the next two years will be well below recent memory and well below expected
demand growth. At the same time, the stocks recently hit 30-year relative price
lows. We believe that once the uncertainties surrounding the impact of the
slowdown in Asian economies subsides, the group offers good return potential.
The group is underowned and out of favor on Wall Street despite what appears to
be solid efforts by management toward long-term fundamental change. The
companies we own in this group include Champion International, Chesapeake
Corporation, International Paper and Boise Cascade.
Q: For newer shareholders would you briefly discuss your investment process?
A: We use our own quantitative screening techniques as a tool to identify
positive, long-term fundamental changes in a company's or industry's business
and its expected earnings. We then conduct fundamental analysis to determine the
validity and sustainability of the change. Finally, we apply our valuation
criteria to determine the future potential for the share price. Our goal is to
build portfolios of good companies that meet our fundamental criteria and where
the valuation allows our shareholders to benefit from future appreciation.
6
The accompanying notes are an integral part of these financial statements.
<PAGE>
----------------------
The Montgomery Funds
----------------------
Growth Fund
----------------------
I n v e s t m e n t s
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
COMMON STOCKS -- 79.8%
Shares Value (Note 1)
Air Freight Courier -- 1.7%
375,000 Federal Express Corporation.................$ 22,898,438
Apparel and Textiles -- 0.8%
250,000 VF Corporation.............................. 11,500,000
Auto/Auto Parts -- 3.1%
475,000 General Motors Corporation.................. 28,796,875
245,900 PACCAR Inc.................................. 12,925,118
----------
41,721,993
Banks/Savings and Loans -- 6.2%
202,400 BankAmerica Corporation..................... 14,775,200
104,750 Citicorp.................................... 13,244,328
575,000 Golden West Financial Corporation........... 56,242,188
----------
84,261,716
Building Materials -- 3.2%
700,000 Masco Corporation**......................... 35,612,500
500,000 RPM of Ohio, Inc............................ 7,718,750
----------
43,331,250
Business Services -- 1.7%
300,000 AccuStaff Inc.+............................. 6,900,000
200,000 Computer Sciences Corporation+.............. 16,512,500
----------
23,412,500
Chemicals -- 2.2%
180,000 Dow Chemical Company........................ 18,270,000
200,000 Eastman Chemical Company.................... 11,912,500
----------
30,182,500
Computers and Office Equipment -- 1.3%
1,000,000 Data General Corporation+................... 17,437,500
Conglomerates -- 2.6%
500,000 Canadian Pacific, Ltd....................... 13,625,000
500,000 Tyco International Ltd...................... 22,531,250
----------
36,156,250
Consumer Services -- 1.1%
450,000 Cendant Corporation+........................ 15,468,750
Diversified Financial Services -- 1.4%
500,000 FirstPlus Financial Group, Inc.**+.......... 19,156,250
Electrical Equipment -- 1.0%
88,000 Matsushita Electric Industrial Company,
Ltd., ADR................................... 13,376,000
Electronics -- 1.5%
475,000 Raychem Corporation......................... 20,454,687
Food and Beverage -- 1.5%
1,500,000 Fleming Companies, Inc...................... 20,156,250
Health Care -- 0.4%
116,600 HealthCare COMPARE Corporation+............. 5,961,175
Home Appliance -- 1.0%
250,000 Whirlpool Corporation....................... 13,750,000
Household Products -- 1.1%
251,200 Unilever N.V., ADR.......................... 15,684,300
Lodging -- 2.6%
1,000,000 Interstate Hotels Company+.................. 35,062,500
Metals and Mining -- 1.6%
200,000 Aluminum Company of America................. 14,075,000
540,000 Freeport-McMoRan Copper & Gold, Series B.... 8,505,000
----------
22,580,000
Newspapers/Publishing -- 3.2%
401,000 Donnelley (R.R.) & Sons Company............. 14,937,250
250,000 Time Warner, Inc............................ 15,500,000
525,000 World Color Press Inc.+..................... 13,945,313
----------
44,382,563
Oil -- 4.5%
525,000 Amerada Hess Corporation.................... 28,809,375
435,000 Belco Oil & Gas Corporation+................ 8,183,437
1,000,000 Union Pacific Resources Group, Inc.......... 24,250,000
----------
61,242,812
Oilfield Equipment -- 2.6%
300,000 Schlumberger Ltd............................ 24,150,000
200,000 Tidewater Inc............................... 11,025,000
----------
35,175,000
Pipelines -- 0.5%
160,000 Enron Corporation........................... 6,650,000
Pulp and Paper -- 6.5%
950,000 Boise Cascade Corporation................... 28,737,500
286,000 Champion International Corporation.......... 12,959,375
350,000 Chesapeake Corporation...................... 12,009,375
800,000 International Paper Company................. 34,500,000
----------
88,206,250
Railroad -- 4.3%
870,000 Canadian National Railway Company........... 41,107,500
275,000 Union Pacific Corporation................... 17,170,313
----------
58,277,813
Real-Estate Investment Trust -- 1.8%
600,000 Meditrust Companies......................... 22,050,000
50,000 Starwood Lodging Trust**.................... 2,893,750
----------
24,943,750
Retail Trade -- 6.5%
313,800 Dayton-Hudson Corporation................... 21,181,500
900,000 Nordstrom, Inc.............................. 54,225,000
375,000 TJX Companies, Inc.......................... 12,890,625
----------
88,297,125
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
Growth Funds
- ----------------------
I n v e s t m e n t s
COMMON STOCKS -- continued
Shares Value (Note 1)
Semiconductors -- 1.2%
250,000 Analog Devices Inc.**+.....................$ 6,921,875
208,600 Texas Instruments, Inc..................... 9,387,000
----------
16,308,875
Software Systems -- 6.9%
2,000,000 Avid Technology Inc.+...................... 53,625,000
798,000 Indus International, Inc................... 5,685,750
149,400 Structural Dynamics Research+.............. 3,380,175
2,400,000 Sybase Inc.+............................... 32,025,000
----------
94,715,925
Telecommunications -- 0.3%
104,000 China Telecom (Hong Kong) Ltd.,............
Sponsored ADR(**)+......................... 3,490,500
Telecommunications Equipment -- 5.5%
925,000 Aspect Telecommunications Corporation+..... 19,425,000
726,300 Boston Technology, Inc.+................... 18,248,288
850,000 Ericsson (L.M.) Telephone Company,
Class B, ADR............................... 31,742,187
150,000 Newbridge Networks Corporation+............ 5,231,250
----------
74,646,725
TOTAL COMMON STOCKS
(Cost $853,612,759)........................................ 1,088,889,397
-------------
REPURCHASE AGREEMENTS -- 21.0%
Principal Amount Value (Note 1)
$94,000,000 Agreement with Bear Stearns, Tri-Party,
6.850% dated 12/31/97, to be repurchased
at $94,035,772 on 01/02/98, collateralized
by $97,915,217 market value of U.S.
government securities, having various
maturities and various interest rates..........$ 94,000,000
76,571,000 Agreement with BZW Securities, Tri-Party,
6.900% dated 12/31/97, to be repurchased
at $76,600,352 on 01/02/98, collateralized
by $78,102,420 market value of U.S.
government securities, having various
maturities and various interest rates.......... 76,571,000
66,013,000 Agreement with Nomura Securities, Tri-Party,
6.900% dated 12/31/97, to be repurchased
at $66,038,305 on 01/02/98, collateralized
by $67,333,260 market value of U.S.
government securities, having various
maturities and various interest rates.......... 66,013,000
51,000,000 Agreement with United Bank of Switzerland,
Tri-Party, 6.900% dated 12/31/97, to be
repurchased at $51,019,550 on 01/02/98,
collateralized by $52,020,824 market value
of U.S. government securities, having
various maturities and various interest
rates.......................................... 51,000,000
TOTAL REPURCHASE AGREEMENTS
(Cost $287,584,000).............................................. 287,584,000
-----------
TOTAL INVESTMENTS -- 100.8%
(Cost $1,141,196,759*)........................................... 1,376,473,397
OTHER ASSETS AND LIABILITIES -- (0.8%)
(Net)............................................................ (11,317,866)
NET ASSETS -- 100.0%.............................................$1,365,155,531
=============
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1997, which have an aggregate market
value of $32,232,062, represent 2.4% of the total net assets of the Fund
(see note 5 to Financial Statements).
+ Non-income producing security.
Abbreviation:
ADR American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
--------------------
The Montgomery Funds
--------------------
Small Cap
Opportunities Fund
--------------------
Portfolio Highlights
(Unaudited)
I N V E S T M E N T R E V I E W
Q: How did the Fund perform for the six months and full year ended December 31,
1997?
A: The Montgomery Small Cap Opportunities Fund was up 9.4% for the second half
of the year and 16.5% for the full year 1997. During the same time periods, the
Russell 2000 Growth Index returned 7.3% and 12.9%, and the Russell 2000 Index
returned 11% and 22.4%. The Fund was able to outperform the more growth-oriented
index of small-cap stocks in 1997, while underperforming the broader index.
Q: Small-cap stocks continued to underperform large-cap companies in 1997. Is
this likely to continue?
A: It's true that large-cap companies as represented by the S&P 500 are
outperforming the Russell 2000 Index of small-cap stocks. The market has chosen
to award very high valuations to large-cap companies relative to their growth
potential, while smaller companies with higher earnings-growth potential are
ignored. Our process attempts to identify high-growth companies with reasonable
valuations. Right now, we believe that smaller companies offer superior value
relative to their larger-cap counterparts when we compare valuation to potential
growth. Our hope is that this relationship will be recognized in the
marketplace.
Q: Will the economic crisis in Asia be a relative positive for U.S. small-cap
stocks, since most of their business is done in this country?
A: The majority of our companies' earnings are generated in the United States.
Many small-cap companies do look to international markets for growth, however,
and so they are not fully insulated from the crisis there. The nature of the
impact of lower demand by that region is only starting to be felt. For instance,
the semiconductor capital equipment companies have already been hurt because of
the falloff in demand by Asian producers. We will certainly monitor the
situation closely as it unfolds. At this point we feel that the effects will be
temporary in nature, yet there is the potential for a more serious situation
should Japan's and China's fundamentals deteriorate further.
Q: Can you comment on a specific stock that performed well in the second half of
1997 and why?
A: In our previous report, we mentioned SBS Technologies, Inc., as a poor
performer in the first half of 1997. SBS manufactures and markets embedded
computer components for the communications, medical device, military/aerospace
and transportation markets. The company is growing through acquisitions, new
product development, penetrating existing accounts and realizing internal
efficiencies. It reported a slightly disappointing March quarter and saw its
stock price fall sharply as a result. This proved to be an opportunity, as the
company's outlook did not change as much as its stock price. SBS has since
rebounded and become one of the better performers in the Fund.
====================
PORTFOLIO MANAGEMENT
--------------------
Roger W. Honour.........................................Senior Portfolio Manager
Andrew G. Pratt, CFA...........................................Portfolio Manager
Kathryn M. Peters..............................................Portfolio Manager
=============================
FUND PERFORMANCE
-----------------------------
Average annual total returns
for the period ended 12/31/97
-----------------------------
Montgomery
Small Cap Opportunities Fund
Since inception (12/29/95)............................................... 26.36%
One year................................................................. 16.45%
-----------------------------
Russell 2000 Index
Since 12/29/95........................................................... 19.39%
One year................................................................. 22.36%
-----------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY SMALL CAP OPP(R)
Initial Investment: $10,000 Period: 12/29/95 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/29/95 12.00 $10,000 $0 $10,000
12/95 12.00 $10,000 $0 $10,000
01/96 13.19 $10,992 $0 $10,992
02/96 14.03 $11,692 $0 $11,692
03/96 14.75 $12,292 $0 $12,292
04/96 15.72 $13,100 $0 $13,100
05/96 16.47 $13,725 $0 $13,725
06/96 15.80 $13,167 $0 $13,167
07/96 14.35 $11,958 $0 $11,958
08/96 15.30 $12,750 $0 $12,750
09/96 16.41 $13,675 $0 $13,675
10/96 15.13 $12,608 $0 $12,608
11/96 15.41 $12,842 $0 $12,842
12/96 16.47 $13,725 $3 $13,728
01/97 16.94 $14,117 $3 $14,120
02/97 16.08 $13,400 $3 $13,403
03/97 14.77 $12,308 $3 $12,311
04/97 14.56 $12,133 $3 $12,136
05/97 16.56 $13,800 $3 $13,803
06/97 17.53 $14,608 $4 $14,612
07/97 18.43 $15,358 $4 $15,362
08/97 18.56 $15,467 $3 $15,470
09/97 20.27 $16,892 $3 $16,895
10/97 19.34 $16,117 $3 $16,120
11/97 19.00 $15,833 $4 $15,837
12/97 18.74 $15,617 $370 $15,987
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP OPP SMALL CAP OPPORTUNITIES
LIPPER
SM CO GROWTH RUSSELL 2000
AVE AVE
12/95-12/97 12/95-12/97
DATE RETURN VALUE DATE RETURN VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dec-95 $10,000 Dec-95 $10,000
Jan-96 $ 9,960 Jan-96 $ 9,989
Feb-96 $10,381 Feb-96 $10,301
Mar-96 $10,662 Mar-96 $10,510
Apr-96 $11,477 Apr-96 $11,072
May-96 $11,960 May-96 $11,509
Jun-96 $11,484 Jun-96 $11,036
Jul-96 $10,497 Jul-96 $10,072
Aug-96 $11,129 Aug-96 $10,657
Sep-96 $11,702 Sep-96 $11,073
Oct-96 $11,481 Oct-96 $10,903
Nov-96 $11,831 Nov-96 $11,352
Dec-96 $12,000 Dec-96 $11,650
Jan-97 $12,295 Jan-97 $11,882
Feb-97 $11,791 Feb-97 $11,594
Mar-97 $11,203 Mar-97 $11,047
Apr-97 $11,131 Apr-97 $11,078
May-97 $12,437 May-97 $12,311
Jun-97 $13,086 Jun-97 $12,838
Jul-97 $13,917 Jul-97 $13,435
Aug-97 $14,160 Aug-97 $13,743
Sep-97 $15,224 Sep-97 $14,749
Oct-97 $14,556 Oct-97 $14,101
Nov-97 $14,336 Nov-97 $14,010
Dec-97 $14,440 Dec-97 $14,255
</TABLE>
/1/ The Russell 2000 Index is a capitalization-weighted total return index that
comprises 2,000 of the smallest-capitalized U.S. domiciled companies whose
common stock is traded in the U.S. on NYSE, AMEX and NASDAQ.
/2/ The Lipper Small Cap Funds Average universe consists of 362 funds.
9
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Small Cap
Opportunities Fund
- --------------------
Investments
=====================================
TOP TEN HOLDINGS
-------------------------------------
(as a percentage of total net assets)
Cooper Companies, Inc. ................................................ 3.5%
Jones Medical Industries, Inc. ........................................ 2.4%
ESC Medical Systems, Ltd. ............................................. 2.4%
SBS Technologies, Inc. ................................................ 2.3%
Acxiom Corporation..................................................... 2.0%
Action Performance Companies, Inc. .................................... 2.0%
Carpenter Technology Corporation ...................................... 2.0%
Waters Corporation..................................................... 1.9%
Prime Hospitality Corporation.......................................... 1.9%
Structural Dynamics Research Corporation............................... 1.9%
=====================================
TOP FIVE INDUSTRIES
-------------------------------------
(as a percentage of total net assets)
Business Services......................................................15.1%
Medical Products.......................................................11.1%
Software Systems....................................................... 8.6%
Oilfield Equipment..................................................... 5.3%
Retail Trade........................................................... 4.5%
Q: Were there any disappointments during the same period?
A: Actel Corporation had some disappointing developments in the third calendar
quarter of 1997 that caused us to sell the stock. The company makes specialized
semiconductor devices used in the design of products for the telecommunications,
industrial, computer and military/aerospace markets. We were closely monitoring
the company after some disappointing results early in the year. At that point we
felt the market had overreacted and that the valuation looked compelling. The
company's problems worsened in the third quarter, however, as a problem was
discovered in an important new product for the military/aerospace market. We
decided to sell the stock because of the magnitude of the problem and the
difficulty in estimating the time it would take to fix it. Actel is a good
company, and we may revisit the story at some point.
Q: What areas of the market look exciting for 1998?
A: Companies that improve the productivity of their customers are always
attractive. We have several companies in the portfolio that do just that. Jack
Henry and Associates sells software and services to small to medium-sized banks
to help automate certain critical functions. Catalina Marketing Corporation
works with consumer products companies to help them market their products more
effectively at grocery stores. The company uses a very unique coupon-issuing
system at the checkout counter based on consumer purchasing behavior. Boole and
Babbage Inc. sells software programs to help large computer networks operate
more reliably. All of these companies represent significant investments in the
Small Cap Opportunities Fund.
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
COMMON STOCKS -- 95.4%
Shares Value (Note 1)
Apparel and Textiles -- 4.0%
69,000 Jones Apparel Group, Inc.+ .............. $ 2,967,000
98,000 St. John Knits, Inc. .................... 3,920,000
82,000 The Men's Wearhouse Inc.+ ............... 2,870,000
---------
9,757,000
Banks -- 1.5%
102,550 Commercial Federal Corporation .......... 3,646,934
Broadcasting/Advertising -- 1.6%
86,500 Catalina Marketing Corporation+ ......... 4,016,844
Business Services -- 15.1%
260,000 Acxiom Corporation+ ..................... 4,972,500
174,300 Alternative Resources Corporation+....... 4,030,687
77,050 Analysts International Corporation+...... 2,677,487
80,800 Applied Graphics Technologies, Inc. ..... 4,282,400
225,200 BA Merchant Services, Inc.+ ............. 3,997,300
100,000 Caribiner International Inc.+ ........... 4,450,000
114,000 Computer Task Group, Inc.+ .............. 4,054,125
43,400 Fair Isaac & Company, Inc. .............. 1,445,763
110,100 Interim Services, Inc.+ ................. 2,841,956
295,000 PMT Services, Inc.+ ..................... 4,120,781
---------
36,872,999
Chemicals -- 1.5%
148,800 Ferro Corporation+ ...................... 3,617,700
Computers and Office Equipment -- 1.3%
163,250 U.S. Office Products Company+ ........... 3,183,375
Consumer Services -- 3.1%
110,200 Budget Group, Inc.+ ..................... 3,808,787
120,000 Education Management Corporation+........ 3,757,500
---------
7,566,287
Containers and Packaging -- 1.1%
117,400 Ivex Packaging Corporation+ ............. 2,817,600
Diversified Financial Services -- 0.9%
114,000 Imperial Credit Industries+ ............. 2,358,375
10
The accompanying notes are an integral part of these financial statements.
<PAGE>
--------------------
The Montgomery Funds
--------------------
Small Cap
Opportunities Fund
--------------------
Investments
COMMON STOCKS - continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C>
Electrical Equipment - 1.3%
132,100 MRV Communications Inc. ................. $ 3,145,631
Electronics - 2.3%
206,500 SBS Technologies, Inc.+ ................. 5,504,516
Food and Beverages - 1.7%
82,900 Whole Foods Market, Inc.+ ................ 4,253,806
Health Care - 4.2%
152,300 FPA Medical Management, Inc.**+ ......... 2,855,625
226,000 Orthodontic Centers of America, Inc.**+ . 3,757,250
105,000 Sierra Health Services+ ................. 3,530,625
---------
10,143,500
Heavy Construction - 1.3%
145,000 Kaufman & Broad Home Corporation ........ 3,253,438
Insurance - 1.8%
101,500 Berkley (W.R.) Corporation .............. 4,510,406
Lodging - 4.2%
103,200 Interstate Hotels Company+ .............. 3,618,450
125,000 Primadonna Resorts, Inc.+ ............... 2,089,844
226,000 Prime Hospitality Corporation**+ ........ 4,604,750
---------
10,313,044
Medical Products - 11.1%
166,000 Ballard Medical Products ................ 4,025,500
206,400 Cooper Companies, Inc.+ ................. 8,436,600
150,600 ESC Medical Systems, Ltd.**+ ............ 5,826,338
128,000 Sola International, Inc.+ ............... 4,160,000
122,800 Waters Corporation+ ..................... 4,620,350
---------
27,068,788
Metals and Mining - 1.3%
105,000 Titanium Metals Corporation**+ .......... 3,058,125
Newspapers/Publishing - 2.2%
115,000 Big Flower Holdings, Inc.**+ ............ 2,774,375
100,000 World Color Press Inc.+ ................. 2,656,250
---------
5,430,625
Oilfield Equipment - 5.3%
113,950 Halter Marine Group, Inc.+ .............. 3,290,306
137,600 Hvide Marine, Inc., Class A**+ .......... 3,508,800
176,700 Marine Drilling Companies, Inc.+ ........ 3,677,569
97,000 Pride International, Inc.+ .............. 2,449,250
---------
12,925,925
Pharmacy/Drugs - 2.4%
152,500 Jones Medical Industries, Inc.**......... 5,852,188
Pulp and Paper - 1.2%
84,000 Caraustar Industries, Inc. ............... 2,898,000
Restaurants - 1.2%
220,000 Apple South, Inc. ....................... 2,894,375
Retail Trade - 4.5%
119,000 Borders Group Inc.+ ..................... 3,726,187
176,000 Eagle Hardware & Garden, Inc.+ .......... 3,421,000
134,000 Proffitt's, Inc.+ ....................... 3,810,625
---------
10,957,812
Software Systems - 8.6%
136,300 Boole and Babbage, Inc.+ ................ 4,089,000
150,000 Jack Henry & Associates ................. 4,143,750
78,100 Kronos, Inc.+ ........................... 2,406,456
106,650 National Instruments Corporation+........ 3,186,169
201,900 Structural Dynamics
Research Corporation+ ................... 4,567,988
71,200 Synopsis, Inc.+ ......................... 2,540,950
---------
20,934,313
Steel - 2.0%
99,500 Carpenter Technology Corporation ........ 4,782,219
Telecommunications Equipment - 3.2%
100,000 Comverse Technology Inc.+ ............... 3,887,500
225,000 P-Com, Inc.+ ............................ 3,937,500
---------
7,825,000
Tobacco - 1.9%
81,000 Consolidated Cigar Holdings, Inc.**+..... 2,232,562
109,000 General Cigar Holdings, Inc.**+ ......... 2,357,125
---------
4,589,687
Toys - 2.0%
128,700 Action Performance Companies, Inc.+ ..... 4,898,644
Trucking - 1.6%
124,000 U.S. Freightways Corporation ............ 4,037,750
TOTAL COMMON STOCKS
(Cost $194,802,569) .................................... 233,114,906
-----------
REPURCHASE AGREEMENTS - 4.3%
Principal Amount
$5,218,000 Agreement with Bear Stearns, Tri-Party,
6.850% dated 12/31/97, to be repurchased
at $5,219,986 on 01/02/98, collateralized
by $5,435,336 market value of U.S.
government securities, having various
maturities and various interest rates..... 5,218,000
5,218,000 Agreement with United Bank of Switzerland,
Tri-Party, 6.900% dated 12/31/97, to be
repurchased at $5,220,000 on 01/02/98,
collateralized by $5,322,444 market value
of U.S. government securities, having various
maturities and various interest rates..... 5,218,000
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $10,436,000)...................................... 10,436,000
----------
</TABLE>
11
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Small Cap
Opportunities Fund
- --------------------
Investments
TOTAL INVESTMENTS - 99.7%
<TABLE>
<CAPTION>
Value (Note 1)
<S> <C>
(Cost $205,238,569*)........................................... $ 243,550,906
OTHER ASSETS AND LIABILITIES - 0.3%
(Net).......................................................... 617,522
-------
NET ASSETS - 100.0%............................................ $ 244,168,428
===========
</TABLE>
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1997, which have an aggregate market
value of $28,174,111, represent 11.5% of the total net assets of the Fund
(see note 5 to Financial Statements).
+ Non-income producting security.
12
The accompanying notes are an integral part of these financial statements.
<PAGE>
--------------------
The Montgomery Funds
--------------------
Small Cap Fund
--------------------
P o r t f o l i o
H i g h l i g h t s
(Unaudited)
I N V E S T M E N T R E V I E W
Q: How did the Fund perform over the second half of 1997?
A: The Fund outperformed its benchmark, the Russell 2000 Index, by nearly six
percentage points over the second half of 1997. For the year, the Fund gained
23.9%, edging out the index over that period too.
Q: The fourth quarter was a difficult stretch for many small-cap growth
investors. How did the Small Cap Fund fare over that period?
A: We kept the Fund's losses to less than half a percentage point during the
fourth quarter. The Russell 2000, in comparison, dropped by nearly three and a
half percentage points.
Q: What factors helped the Fund outperform its benchmark?
A: Despite the difficult environment, a variety of our holdings turned in solid
returns over the second half, and, for that matter, in 1997 as a whole. Nearly
nine times out of 10 over the past year, our companies reported quarterly
earnings that met or exceeded our expectations.
The Fund also benefited from its relatively light weighting in technology
companies, a sector that came under intense pressure during the fourth quarter.
Investors have been concerned that Asia's economic crisis will weigh on the
region's demand for technology, which many U.S. software and other
computer-oriented companies had been counting on as a major source of sales
growth. The Fund also profited from its exposure to competitive local exchange
carriers (CLECs) such as ICG Communications (its top holding as of June 30,
1997). CLECs provide long-distance carriers with access to certain local markets
at a lower cost than do the regional Bell operating companies. The sector was
buoyed in late 1997 by AT&T's rumored offer to buy Teleport, one of the leading
CLECs in the United States.
Q: Did the composition of the portfolio change much during the second half of
1997?
A: We made only minor shifts during the period. That kind of gradual change,
which reflects our bottom-up investment process and our strict sell discipline,
is typical of the Fund. Each time we buy a stock, we set a price target for it
and sell it once it has reached that goal. For that reason, we took profits on
Comverse Technology (which develops voice-mail processing systems) and Conseco
(which provides life and health insurance) during the fourth quarter.
We may also sell a stock if its earnings don't meet our expectations or if we
find better potential elsewhere. For example, we recently eliminated Regal
Cinemas (which operates movie theaters around the country) and Encad (which
makes inkjet printers for specialized applications), because their earnings
didn't meet our expectations. In their place we added a few new names, including
two pharmaceutical companies--Centocor and MedImmune. The market's volatility in
the fourth quarter was positive in this respect, because it allowed us to
initiate positions in what we consider to be
=======================================
P O R T F O L I O M A N A G E M E N T
---------------------------------------
Stuart O. Roberts.......................................Senior Portfolio Manager
Jerome C. Philpott, CFA........................................Portfolio Manager
Bradford D. Kidwell............................................Portfolio Manager
===============================
F U N D P E R F O R M A N C E
-------------------------------
Average annual total returns
for the period ended 12/31/97
- --------------------------------------------------------------------------------
Montgomery Small Cap Fund
Since inception (7/13/90).................................................21.47%
One year..................................................................23.86%
Five years................................................................17.33%
- --------------------------------------------------------------------------------
Russell 2000 Index
Since 6/30/90.............................................................15.43%
One year..................................................................22.36%
Five years................................................................16.40%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
[LINE GRAPH APPEARS HERE]
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY SMALL CAP(R)
Initial Investment: $10,000 Period: 07/13/90 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
07/13/90 10.62 $ 10,000 $ 0 $ 10,000
07/90 10.13 $ 9,539 $ 0 $ 9,539
08/90 9.10 $ 8,569 $ 0 $ 8,569
09/90 8.34 $ 7,853 $ 0 $ 7,853
10/90 8.02 $ 7,552 $ 0 $ 7,552
11/90 8.66 $ 8,154 $ 0 $ 8,154
12/90 9.35 $ 8,804 $ 16 $ 8,820
01/91 10.66 $ 10,038 $ 17 $ 10,055
02/91 12.00 $ 11,299 $ 20 $ 11,319
03/91 13.05 $ 12,288 $ 22 $ 12,310
04/91 12.81 $ 12,062 $ 21 $ 12,083
05/91 13.76 $ 12,957 $ 22 $ 12,979
06/91 13.24 $ 12,467 $ 22 $ 12,489
07/91 11.82 $ 11,130 $ 2,634 $ 13,764
08/91 12.81 $ 12,062 $ 2,855 $ 14,917
09/91 13.20 $ 12,429 $ 2,942 $ 15,371
10/91 14.07 $ 13,249 $ 3,135 $ 16,384
11/91 13.15 $ 12,382 $ 2,931 $ 15,313
12/91 14.18 $ 13,352 $ 4,177 $ 17,529
01/92 14.89 $ 14,021 $ 4,386 $ 18,407
02/92 14.86 $ 13,992 $ 4,378 $ 18,370
03/92 14.19 $ 13,362 $ 4,179 $ 17,541
04/92 13.43 $ 12,646 $ 3,956 $ 16,602
05/92 13.41 $ 12,627 $ 3,950 $ 16,577
06/92 12.90 $ 12,147 $ 3,800 $ 15,947
07/92 13.25 $ 12,476 $ 3,903 $ 16,379
08/92 12.74 $ 11,996 $ 3,753 $ 15,749
09/92 13.13 $ 12,363 $ 3,868 $ 16,231
10/92 13.58 $ 12,787 $ 4,000 $ 16,787
11/92 15.16 $ 14,275 $ 4,465 $ 18,740
12/92 15.54 $ 14,633 $ 4,577 $ 19,210
01/93 15.77 $ 14,849 $ 4,646 $ 19,495
02/93 15.01 $ 14,134 $ 4,421 $ 18,555
03/93 15.69 $ 14,774 $ 4,622 $ 19,396
04/93 15.27 $ 14,379 $ 4,497 $ 18,876
05/93 16.44 $ 15,480 $ 4,843 $ 20,323
06/93 16.83 $ 15,847 $ 4,958 $ 20,805
07/93 16.94 $ 15,951 $ 4,990 $ 20,941
08/93 17.67 $ 16,638 $ 5,755 $ 22,393
09/93 18.49 $ 17,411 $ 6,021 $ 23,432
10/93 19.23 $ 18,107 $ 6,262 $ 24,369
11/93 16.74 $ 15,763 $ 6,861 $ 22,624
12/93 17.67 $ 16,638 $ 7,243 $ 23,881
01/94 18.24 $ 17,175 $ 7,476 $ 24,651
02/94 17.99 $ 16,940 $ 7,373 $ 24,313
03/94 16.87 $ 15,885 $ 6,915 $ 22,800
04/94 16.87 $ 15,885 $ 6,915 $ 22,800
05/94 16.02 $ 15,085 $ 6,566 $ 21,651
06/94 15.15 $ 14,266 $ 6,209 $ 20,475
07/94 15.61 $ 14,699 $ 6,398 $ 21,097
08/94 17.02 $ 16,026 $ 6,976 $ 23,002
09/94 16.81 $ 15,829 $ 6,889 $ 22,718
10/94 16.64 $ 15,669 $ 6,820 $ 22,489
11/94 14.94 $ 14,068 $ 7,407 $ 21,475
12/94 14.96 $ 14,087 $ 7,416 $ 21,503
01/95 14.94 $ 14,068 $ 7,407 $ 21,475
02/95 15.47 $ 14,567 $ 7,669 $ 22,236
03/95 15.87 $ 14,944 $ 7,867 $ 22,811
04/95 15.84 $ 14,915 $ 7,853 $ 22,768
05/95 16.15 $ 15,207 $ 8,007 $ 23,214
06/95 17.11 $ 16,111 $ 8,483 $ 24,594
07/95 18.16 $ 17,100 $ 9,003 $ 26,103
08/95 19.00 $ 17,891 $ 9,419 $ 27,310
09/95 19.36 $ 18,230 $ 9,598 $ 27,828
10/95 18.37 $ 17,298 $ 9,107 $ 26,405
11/95 17.16 $ 16,158 $ 11,118 $ 27,276
12/95 18.28 $ 17,213 $ 11,843 $ 29,056
01/96 18.25 $ 17,185 $ 11,823 $ 29,008
02/96 18.96 $ 17,853 $ 12,284 $ 30,137
03/96 19.83 $ 18,672 $ 12,847 $ 31,519
04/96 21.05 $ 19,821 $ 13,638 $ 33,459
05/96 22.26 $ 20,960 $ 14,422 $ 35,382
06/96 21.55 $ 20,292 $ 13,961 $ 34,253
07/96 20.03 $ 18,861 $ 12,976 $ 31,837
08/96 20.79 $ 19,576 $ 13,469 $ 33,045
09/96 21.89 $ 20,612 $ 14,182 $ 34,794
10/96 19.07 $ 17,957 $ 16,079 $ 34,036
11/96 19.57 $ 18,427 $ 16,502 $ 34,929
12/96 18.40 $ 17,326 $ 17,161 $ 34,487
01/97 18.75 $ 17,655 $ 17,488 $ 35,143
02/97 17.68 $ 16,648 $ 16,490 $ 33,138
03/97 16.25 $ 15,301 $ 15,156 $ 30,457
04/97 15.85 $ 14,925 $ 14,783 $ 29,708
05/97 18.31 $ 17,241 $ 17,077 $ 34,318
06/97 19.52 $ 18,380 $ 18,206 $ 36,586
07/97 20.61 $ 19,407 $ 19,222 $ 38,629
08/97 20.74 $ 19,529 $ 19,344 $ 38,873
09/97 22.89 $ 21,554 $ 21,349 $ 42,903
10/97 22.21 $ 20,913 $ 20,715 $ 41,628
11/97 22.06 $ 20,772 $ 20,575 $ 41,347
12/97 19.64 $ 18,493 $ 24,223 $ 42,716
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
SMALL CAP FUND SMALL CAP FUND
LITTER
SM CO GROWTH RUSSELL 2000
AVE AVE
6/30 - 12/97 6/20 - 12/97
DATE RETURN VALUE DATE RETURN VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jun-90 $ 10,000 Jun-90 $ 10,000
Jul-90 $ 9,644 Jul-90 $ 9,560
Aug-90 $ 8,443 Aug-90 $ 8,287
Sep-90 $ 7,736 Sep-90 $ 7,554
Oct-90 $ 7,433 Oct-90 $ 7,093
Nov-90 $ 8,010 Nov-90 $ 7,633
Dec-90 $ 8,439 Dec-90 $ 7,936
Jan-91 $ 9,160 Jan-91 $ 8,654
Feb-91 $ 9,953 Feb-91 $ 9,619
Mar-91 $ 10,574 Mar-91 $ 10,296
Apr-91 $ 10,507 Apr-91 $ 10,270
May-91 $ 10,997 May-91 $ 10,760
Jun-91 $ 10,416 Jun-91 $ 10,133
Jul-91 $ 11,024 Jul-91 $ 10,488
Aug-91 $ 11,483 Aug-91 $ 10,876
Sep-91 $ 11,543 Sep-91 $ 10,962
Oct-91 $ 11,919 Oct-91 $ 11,251
Nov-91 $ 11,435 Nov-91 $ 10,731
Dec-91 $ 12,746 Dec-91 $ 11,590
Jan-92 $ 13,361 Jan-92 $ 12,529
Feb-92 $ 13,609 Feb-92 $ 12,895
Mar-92 $ 13,055 Mar-92 $ 12,458
Apr-92 $ 12,484 Apr-92 $ 12,022
May-92 $ 12,474 May-92 $ 12,182
Jun-92 $ 11,917 Jun-92 $ 11,606
Jul-92 $ 12,315 Jul-92 $ 12,010
Aug-92 $ 12,065 Aug-92 $ 11,671
Sep-92 $ 12,334 Sep-92 $ 11,940
Oct-92 $ 12,855 Oct-92 $ 12,319
Nov-92 $ 13,897 Nov-92 $ 13,262
Dec-92 $ 14,364 Dec-92 $ 13,724
Jan-93 $ 14,675 Jan-93 $ 14,189
Feb-93 $ 14,127 Feb-93 $ 13,861
Mar-93 $ 14,623 Mar-93 $ 14,311
Apr-93 $ 14,158 Apr-93 $ 13,918
May-93 $ 14,936 May-93 $ 14,534
Jun-93 $ 15,046 Jun-93 $ 14,624
Jul-93 $ 15,157 Jul-93 $ 14,826
Aug-93 $ 15,918 Aug-93 $ 15,467
Sep-93 $ 16,464 Sep-93 $ 15,903
Oct-93 $ 16,725 Oct-93 $ 16,313
Nov-93 $ 16,142 Nov-93 $ 15,776
Dec-93 $ 16,833 Dec-93 $ 16,315
Jan-94 $ 17,267 Jan-94 $ 16,827
Feb-94 $ 17,270 Feb-94 $ 16,766
Mar-94 $ 16,342 Mar-94 $ 15,881
Apr-94 $ 16,363 Apr-94 $ 15,975
May-94 $ 16,072 May-94 $ 15,796
Jun-94 $ 15,498 Jun-94 $ 15,259
Jul-94 $ 15,756 Jul-94 $ 15,510
Aug-94 $ 16,717 Aug-94 $ 16,374
Sep-94 $ 16,834 Sep-94 $ 16,319
Oct-94 $ 17,083 Oct-94 $ 16,255
Nov-94 $ 16,474 Nov-94 $ 15,598
Dec-94 $ 16,820 Dec-94 $ 16,018
Jan-95 $ 16,662 Jan-95 $ 15,815
Feb-95 $ 17,347 Feb-95 $ 16,473
Mar-95 $ 17,812 Mar-95 $ 16,757
Apr-95 $ 18,045 Apr-95 $ 17,130
May-95 $ 18,323 May-95 $ 17,424
Jun-95 $ 19,443 Jun-95 $ 18,328
Jul-95 $ 20,893 Jul-95 $ 19,384
Aug-95 $ 21,246 Aug-95 $ 19,785
Sep-95 $ 21,835 Sep-95 $ 20,138
Oct-95 $ 21,188 Oct-95 $ 19,237
Nov-95 $ 21,966 Nov-95 $ 20,046
Dec-95 $ 22,216 Dec-95 $ 20,575
Jan-96 $ 22,028 Jan-96 $ 20,552
Feb-96 $ 22,934 Feb-96 $ 21,193
Mar-96 $ 23,437 Mar-96 $ 21,624
Apr-96 $ 25,221 Apr-96 $ 22,781
May-96 $ 26,211 May-96 $ 23,679
Jun-96 $ 25,154 Jun-96 $ 22,706
Jul-96 $ 22,879 Jul-96 $ 20,723
Aug-96 $ 24,282 Aug-96 $ 21,926
Sep-96 $ ??,??? Sep-96 $ ??,???
Oct-96 $ 24,983 Oct-96 $ 22,432
Nov-96 $ 25,709 Nov-96 $ 23,356
Dec-96 $ 26,026 Dec-96 $ 23,968
Jan-97 $ 26,729 Jan-97 $ 24,447
Feb-97 $ 25,576 Feb-97 $ 23,855
Mar-97 $ 24,197 Mar-97 $ 22,729
Apr-97 $ 24,057 Apr-97 $ 22,793
May-97 $ 26,861 May-97 $ 25,328
Jun-97 $ 28,197 Jun-97 $ 26,414
Jul-97 $ 29,903 Jul-97 $ 27,643
Aug-97 $ 30,327 Aug-97 $ 28,275
Sep-97 $ 32,591 Sep-97 $ 30,345
Oct-97 $ 31,142 Oct-97 $ 29,012
Nov-97 $ 30,744 Nov-97 $ 28,824
Dec-97 $ 31,011 Dec-97 $ 29,329
</TABLE>
/1/ The Russell 2000 Index is a capitalization-weighted total return index
that comprises 2,000 of the smallest-capitalized U.S. domiciled companies
whose stock is traded in the U.S. on NYSE, AMEX and NASDAQ.
/2/ The Lipper Small Cap Funds Average universe consists of 77 funds.
13
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Small Cap Fund
- --------------------
P o r t f o l i o
H i g h l i g h t s
====================
TOP TEN HOLDINGS
--------------------
(as a percentage of total net assets)
ICG Communications, Inc. ...................................................5.7%
Smithfield Foods, Inc. .....................................................3.5%
LCI International Inc. .....................................................3.5%
HSN, Inc. ..................................................................3.3%
Billing Information Concepts ...............................................2.9%
AmeriCredit Corporation ....................................................2.8%
Commercial Federal Corporation .............................................2.3%
Renters Choice, Inc. .......................................................2.1%
Petroleum Geo-Services, ADR ................................................2.0%
Coventry Corporation .......................................................2.0%
=====================
TOP FIVE INDUSTRIES
---------------------
(as a percentage of total net assets)
Telephone .................................................................12.1%
Health Care ................................................................7.4%
Business Services ..........................................................7.2%
Banks ......................................................................7.0%
Medical Products ...........................................................6.7%
attractive stocks at depressed prices. We also added to the Fund's existing
positions in stocks that we think were oversold.
Q: What do you look for in a potential investment? Can you give an example of a
company that you found attractive recently?
A: We seek out small-cap companies (which we define as those with market
capitalizations between roughly $100 million and $1 billion) that are at an
early or transitional stage of development, and invest in them before the market
discovers that potential. We ask a battery of questions when researching any
potential investment: Is the industry in which the company operates growing, and
is the company gaining market share? Does it have an advantage in its industry,
such as a unique market position? How strong is the company's balance sheet? Can
it finance growth internally?
One company that we recently invested in after it jumped all those hurdles is
Franchise Mortgage Acceptance Co., a specialty finance company that makes loans
to franchise-based businesses. Market analysts estimate that the franchise
lending market is currently about $40 billion in size. They also believe that it
will grow at an average rate of 12% annually over the next five years. Most
specialty lenders finance their loan production by securitizing existing loans.
Franchise Mortgage, in contrast, can finance its growth internally (without
diluting existing shares), because its operating cash flow usually exceeds its
reported earnings. This is the sort of competitive advantage and sign of
fundamental strength that we look for in every potential investment.
Q: Asia's crisis and its potential impact on the United States has been much
debated lately. What's your opinion? How does it factor into your outlook for
the coming year?
A: Contrary to what some investors believe, we think the economic crisis in Asia
could make small-cap stocks more, not less, attractive than the large-caps that
have been so popular lately. Assuming that foreign demand weakens further while
the U.S. dollar strengthens, we think that the companies in the large-cap S&P
500 will deliver earnings growth of no greater than 5%, on average, in 1998. In
comparison, we expect the companies in the Small Cap Fund's portfolio, many of
which have little or no foreign exposure, to post average earnings growth of 24%
in 1998. Our expectations assume that U.S. GDP growth ends up in the 2% range
and interest rates remain stable in 1998. In such an environment, we believe
that the market will begin to appreciate small-caps much more than it has for
many years, if they can deliver on the expectations that we and other investors
have set for them. We have a lot of confidence that they will.
14
<PAGE>
---------------------
The Montgomery Funds
---------------------
Small Cap Fund
---------------------
I n v e s t m e n t s
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
COMMON STOCKS -- 97.4%
Shares Value (Note 1)
Aerospace and Defense -- 1.0%
76,000 Tracor, Inc.+ ............................ $ 2,332,250
Apparel and Textiles -- 1.6%
74,000 Interface, Inc. ......................... 2,132,125
74,000 Novel Denim Holdings Ltd.+ .............. 1,461,500
---------
3,593,625
Auto/Auto Parts -- 1.7%
136,000 OEA Inc. ................................ 3,935,500
Banks -- 7.0%
58,700 Bank United Corporation, Class A ........ 2,887,306
31,500 Charter One Financial, Inc. ............. 1,982,531
150,000 Commercial Federal Corporation .......... 5,334,375
92,000 Dime Bancorp, Inc. ...................... 2,783,000
84,000 Golden State Bancorp Inc.+ .............. 3,139,500
---------
16,126,712
Biotechnology -- 1.2%
52,300 Centocor, Inc.+ ......................... 1,745,512
96,000 Cephalon Inc.+ .......................... 1,095,000
---------
2,840,512
Broadcasting/Advertising -- 5.8%
148,000 HSN, Inc.**+ ............................ 7,631,250
91,000 Snyder Communications, Inc.+ ............ 3,321,500
64,000 Telecommunications Liberty Media
Group, Class A+ ......................... 2,326,000
---------
13,278,750
Building Materials -- 2.5%
160,000 Champion Enterprises, Inc.+ ............. 3,290,000
76,000 Oakwood Homes Corporation ............... 2,522,250
---------
5,812,250
Business Services -- 7.2%
136,000 Billing Information Concepts+ ........... 6,553,500
50,000 DST Systems, Inc.+ ...................... 2,134,375
56,000 Envoy Corporation**+ .................... 1,641,500
104,000 MetroNet Communications Corporation,
Class B**+ .............................. 1,764,750
80,000 National Data Corporation ............... 2,890,000
48,000 Personnel Group of America Inc.+ ........ 1,584,000
---------
16,568,125
Diversified Financial Services -- 6.6%
232,000 AmeriCredit Corporation+ ................ 6,423,500
66,800 Amresco, Inc.+ .......................... 1,999,825
73,300 ContiFinancial Corporation**+ ........... 1,846,244
77,300 FirstPlus Financial Group, Inc.**+ ...... 2,961,556
104,000 Franchise Mortgage Acceptance
Company LLC+ ............................ 1,917,500
---------
15,148,625
Electronics -- 2.4%
83,400 Genrad, Inc.+ ........................... $ 2,517,637
71,900 Nice Systems Ltd., ADR+ ................. 3,006,319
---------
5,523,956
Food and Beverage -- 5.4%
78,200 Canandaigua Wine Company, Inc., Class A+. 4,340,100
248,000 Smithfield Foods Inc.+ .................. 8,129,750
---------
12,469,850
Furniture -- 1.4%
97,100 Knoll, Inc.+ ............................ 3,119,338
Health Care -- 7.4%
300,000 Coventry Corporation+ ................... 4,584,375
112,000 Mid Atlantic Medical Services, Inc.+ .... 1,428,000
104,000 PMR Corporation+ ........................ 2,086,500
167,850 Quorum Health Group, Inc.+ .............. 4,406,063
168,000 Trigon Healthcare Inc.+ ................. 4,389,000
---------
16,893,938
Insurance -- 4.1%
60,000 CMAC Investment Corporation.............. 3,622,500
64,000 Everest Reinsurance Holdings Inc. ....... 2,640,000
47,600 Life RE Corporation ..................... 3,102,925
---------
9,365,425
Investment Management -- 1.5%
56,300 Affiliated Managers Group, Inc.+ ........ 1,632,700
64,000 Tele-Communications TCI Ventures
Group, Class A+ ......................... 1,814,000
---------
3,446,700
Leisure Time -- 1.0%
104,000 K2 Resources, Inc ....................... 2,366,000
Lodging -- 2.1%
112,000 Prime Hospitality Corporation**+ ........ 2,282,000
162,904 ShoLodge, Inc.+ ......................... 2,545,375
---------
4,827,375
Medical Products -- 6.7%
56,000 A T L Ultrasound Inc.+ .................. 2,583,000
80,000 Arrow International ..................... 2,990,000
97,700 I-Stat Corporation**+ ................... 1,535,722
105,000 Mentor Corporation ...................... 3,858,750
92,000 Steris Corporation+ ..................... 4,462,000
---------
15,429,472
Newspapers/Publishing -- 0.9%
90,000 Petersen Companies, Inc., Class A+ ...... 2,070,000
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Small Cap Fund
- --------------------
I n v e s t m e n t s
COMMON STOCKS - continued
Shares Value (Note 1)
Oil - 5.5%
54,400 BJ Services Company+ ...................... $ 3,913,400
21,500 Camco International Inc. .................. 1,369,281
104,000 Domain Energy Corporation+ ................ 1,638,000
208,000 Grey Wolf, Inc.+ .......................... 1,118,000
71,000 Petroleum Geo-Services, ADR+ .............. 4,597,250
---------
12,635,931
Oilfield Equipment - 2.0%
39,200 Energy Ventures, Inc.+ .................... 2,028,600
71,600 R&B Falcon Corporation**+ ................. 2,510,475
---------
4,539,075
Pharmacy/Drugs - 3.4%
40,000 AmeriSource Health Corporation, Class A+ .. 2,350,000
28,500 MedImmune, Inc.+ .......................... 1,225,500
72,000 North American Vaccine Inc.**+ ............ 1,795,500
72,000 Watson Pharmaceuticals, Inc.+ ............. 2,335,500
---------
7,706,500
Retail Trade - 2.8%
56,000 Proffitt's, Inc.+ ......................... 1,592,500
230,900 Renters Choice, Inc.+ ..................... 4,762,313
---------
6,354,813
Software Systems - 2.0%
22,500 CSG Systems International, Inc.+ .......... 904,219
64,000 Electronic Arts, Inc.+ .................... 2,422,000
69,900 Midway Games Inc.**+ ...................... 1,271,306
---------
4,597,525
Specialty Chemicals - 1.3%
144,000 Tetra Technologies Inc.+ .................. 3,033,000
Telecommunications Equipment - 0.8%
36,000 Globalstar Telecommunication Ltd.**+ ...... 1,770,750
Telephone - 12.1%
480,000 ICG Communications, Inc.**+ ............... 13,170,000
60,000 Intermedia Communications of
Florida, Inc.**+ .......................... 3,641,250
261,500 LCI International Inc.+ ................... 8,041,125
86,200 McLeod USA, Inc.+ ......................... 2,769,175
---------
27,621,550
TOTAL COMMON STOCKS
(Cost $158,139,803) .................................... $ 223,407,547
-----------
REPURCHASE AGREEMENTS - 2.8%
Principal Amount
$3,214,000 Agreement with Bear Stearns, Tri-Party,
6.850% dated 12/31/97, to be repurchased
at $3,215,223 on 01/02/98, collateralized
by $3,347,867 market value of U.S.
government securities, having various
maturities and various interest rates .... 3,214,000
3,214,000 Agreement with BZW Securities, Tri-Party,
6.900% dated 12/31/97, to be repurchased
at $3,215,232 on 01/02/98, collateralized
by $3,278,280 market value of U.S.
government securities, having various
maturities and various interest rates..... 3,214,000
TOTAL REPURCHASE AGREEMENTS
(Cost $6,428,000) ...................................... 6,428,000
TOTAL INVESTMENTS - 100.2%
(Cost $164,567,803*) ................................... 229,835,547
OTHER ASSETS AND LIABILITIES - (0.2%)
(Net) .................................................. (506,237)
--------
NET ASSETS - 100.0% .................................... $ 229,329,310
===========
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1997, which have an aggregate market
value of $28,223,216, represent 12.3% of the total net assets of the Fund
(see note 5 to Financial Statements).
+ Non-income producing security.
16
The accompanying notes are an integral part of these unancial statements.
<PAGE>
--------------------
The Montgomery Funds
--------------------
Micro Cap Fund
--------------------
Portfolio Highlights
(unaudited)
I N V E S T M E N T R E V I E W
Q: How did the Micro Cap Fund perform for the six months ended December 31,
1997, and the 1997 calendar year?
A: For the six months ended December 31, 1997, the Micro Cap Fund was up 13.08%,
surpassing both the Russell 2000 Index and the Russell 2000 Growth Index, which
were up 11.04% and 7.34%, respectively.
For the 1997 calendar year, the Micro Cap Fund was up 27.05%, again surpassing
the Russell 2000 Index and the Russell 2000 Growth Index, which were up 22.36%
and 12.95%, respectively. The Fund outperformed its benchmark by 4.69 percentage
points by following our disciplined investment process, which led us to good
growth companies trading at reasonable valuations. This relative performance is
particularly favorable given that we have been in a market environment where the
bigger-capitalization stocks are performing much better than the smaller-
capitalization stocks, and the weighted average market cap of the Russell 2000
is much bigger than that of the Micro Cap Fund.
Q: What holdings performed especially well in the last six months of 1997 and
why?
A: Cooper Companies is a rapidly growing specialty health-care company involved
in three segments: soft toric contact lenses, women's diagnostic and surgical
instruments, and psychiatric hospitals. In December 1996 we purchased the stock
at $17 per share, and it ended 1997 at $40 7/8, up 140%. There was no Wall
Street analyst coverage when we found the company. There was great potential,
improving fundamentals and low valuation. Cooper Companies did a secondary
offering in July in the mid-twenties. At this point, the company told its story,
received sell-side analyst coverage and became better known, and the stock
subsequently went up more than 70%.
Continental Can is a leading manufacturer of packaging for consumer products
including food, beverages and household goods. We first started buying this
stock in the Micro Cap Fund in February 1996 at less than $16 per share. The
company was undergoing restructuring, insiders were accumulating shares and the
industry was in consolidation. The stock ended 1997 at $25 3/16, up 57%. On
January 15, Suiza Foods, another stock owned in the Micro Cap Fund, announced
that it would acquire Continental Can for stock valued at $40.65 per share at
the time of the announcement, or 154% above the price we initiated our position.
Suiza Foods is a leading U.S. dairy company, which also owns a packaging
business. What is interesting about this position is that we have never bought a
single share of Suiza Foods; instead we received this stock when the company
bought Morningstar Group, another Micro Cap holding, in December 1997.
Morningstar Group was a stock we first bought in October 1996 for slightly less
than $16 per share. When Suiza announced its agreement to purchase Morningstar
on September 29, the stock to be received was valued at $45.85 per share, up
187%.
==================================================
PORTFOLIO MANAGEMENT
--------------------------------------------------
Roger W. Honour...........Senior Portfolio Manager
Andrew G. Pratt, CFA.............Portfolio Manager
Kathryn M. Peters................Portfolio Manager
==================================================
FUND PERFORMANCE
--------------------------------------------------
Average annual total returns
for the period ended 12/31/97
--------------------------------------------------
Montgomery Micro Cap Fund
Since inception (12/30/94)..................24.85%
One year....................................27.05%
Three years.................................24.87%
--------------------------------------------------
Russell 2000 Index
Since 12/30/94..............................22.34%
One year....................................22.36%
Three years.................................22.34%
Past performance is no guarantee of future results. Net asset
value, investment return and principal value will fluctuate, so
shares, when redeemed, may be worth more or less than their
original cost.
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
MICRO CAP
LIPPER
MICRO CAP
AVE
12/94-12/97
DATE RETURN VALUE
=======================================
<S> <C> <C>
Dec-94 $10,000
Jan-95 $10,107
Feb-95 $10,390
Mar-95 $10,592
Apr-95 $10,865
May-95 $11,046
Jun-95 $11,540
Jul-95 $12,136
Aug-95 $12,500
Sep-95 $12,757
Oct-95 $12,365
Nov-95 $12,644
Dec-95 $13,022
Jan-96 $12,982
Feb-96 $13,400
Mar-96 $13,840
Apr-96 $14,933
May-96 $15,917
Jun-96 $15,390
Jul-96 $14,030
Aug-96 $14,588
Sep-96 $15,065
Oct-96 $14,939
Nov-96 $15,426
Dec-96 $15,859
Jan-97 $16,558
Feb-97 $16,106
Mar-97 $15,339
Apr-97 $15,018
May-97 $16,680
Jun-97 $17,820
Jul-97 $18,735
Aug-97 $19,686
Sep-97 $21,579
Oct-97 $20,722
Nov-97 $20,502
Dec-97 $20,131
</TABLE>
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY MICRO CAP(R)
Initial Investment: $10,000 Period: 12/30/94 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/30/94 12.00 $10,000 $0 $10,000
12/94 12.00 $10,000 $0 $10,000
01/95 12.10 $10,083 $0 $10,083
02/95 12.25 $10,208 $0 $10,208
03/95 12.67 $10,558 $0 $10,558
04/95 12.82 $10,683 $0 $10,683
05/95 12.95 $10,792 $0 $10,792
06/95 13.75 $11,458 $0 $11,458
07/95 14.50 $12,083 $0 $12,083
08/95 14.75 $12,292 $0 $12,292
09/95 14.97 $12,475 $0 $12,475
10/95 14.47 $12,058 $0 $12,058
11/95 14.93 $12,442 $129 $12,571
12/95 15.28 $12,733 $133 $12,866
01/96 15.19 $12,658 $132 $12,790
02/96 15.63 $13,025 $136 $13,161
03/96 16.14 $13,450 $140 $13,590
04/96 17.52 $14,600 $152 $14,752
05/96 18.81 $15,675 $163 $15,838
06/96 17.82 $14,850 $155 $15,005
07/96 15.99 $13,325 $139 $13,464
08/96 16.72 $13,933 $146 $14,079
09/96 17.32 $14,433 $151 $14,584
10/96 16.26 $13,550 $994 $14,544
11/96 16.62 $13,850 $1,016 $14,866
12/96 16.91 $14,092 $1,234 $15,326
01/97 17.67 $14,725 $1,290 $16,015
02/97 16.64 $13,867 $1,215 $15,082
03/97 15.99 $13,325 $1,168 $14,493
04/97 15.93 $13,275 $1,163 $14,438
05/97 17.73 $14,775 $1,295 $16,070
06/97 19.00 $15,833 $1,388 $17,221
07/97 20.06 $16,717 $1,464 $18,181
08/97 21.04 $17,533 $1,537 $19,070
09/97 22.53 $18,775 $1,645 $20,420
10/97 21.80 $18,167 $1,591 $19,758
11/97 21.42 $17,850 $1,564 $19,414
12/97 20.31 $16,925 $2,547 $19,472
</TABLE>
<TABLE>
<CAPTION>
MICRO CAP
RUSSEL 2000
AVE
12/94-12/97
DATE RETURN VALUE
=======================================
<S> <C> <C>
Dec-94 $10,000
Jan-95 $9,874
Feb-95 $10,285
Mar-95 $10,462
Apr-95 $10,694
May-95 $10,878
Jun-95 $11,443
Jul-95 $12,102
Aug-95 $12,352
Sep-95 $12,573
Oct-95 $12,010
Nov-95 $12,515
Dec-95 $12,845
Jan-96 $12,831
Feb-96 $13,231
Mar-96 $13,501
Apr-96 $14,222
May-96 $14,783
Jun-96 $14,176
Jul-96 $12,938
Aug-96 $13,689
Sep-96 $14,224
Oct-96 $14,005
Nov-96 $14,582
Dec-96 $14,964
Jan-97 $15,263
Feb-97 $14,893
Mar-97 $14,190
Apr-97 $14,230
May-97 $15,813
Jun-97 $16,491
Jul-97 $17,258
Aug-97 $17,653
Sep-97 $18,945
Oct-97 $18,113
Nov-97 $17,996
Dec-97 $18,310
</TABLE>
Growth of a $10,000 Investment
12/97 Montgomery Micro Cap Fund $19,472
12/97 Russell 2000 Index /1/ $18,310
12/97 Lipper Micro Cap Funds Average /2/ $20,131
/1/ The Russell 2000 Index is a capitalization-weighted total return index that
comprises 2,000 of the smallest-capitalized U.S. domiciled companies whose
common stock is traded in the U.S. on NYSE, AMEX and NASDAQ.
/2/ The Lipper Micro Cap Funds Average universe consists of 11 funds.
17
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Micro Cap Fund
- --------------------
Portfolio Highlights
==================================================
TOP TEN HOLDINGS
--------------------------------------------------
(as a percentage of total net assets)
Cooper Companies, Inc. .......................3.2%
HA-LO Industries Inc. ........................3.1%
Moog, Inc., Class A...........................2.9%
Life RE Corporation...........................2.9%
Manitowoc Company.............................2.9%
On Assignment Inc. ...........................2.9%
Elcor Corporation.............................2.4%
Applied Power, Inc. ..........................2.2%
Triangle Pacific Corporation..................2.1%
Metro Networks Inc. ..........................2.0%
==================================================
TOP FIVE INDUSTRIES
--------------------------------------------------
(as a percentage of total net assets)
Machinery and Tools...........................7.5%
Oilfield Equipment and Services...............6.8%
Business Services.............................6.4%
Broadcasting/Advertising......................5.8%
Building Materials............................5.4%
Q: Were there holdings--or an industry group--that underperformed the market in
the last six months of the year?
A: The oil service stocks had tremendous price performance from June 1997
through October 1997 and then corrected sharply, giving back most of that
performance during November and December. The stocks we own in this sector
include Varco International, R&B Falcon Corporation (formerly named Falcon
Drilling prior to merging with Reading & Bates) and Pride International. Even
taking into account the correction, our returns on these stocks range from two
to eight times our original investment.
These stocks have corrected as the price of crude oil has dropped heavily during
the past few months. The fear is that with lower crude prices, it will be less
economical for the large oil companies, the customers of the oil service
companies, to drill for as much oil as was expected, and therefore they will
reduce their capital spending. The budgets of these large oil companies,
however, are based on price estimates of crude oil over a much longer period of
time than a few months. The technology for finding oil has advanced so that it
is much less expensive to locate oil than it used to be. In addition, there
remains a limited supply of rigs and equipment, thus the supply and demand
characteristics of these companies remain favorable. Talking with the management
of the companies whose stocks we own reveals that they have not experienced any
delays, cancellations or pricing pressure from their customers. We continue to
closely monitor the fundamentals of these companies.
Q: Has the Micro Cap Fund's strategy changed?
A: As it has since its inception, the Fund's strategy continues to be centered
on our stock selection process, which seeks to identify good, micro-cap growth
companies with improving business fundamentals that are trading at reasonable
valuations before that potential is fully recognized by the market. We seek
companies that will not always be micro-cap but that have the potential to
become large, successful companies providing superior returns. We use a
quantitative screening process to uncover companies with improving growth; then
we perform rigorous fundamental analysis to determine the validity and
sustainability of the company's prospects. Finally, we apply valuation criteria
to determine if this good growth company is a good investment. Only after a
stock meets all three steps of our process do we invest in it. We continually
subject the stocks in our portfolio to the same process that got them there in
the first place. If they no longer meet all three steps of the process, we trim
or sell the position. We have a Fund composed of what we believe are good growth
companies with solid business fundamentals trading at reasonable valuations,
which we think will be good investments over the coming year.
Q: Why is now a good time to be invested in the Micro Cap Fund?
A: During 1997 the returns of the largest-cap stocks far exceeded those of the
small-caps, causing a significant valuation disparity between the two groups. In
addition, the small-cap companies are more domestically driven and thus are far
less impacted by the Asian economic crisis than the large multinationals. The
smallest-cap stocks, such as those in the Micro Cap Fund, we believe offer the
best combination of growth and value in the market and therefore provide an
opportunity for tremendous upside potential.
18
<PAGE>
---------------------
The Montgomery Funds
---------------------
Micro Cap Fund
---------------------
I n v e s t m e n t s
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
COMMON STOCKS -- 88.9%
Shares Value(Note 1)
Aerospace and Defense -- 2.9%
310,100 Moog, Inc., Class A+............................. $ 10,834,118
Air Freight Courier -- 1.0%
97,000 Expeditors International of
Washington, Inc.................................. 3,776,938
Apparel and Textiles -- 4.4%
110,000 Oxford Industries Inc............................ 3,575,000
130,000 Interface, Inc................................... 3,745,625
150,730 Pillowtex Corporation(**)........................ 5,256,709
88,000 St. John Knits Inc............................... 3,520,000
----------
16,097,334
Auto/Auto Parts -- 1.3%
200,000 Donnelly Corporation............................. 3,362,500
146,900 Sonic Automotive Inc.+........................... 1,413,913
---------
4,776,413
Banks -- 1.5%
110,000 Bank United Corporation, Class A................. 5,410,625
Basic Materials-Chemicals -- 2.4%
290,300 Brunswick Technologies Inc.+..................... 4,227,493
225,000 Furon Company.................................... 4,696,875
---------
8,924,368
Broadcasting/Advertising -- 5.8%
127,900 Ackerley Group Inc............................... 2,166,306
445,000 HA-LO Industries Inc.+........................... 11,570,000
225,000 Metro Networks Inc.**+........................... 7,509,375
10,000 TMP Worldwide+................................... 228,750
----------
21,474,431
Building Materials -- 5.4%
373,200 Elcor Corporation................................ 8,956,800
51,000 NCI Building Systems, Inc.+...................... 1,804,125
91,000 Republic Group Inc............................... 1,490,125
222,500 Triangle Pacific Corporation+.................... 7,551,093
----------
19,802,143
Business Services -- 6.4%
106,500 Bell & Howell Company+........................... 2,575,968
58,000 Hall Kinion & Associates+........................ 1,279,625
158,900 Maximus, Inc.+................................... 3,843,394
400,900 On Assignment Inc.+.............................. 10,523,625
112,000 Personnel Group of America Inc.+................. 3,696,000
90,000 SOS Staffing+.................................... 1,710,000
----------
23,628,612
Computers and Office Equipment -- 2.6%
182,000 Computer Products Inc.(**)+...................... 4,134,812
123,000 MICROS Systems, Inc.+............................ 5,611,875
---------
9,746,687
Consumer Services -- 0.6%
98,900 Equity Corporation International+................ 2,287,062
Containers and Packaging -- 1.2%
173,000 Continental Can Inc.+............................ 4,346,625
Electrical Equipment -- 0.9%
143,000 Giga-Tronics Inc.+............................... 1,374,141
101,700 Woodhead Industries, Inc......................... 1,894,163
---------
3,268,304
Electronics -- 3.8%
101,100 Cubic Corporation................................ 3,311,025
67,900 Genrad, Inc.+.................................... 2,049,731
160,000 Kollmorgen Corporation........................... 2,930,000
375,000 Plexus Corporation+.............................. 5,601,563
----------
13,892,319
Food and Beverage -- 4.8%
40,000 Berringer Wine Estates+.......................... 1,520,000
180,000 Dominick's Supermarkets, Inc.**+................. 6,570,000
155,000 Nature's Sunshine Products, Inc.................. 4,068,750
90,950 Suiza Foods Corporation+......................... 5,417,209
----------
17,575,959
Glass -- 0.5%
50,000 Libbey, Inc...................................... 1,893,750
Health Care Services -- 0.1%
20,000 Diagnostic Health Services Inc.+................. 233,125
Heavy Construction -- 1.0%
158,000 Granite Construction, Inc........................ 3,634,000
Insurance -- 5.3%
148,000 Amerin Corporation+.............................. 4,181,000
163,000 Life RE Corporation.............................. 10,625,563
223,000 Penn-America Group Inc........................... 4,557,563
----------
19,364,126
Leisure Time -- 0.6%
95,000 Cannondale Corporation**+........................ 2,090,000
Machinery and Tools -- 7.5%
115,000 Applied Power, Inc., Class A..................... 7,935,000
156,000 Chart Industries, Inc............................ 3,558,750
90,000 DT Industries, Inc............................... 3,071,250
100,000 II-VI Inc.+...................................... 2,375,000
325,000 Manitowoc Company................................ 10,562,500
----------
27,502,500
Medical Products -- 5.3%
290,000 Cooper Companies, Inc.+.......................... 11,853,750
350,000 Graham Field Health Products+.................... 5,840,625
107,700 Physio-Control International Corporation +....... 1,709,738
----------
19,404,113
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Micro Cap Fund
- ---------------------
I n v e s t m e n t s
COMMON STOCKS - continued
Shares Value(Note 1)
Metals and Mining - 1.7%
127,600 Encore Wire Corporation+......................... $ 3,931,675
160,500 Lindberg Corporation............................. 2,347,312
---------
6,278,987
Oil - 1.0%
400,000 Unit Corporation+................................ 3,850,000
Oilfield Equipment and Services - 6.8%
175,000 Key Energy Group, Inc.+.......................... 3,795,313
105,000 Lufkin Industries Inc............................ 3,740,625
244,500 Pride International Inc.+........................ 6,173,625
144,800 R&B Falcon Corp.**+.............................. 5,077,050
290,000 Varco International Inc.+........................ 6,216,875
----------
25,003,488
Photography - 0.8%
160,000 X-Rite Inc....................................... 2,935,000
Pollution Control - 0.7%
250,000 American Eco Corporation**+...................... 2,695,312
Pulp and Paper - 0.4%
75,000 Fibermark, Inc.+................................. 1,612,500
Real-Estate Investment Trust - 1.0%
66,300 Starwood Lodging Trust**......................... 3,837,113
Restaurants - 1.0%
220,788 Consolidated Products, Inc....................... 3,615,395
Retail Trade - 3.4%
105,000 Ethan Allen Interiors Inc........................ 4,049,062
756,000 Filene's Basement Corporation+................... 3,047,625
125,000 Linen 'N Things, Inc.+........................... 5,453,125
----------
12,549,812
Semiconductors - 1.0%
70,000 Cymer Inc.+...................................... 1,052,187
207,500 International Rectifier Corporation+............. 2,451,094
---------
3,502,281
Software Systems - 2.8%
160,750 Boole and Babbage, Inc.+......................... 4,822,500
135,000 Henry (Jack) & Associates........................ 3,729,375
62,000 Kronos, Inc.+.................................... 1,910,375
----------
10,462,250
Specialty Chemicals - 1.2%
203,500 Tetra Technologies, Inc.+........................ 4,286,219
Telecommunications Equipment - 0.4%
153,000 Harmonic Lightwaves, Inc.(**)+................... 1,673,438
Trucking - 1.4%
155,000 Swift Transportation Company Inc.+............... 5,047,188
TOTAL COMMON STOCKS
(Cost $212,245,656)............................................. $327,313,535
-----------
REPURCHASE AGREEMENTS - 11.7%
Principal Amount
$21,581,000 Agreement with Bear Stearns, Tri-Party,
6.850% dated 12/31/97, to be repurchased at
$21,589,213 on 01/02/98, collateralized by
$22,479,876 market value of U.S. government
securities, having various maturities and
various interest rates.......................... 21,581,000
21,581,000 Agreement with Nomura Securities, Tri-Party,
6.900% dated 12/31/97, to be repurchased at
$21,589,273 on 01/02/98, collateralized by
$22,012,620 market value of U.S. government
securities, having various maturities and
various interest rates.......................... 21,581,000
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $43,162,000).............................................. 43,162,000
----------
TOTAL INVESTMENTS - 100.6%
(Cost $255,407,656*)............................................ 370,475,535
OTHER ASSETS AND LIABILITIES - (0.6%)
(Net)........................................................... (2,391,667)
----------
NET ASSETS - 100.0%............................................. $368,083,868
===========
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1997, which have an aggregate market
value of $16,287,518, represent 4.4% of the total net assets of the Fund
(see note 5 to Financial Statements).
+ Non-income producing security.
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
--------------------
The Montgomery Funds
--------------------
Equity Income Fund
--------------------
P o r t f o l i o
H i g h l i g h t s
(unaudited)
I N V E S T M E N T R E V I E W
Q: How did the Fund perform over the second half of 1997?
A: The Fund beat the unmanaged S&P 500 Index, which has been a very difficult
benchmark to outperform over the past few years. The Fund gained 11.43% during
the second half, whereas the S&P returned 10.59%.
Q: What factors contributed most to the Fund's outperformance?
A: As we mentioned in the previous shareholder report, we have kept the Fund
defensively positioned for some time. About 30% of the portfolio is devoted to
utilities, a stake composed mainly of electricity generators/distributors but
which also includes some telephone and natural-gas utilities. We also have a
fairly large share of consumer nondurables stocks. That segment includes food
manufacturers such as General Mills, Heinz and McCormick (the spice maker), as
well as Rubbermaid and a few pharmaceutical companies.
These defensive stocks put the Fund at somewhat of a disadvantage during the
first half of 1997. Over much of that period, investors favored companies that
they believed might be able to deliver very strong, if somewhat unpredictable,
earnings. That's why technology stocks, for example, were so popular in the
first part of 1997.
That sentiment began to dissolve in the second half, however. Asia's slowdown
threw a wrench into the earnings expectations for many growth-oriented and
cyclical stocks. In their place, investors gained a new appreciation for
companies that have a history of delivering consistent, if more sedate,
earnings. The Fund's defensive positions gave it an advantage in this "flight to
quality."
Q: Were there any disappointments?
A: Over the second half, the near-term outlook for oil companies became a little
cloudy. Not only did OPEC increase its production quotas, but there was also
speculation that the United Nations might allow Iraq to resume oil exports in
exchange for humanitarian aid. The potential for heavier supply depressed the
price of crude oil and, in turn, most oil-related stocks (including our holdings
in Amoco and Chevron, among others).
Other commodity and basic-materials stocks also fell on hard times in the second
half. The problem for many of them was potentially lower demand, rather than
heavier supply. Investors lost confidence in paper manufacturers like
Weyerhaeuser and International Paper, for instance, because Asia's slowdown is
likely to curtail the region's demand for paper and forest products.
Q: You've said in the past that your goal is to invest in companies with
attractive relative dividend yields, among other qualities. Isn't that a
difficult strategy to execute now, given the market's low dividend yield?
A: We actually use two relative-yield benchmarks whenever we research a
potential holding: a stock's current dividend yield relative to its own
historical dividend yield and relative to market averages. If we used only the
first criterion, it would be difficult to find attractive candidates right now.
The market's lengthy rally has pushed down
===========================================
PORTFOLIO MANAGEMENT
-------------------------------------------
John H. Brown, CFA.................. Senior
Portfolio Manager
===========================================
FUND PERFORMANCE
-------------------------------------------
Average annual total returns
for the period ended 12/31/97
-------------------------------------------
Montgomery Equity Income Fund
Since inception (9/30/94)........... 23.74%
One year............................ 26.10%
Three years......................... 26.35%
-------------------------------------------
S&P 500 Index
Since 9/30/94....................... 28.42%
One year............................ 33.35%
Three years......................... 31.13%
-------------------------------------------
Past performance is no guarantee of future
results. Net asset value, investment return
and principal value will fluctuate, so shares,
when redeemed, may be worth more or less than
their original cost.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY EQUITY INCOME(R)
Initial Investmment: $10,000 Period: 09/30/94 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/94 12.00 $10,000 $0 $10,000
09/94 12.00 $10,000 $0 $10,000
10/94 12.10 $10,083 $0 $10,083
11/94 11.79 $9,825 $0 $9,825
12/94 11.77 $9,808 $99 $9,907
01/95 12.28 $10,233 $103 $10,336
02/95 12.59 $10,492 $105 $10,597
03/95 12.78 $10,650 $174 $10,824
04/95 13.02 $10,850 $178 $11,028
05/95 13.45 $11,208 $184 $11,392
06/95 13.38 $11,150 $276 $11,426
07/95 13.54 $11,283 $279 $11,562
08/95 13.75 $11,458 $284 $11,742
09/95 14.28 $11,900 $380 $12,280
10/95 14.28 $11,900 $380 $12,280
11/95 15.00 $12,500 $399 $12,899
12/95 15.36 $12,800 $592 $13,392
01/96 15.61 $13,008 $602 $13,610
02/96 15.72 $13,100 $605 $13,705
03/96 15.70 $13,083 $701 $13,784
04/96 15.75 $13,125 $703 $13,828
05/96 16.02 $13,350 $715 $14,065
06/96 16.09 $13,408 $824 $14,232
07/96 15.64 $13,033 $801 $13,834
08/96 15.95 $13,292 $816 $14,108
09/96 16.44 $13,700 $939 $14,639
10/96 15.59 $12,992 $2,134 $15,126
11/96 16.52 $13,767 $2,261 $16,028
12/96 16.04 $13,367 $2,481 $15,848
01/97 16.37 $13,642 $2,532 $16,174
02/97 16.87 $14,058 $2,610 $16,668
03/97 16.33 $13,608 $2,624 $16,232
04/97 16.61 $13,842 $2,669 $16,511
05/97 17.46 $14,550 $2,806 $17,356
06/97 17.91 $14,925 $3,010 $17,935
07/97 18.91 $15,758 $3,178 $18,936
08/97 18.26 $15,217 $3,068 $18,285
09/97 19.01 $15,842 $3,306 $19,148
10/97 18.28 $15,233 $3,179 $18,412
11/97 19.29 $16,075 $3,355 $19,430
12/97 17.78 $14,817 $5,167 $19,984
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
EQUITY INCOME EQUITY INCOME
LIPPER
EQUITY INCOME S&P 500
AVE AVE
9/94-12/97 9/94-12/97
DATE RETURN VALUE DATE RETURN VALUE
=====================================================================
<S> <C> <C> <C> <C> <C>
Sep-94 $10,000 Sep-94 $10,000
Oct-94 $10,060 Oct-94 $10,224
Nov-94 $9,680 Nov-94 $9,852
Dec-94 $9,753 Dec-94 $9,998
Jan-95 $9,938 Jan-95 $10,257
Feb-95 $10,268 Feb-95 $10,657
Mar-95 $10,519 Mar-95 $10,971
Apr-95 $10,759 Apr-95 $11,294
May-95 $11,088 May-95 $11,744
Jun-95 $11,226 Jun-95 $12,017
Jul-95 $11,524 Jul-95 $12,415
Aug-95 $11,640 Aug-95 $12,446
Sep-95 $12,025 Sep-95 $12,971
Oct-95 $11,898 Oct-95 $12,924
Nov-95 $12,420 Nov-95 $13,491
Dec-95 $12,725 Dec-95 $13,751
Jan-96 $13,033 Jan-96 $14,219
Feb-96 $13,151 Feb-96 $14,351
Mar-96 $13,322 Mar-96 $14,489
Apr-96 $13,465 Apr-96 $14,702
May-96 $13,679 May-96 $15,081
Jun-96 $13,698 Jun-96 $15,138
Jul-96 $13,211 Jul-96 $14,470
Aug-96 $13,559 Aug-96 $14,776
Sep-96 $14,083 Sep-96 $15,607
Oct-96 $14,414 Oct-96 $16,037
Nov-96 $15,230 Nov-96 $17,248
Dec-96 $15,146 Dec-96 $16,906
Jan-97 $15,717 Jan-97 $17,962
Feb-97 $15,904 Feb-97 $18,103
Mar-97 $15,422 Mar-97 $17,361
Apr-97 $15,885 Apr-97 $18,396
May-97 $16,794 May-97 $19,521
Jun-97 $17,421 Jun-97 $20,388
Jul-97 $18,548 Jul-97 $22,010
Aug-97 $17,988 Aug-97 $20,778
Sep-97 $18,880 Sep-97 $21,916
Oct-97 $18,294 Oct-97 $21,184
Nov-97 $18,870 Nov-97 $22,164
Dec-97 $19,318 Dec-97 $22,545
</TABLE>
/1/ The Standard & Poor's 500 Index is composed of 500 widely held common
stocks listed on the NYSE, AMEX and OTC markets.
/2/ The Lipper Equity Income Funds Average universe consists of 111 funds.
21
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Equity Income Fund
- --------------------
Investments
=========================================
TOP TEN HOLDINGS
-----------------------------------------
(as a percentage of total net assets)
GTE Corporation..................... 3.3%
Ameritech Corporation............... 2.9%
Bell Atlantic Corporation........... 2.9%
Anheuser-Busch Companies, Inc....... 2.8%
Genuine Parts Company............... 2.6%
UST Inc............................. 2.5%
Penney (J.C.) Company, Inc.......... 2.5%
SAFECO Corporation.................. 2.3%
Phillips Petroleum Company.......... 2.3%
Morgan (J.P.) & Company, Inc........ 2.3%
=========================================
TOP FIVE INDUSTRIES
-----------------------------------------
(as a percentage of total net assets)
Electric Utilities..................13.3%
Oil................................. 9.2%
Food and Beverage................... 8.5%
Telephone/Regional-Local............ 6.8%
Insurance........................... 6.7%
the dividend yields of most stocks relative to their historical levels. We are
still able to find stocks that we believe offer attractive dividend yields
relative to market averages, though. In fact, at the end of 1997 the Equity
Income portfolio had a dividend yield of roughly 3.1%, versus 1.6% for the S&P
500.
We disagree with pundits who say that dividends are no longer relevant in
today's market. Looking for attractive relative yields often leads us to
fundamentally healthy companies whose shares we believe are undervalued. We're
not alone in thinking that, nor in believing that a company's dividend policy
can give clues to what kind of earnings its management is expecting down the
road. In other words, we assume that a firm's ability to pay a consistently
solid dividend is a sign that it may remain in solid financial shape over the
long term.
Q: Have you made any major changes to the portfolio recently?
A: We think patience is a virtue when it comes to investing, so we rarely make
dramatic shifts in the portfolio. Our average holding period for a stock is
about three years. We also get to know each company inside and out before we add
it to our portfolio, with the goal of avoiding any unpleasant surprises. That
helps to minimize the Fund's turnover.
Q: What's your outlook for the U.S. stock market in 1998?
A: We expect to see an ongoing lack of consensus about where the economy is
heading. The uncertainty could add momentum to the flight to quality, which may
continue to benefit our portfolio. We'll keep looking for companies that we
believe have a stable profit stream, a clean balance sheet and a strong
competitive position, among other signs of strength. If the economy moderates
somewhat, we think investors will begin to appreciate these companies much more
than they have in a long time.
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
COMMON STOCKS - 95.2%
Shares Value (Note 1)
Auto/Auto Parts - 2.6%
34,000 Genuine Parts Company.......... $ 1,153,875
Banks/Savings and Loans - 5.8%
13,000 First Union Corporation........ 666,250
9,000 Morgan (J.P.) & Company Inc.... 1,015,875
7,000 National City Corporation...... 460,250
5,000 Wachovia Corporation........... 405,625
-------
2,548,000
Building Materials - 0.9%
8,000 Masco Corporation.............. 407,000
Business Services - 1.0%
21,000 Pall Corporation............... 434,438
Chemicals - 5.5%
13,000 Betzdearborn, Inc.............. 793,812
8,000 Dow Chemical Company........... 812,000
21,000 Nalco Chemical Company......... 830,812
-------
2,436,624
Computers and Office Equipment - 1.0%
5,000 Pitney Bowes Inc.............. 449,688
22
The accompanying notes are an integral part of these financial statements.
<PAGE>
--------------------
The Montgomery Funds
--------------------
Equity Income Fund
--------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
Electric Utilities - 13.3%
26,000 Baltimore Gas & Electric Company.......$ 885,625
8,000 Duke Energy Corporation................ 443,000
16,000 Florida Progress Corporation........... 628,000
26,000 PacifiCorp............................. 710,125
22,000 SCANA Corporation...................... 658,625
20,000 Teco Energy Inc........................ 562,500
20,000 Union Electric Company................. 865,000
15,000 Western Resources, Inc................. 645,000
15,000 Wisconsin Energy Corporation........... 431,250
-------
5,829,125
Electrical Equipment - 4.8%
10,000 AMP, Inc.............................. 420,000
11,000 Emerson Electric Company.............. 620,812
10,000 General Signal Corporation............ 421,875
13,000 Hubbell Inc., Class B................. 641,062
-------
2,103,749
Food and Beverage - 8.5%
28,000 Anheuser-Busch Companies Inc........... 1,232,000
14,000 General Mills Inc...................... 1,002,750
17,000 Heinz (H.J.) Company................... 863,812
23,000 McCormick & Company, Inc.,
Non-Voting Shares...................... 645,438
-------
3,744,000
Gas Utilities - 3.0%
11,000 Consolidated Natural Gas Company....... 665,500
15,000 Questar Corporation.................... 669,375
-------
1,334,875
Household Products - 1.9%
34,000 Rubbermaid, Inc........................ 850,000
Insurance - 6.7%
8,000 American General Corporation........... 432,500
9,000 Marsh & McLennan Companies............. 671,062
21,000 SAFECO Corporation..................... 1,022,438
10,000 St. Paul Companies, Inc................ 820,625
-------
2,946,625
Leisure Time - 1.0%
10,000 Fleetwood Enterprises, Inc............. 424,375
Machinery and Tools - 1.7%
15,000 Cooper Industries Inc.................. 735,000
Newspapers/Publishing - 1.0%
6,000 McGraw-Hill Companies, Inc............. 444,000
Oil - 9.2%
11,000 Amoco Corporation...................... 936,375
12,000 Atlantic Richfield Company............. 961,500
5,000 Chevron Corporation.................... 385,000
9,000 Dresser Industries Inc................. 377,437
6,000 Exxon Corporation...................... 367,125
21,000 Phillips Petroleum Company............. 1,021,125
---------
4,048,562
Pharmacy/Drugs - 2.5%
6,000 American Home Products Corporation.....$ 459,000
18,000 Pharmacia & Upjohn, Inc................ 659,250
-------
1,118,250
Pulp and Paper - 4.1%
8,000 International Paper Company............ 345,000
10,000 Kimberly-Clark Corporation............. 493,125
4,000 Union Camp Corporation................. 214,750
15,000 Weyerhaeuser Company................... 735,938
-------
1,788,813
Railroads - 1.5%
22,000 Norfolk Southern Corporation........... 677,875
Retail Trade - 4.1%
13,000 May Department Stores Company.......... 684,938
18,000 Penney (J.C.) Company, Inc............. 1,085,625
---------
1,770,563
Telephone/Long Distance - 1.0%
7,000 AT&T Corporation....................... 428,750
Telephone/Regional-Local - 6.8%
16,000 Ameritech Corporation.................. 1,288,000
14,000 Bell Atlantic Corporation.............. 1,274,000
8,000 BellSouth Corporation.................. 450,500
-------
3,012,500
Telephone/Networks - 3.3%
28,000 GTE Corporation........................ 1,463,000
Tobacco - 4.0%
14,000 Philip Morris Companies Inc............ 634,375
30,000 UST Inc................................ 1,108,125
---------
1,742,500
TOTAL COMMON STOCKS
(Cost $35,804,550) 41,892,187
----------
REPURCHASE AGREEMENT - 6.1%
(Cost $2,681,000)
Principal Amount
$2,681,000 Agreement with Bear Stearns, Tri-Party,
6.850% dated 12/31/97, to be repurchased
at $2,682,020 on 01/02/98, collateralized
by $2,792,667 market value of U.S. government
securities, having various maturities and
various interest rates................. 2,681,000
---------
TOTAL INVESTMENTS - 101.3%
(Cost $38,485,550*).............................................. 44,573,187
OTHER ASSETS AND LIABILITIES - (1.3%)
(Net)............................................................ (582,594)
-------
NET ASSETS - 100.0%..............................................$ 43,990,593
* Aggregate cost for federal tax purposes.
23
The accompanying notes are an integral part of these unancial statements.
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
International Growth Fund
- -------------------------
Portfolio Highlights
(Unaudited)
====================
PORTFOLIO MANAGEMENT
--------------------
John D. Boich, CFA.... Senior Portfolio Manager
Oscar A. Castro, CFA.................... Senior
Portfolio Manager
================
FUND PERFORMANCE
----------------
Average annual total returns
for the period ended 12/31/97
-----------------------------------------------
Montgomery
International Growth Fund
Since inception (7/3/95)................. 17.18%
One year................................. 10.15%
------------------------------------------------
MSCI EAFE Index
Since 6/30/95............................. 6.48%
One year.................................. 1.78%
------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY INT'L GROWTH(R)
Initial Investment: $10,000 Period: 07/03/95 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
07/03/95 12.00 $ 10,000 $ 0 $ 10,000
07/95 12.10 $ 10,083 $ 0 $ 10,083
08/95 12.07 $ 10,058 $ 0 $ 10,058
09/95 12.50 $ 10,417 $ 0 $ 10,417
10/95 12.81 $ 10,675 $ 0 $ 10,675
11/95 12.94 $ 10,783 $ 0 $ 10,783
12/95 13.37 $ 11,142 $ 0 $ 11,142
01/96 13.67 $ 11,392 $ 0 $ 11,392
02/96 13.94 $ 11,617 $ 0 $ 11,617
03/96 14.21 $ 11,842 $ 0 $ 11,842
04/96 15.12 $ 12,600 $ 0 $ 12,600
05/96 15.51 $ 12,925 $ 0 $ 12,925
06/96 15.31 $ 12,758 $ 0 $ 12,758
07/96 14.62 $ 12,183 $ 0 $ 12,183
08/96 15.00 $ 12,500 $ 0 $ 12,500
09/96 15.26 $ 12,717 $ 0 $ 12,717
10/96 13.61 $ 11,342 $ 1,395 $ 12,737
11/96 14.34 $ 11,950 $ 1,470 $ 13,420
12/96 14.40 $ 12,000 $ 1,477 $ 13,477
01/97 14.69 $ 12,242 $ 1,506 $ 13,748
02/97 14.62 $ 12,138 $ 1,500 $ 13,683
03/97 14.67 $ 12,225 $ 1,505 $ 13,730
04/97 14.68 $ 12,233 $ 1,506 $ 13,739
05/97 15.57 $ 12,975 $ 1,597 $ 14,572
06/97 16.25 $ 13,542 $ 1,666 $ 15,208
07/97 16.78 $ 13,983 $ 1,721 $ 15,704
08/97 15.92 $ 13,267 $ 1,632 $ 14,899
09/97 16.87 $ 14,058 $ 1,731 $ 15,789
10/97 15.57 $ 12,975 $ 1,597 $ 14,572
11/97 15.76 $ 13,133 $ 1,617 $ 14,750
12/97 14.76 $ 12,300 $ 2,545 $ 14,845
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH INTERNATIONAL GROWTH
LIPPER
INTERNATIONAL MSCI EAFE IX ND
AVE AVE
6/95-12/97 6/95-12/97
DATE RETURN VALUE DATE RETURN VALUE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jun-95 $ 10,000 Jun-95 $ 10,000
Jul-95 $ 10,533 Jul-95 $ 10,623
Aug-95 $ 10,335 Aug-95 $ 10,217
Sep-95 $ 10,487 Sep-95 $ 10,417
Oct-95 $ 10,274 Oct-95 $ 10,137
Nov-95 $ 10,384 Nov-95 $ 10,419
Dec-95 $ 10,699 Dec-95 $ 10,839
Jan-96 $ 10,939 Jan-96 $ 10,883
Feb-96 $ 10,984 Feb-96 $ 10,920
Mar-96 $ 11,174 Mar-96 $ 11,152
Apr-96 $ 11,533 Apr-96 $ 11,476
May-96 $ 11,498 May-96 $ 11,265
Jun-96 $ 11,577 Jun-96 $ 11,328
Jul-96 $ 11,141 Jul-96 $ 10,997
Aug-96 $ 11,266 Aug-96 $ 11,021
Sep-96 $ 11,508 Sep-96 $ 11,314
Oct-96 $ 11,425 Oct-96 $ 11,198
Nov-96 $ 11,909 Nov-96 $ 11,644
Dec-96 $ 11,950 Dec-96 $ 11,494
Jan-97 $ 11,907 Jan-97 $ 11,092
Feb-97 $ 12,063 Feb-97 $ 11,273
Mar-97 $ 12,091 Mar-97 $ 11,314
Apr-97 $ 12,109 Apr-97 $ 11,374
May-97 $ 12,827 May-97 $ 12,114
Jun-97 $ 13,426 Jun-97 $ 12,782
Jul-97 $ 13,802 Jul-97 $ 12,989
Aug-97 $ 12,793 Aug-97 $ 12,019
Sep-97 $ 13,589 Sep-97 $ 12,692
Oct-97 $ 12,549 Oct-97 $ 11,717
Nov-97 $ 12,423 Nov-97 $ 11,597
Dec-97 $ 12,519 Dec-97 $ 11,698
</TABLE>
/1/ The Morgan Stanley Capital International EAFE Index is composed of 21
developed market countries in Europe, Australasia and the Far East. The
returns are presented net of dividend withholding taxes.
/2/ The Lipper International Funds Average universe consists of 292 funds.
I N V E S T M E N T R E V I E W
Q: How did the Fund perform from July 1 through December 31, 1997?
A: The Fund gained six percentage points more than its benchmark, the MSCI EAFE
Index. It also led the index in 1997, with a gain of 10.2% to EAFE's 1.8%.
Q: What factors helped the Fund outperform its benchmark?
A: The Fund's underexposure to Japan paid off in the second half of 1997, when
that market faltered. We haven't found many Japanese companies that we consider
attractive from a bottom-up perspective, and have kept the portfolio
underweighted there relative to our EAFE benchmark for a while. As of July 1,
the Fund had just 14.2% of its assets in Japan, compared with an index
weighting of roughly 25%. Earlier in the year, investors had been pessimistic
about Japan's economy. The sentiment grew even more gloomy later on, as
investors became concerned about Japan's links to developing Asian economies
such as Indonesia.
The Fund also benefited from our stock selection in Europe during the turbulent
fourth quarter. One of our U.K. holdings, Amvescap, gained 26.3% over that
period while the MSCI U.K. Index inched up just 0.3% in U.S. dollar terms.
(Amvescap is one of the world's largest investment managers.) Similarly, the
MSCI France Index declined 1.3% from October through December, but the Fund
profited from such holdings as Atos and Generale des Eaux. Atos, a leading
European information-technology provider, gained 21% in the final three months
of 1997 while Generale des Eaux, a major infrastructure company, rose 20%.
Q: Asia's economic crisis dominated headlines in late 1997. What impact do
you think it might have on international markets in 1998?
A: Among international developed markets, we believe that the Asian crisis will
have the largest impact on Japan. About 44% of Japan's exports are destined for
neighboring Asian countries. So we suspect that slower growth in the region
will put pressure on Japan's fragile economy. The late-1997 devaluation of the
South Korean won is another obstacle, as Japan has extensive financial
interests in South Korea and competes directly with it on the trade front. We
expect forecasts for Japan's 1998 GDP growth to decline to the 1.0 to 1.5%
range from the current 1.8 to 2.0% range. That does not amount to a disaster
for Japan, but it is another thorn in the side of an already ailing economy.
That said, we do find some Japanese exporters (such as Sony) attractive.
We did take advantage of the recent volatility to initiate or add to our
position in companies that we believe can stay on a solid footing even if the
environment becomes more challenging. We recently increased the Fund's position
in Unilever, for example. This multi-national (which is based in the
Netherlands but has extensive operations in the United States) makes a huge
range of food and other consumer-oriented products. Not only does it have
little exposure to Asia, but it has also been restructuring to cut costs. As a
result, we believe that it may be a defensive holding if the global economy
slows.
24
<PAGE>
----------------
Montgomery Funds
----------------
International Growth Fund
-------------------------
I n v e s t m e n t s
Q: You've said in the past that even though you build the portfolio from the
bottom up-by focusing on corporate fundamentals-themes sometimes do emerge. Is
that true now?
A: Yes. We think firms involved in the fee-based asset management business may
be attractive long-term investments, as they could benefit from financial
deregulation in Europe and other parts of the world. Many investors still
overlook this potential and continue to value these companies as traditional
banks and insurers. That's allowed us to invest in these firms at prices that
we believe are very attractive. We've found some similar dynamics at work in
the European utilities industry. Many investors have outdated notions that this
sector is a backwater. We, in contrast, see a lot of potential for growth, as
European countries deregulate their telecommunications and electricity
distribution networks. This is one of the reasons why we have invested in
Germany's Viag and the U.K.'s United Utilities, two companies that we believe
may emerge as leaders in the newly competitive environment. Deregulation, in
fact, is one of the portfolio's overarching themes. It is transforming many
industries-from telecommunications to electric utilities, transportation to
financial services-in Europe and potentially Japan. We believe that it is
creating great opportunities for investors.
Q: After all the market turmoil in 1997, some market observers have been
questioning whether it makes sense to invest overseas. How would you respond to
that?
A: History has shown that over time there is no single stock market that
provides consistent leadership. Some rise; others fall. Over the past three
years, the U.S. market has risen substantially while others such as Japan have
declined. That's something to consider when evaluating international investing.
Additionally, many of the forces that have driven the U.S. rally are only now
beginning to affect markets in Europe and Asia. Deregulation and corporate
restructuring are sweeping across Europe and are soon to be dominant forces in
Japan. Having witnessed how these trends boosted U.S. stocks, we're optimistic
about similar developments abroad.
================================================
TOP TEN HOLDINGS
------------------------------------------------
(as a percentage of total net assets)
Gucci Group................................ 2.7%
Reckitt and Coleman PLC.................... 2.6%
Nokia Corporation AB, Series A............. 2.6%
Mannesmann AG.............................. 2.6%
ASM Lithography Holding NV................. 2.5%
Unilever NV................................ 2.5%
Glaxo Wellcome PLC......................... 2.4%
Baer (Julius) Holdings AG-B................ 2.4%
Axime (Ex Segin)........................... 2.4%
Telefonica de Espana, ORD.................. 2.4%
================================================
TOP FIVE COUNTRIES
------------------------------------------------
(as a percentage of total net assets)
Great Britain............................. 17.0%
Japan..................................... 11.7%
Italy..................................... 10.8%
Netherlands............................... 10.7%
France..................................... 9.5%
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
COMMON STOCKS - 92.9%
Shares Value (Note 1)
Australia - 1.5%
34,204 National Australia Bank, Ltd. (Banks)........ $ 477,727
Canada - 1.9%
26,300 Cognos, Inc.+ (Software Systems)............. 606,544
China/Hong Kong - 6.3%
10,800 HSBC Holdings (Banks)........................ 266,202
14,700 HSBC Holdings-London (Banks)................. 376,623
172,000 New World Development Company
Ltd. (Conglomerates)......................... 594,864
331,000 New World Infrastructure Ltd.+
(Heavy Construction)......................... 745,380
-------
1,983,069
Finland - 4.8%
127,200 Merita PLC+ (Banks).......................... 694,450
11,520 Nokia Corporation AB, Series A
(Telecommunications Equipment)............... 817,617
-------
1,512,067
France - 9.5%
8,070 AXA S.A. (Insurance)......................... 624,285
5,862 Axime (Ex Segin)+ (Information/
Business Services)........................... 755,633
4,783 Eaux (Cie Generale des) (Conglomerates)...... 667,395
11,100 France Telecom S.A.+ (Telephone/Networks).... 402,513
19,500 Renault S.A.+ (Auto/Auto Parts).............. 548,397
-------
2,998,223
25
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ----------------
Montgomery Funds
- ----------------
International Growth Fund
- -------------------------
I n v e s t m e n t s
COMMON STOCKS - continued
Shares Value (Note 1)
Germany - 8.9%
520 Axel Springer Verlag, Class A
(Newspapers/Publishing)...................... $ 349,750
25,000 Deutsche Lufthansa AG+ (Airlines)............ 479,433
1,610 Mannesmann AG (Conglomerates)................ 813,502
3,590 SGL Carbon AG (Metals & Mining).............. 462,968
1,350 Viag AG (Electric Utilities)................. 727,154
-------
2,832,807
Great Britain - 17.0%
472,100 Aegis Group, ORD
(Broadcasting/Advertising)................... 531,117
84,948 Amvescap PLC+ (Holding)...................... 732,450
32,553 Glaxo Wellcome PLC (Pharmacy/Drugs).......... 769,873
55,900 National Power PLC, ORD
(Electric Utilities)......................... 550,844
140,654 Orange PLC+ (Telecommunications/
Wireless).................................... 609,848
40,718 Railtrack Group PLC (Railroad)............... 646,663
52,463 Reckitt and Coleman PLC (Cosmetics
& Personal Care)............................. 822,852
56,909 United Utilities PLC, ORD (Water Utilities).. 729,023
-------
5,392,670
Ireland - 2.2%
3,700 Axogen Ltd. Units+ (Pharmacy/Drugs).......... 147,075
11,000 Elan Corporation PLC, ADR**+
(Pharmacy/Drugs)............................. 563,063
-------
710,138
Italy - 10.8%
500,000 Banca di Roma+ (Banks)....................... 504,522
90,940 Eni SpA (Oil)................................ 515,618
20,740 Gucci Group (Retail Trade)................... 868,488
130,900 Telecom Italia Mobile SpA (Telephone/
Wireless).................................... 604,182
110,600 Telecom Italia SpA+
(Telephone/Regional-Local)................... 706,490
51,700 Telecom Italia SpA Risp+
(Telephone/Regional-Local)................... 227,959
-------
3,427,259
Japan - 5.4%
6,300 Advantest Corporation
(Electrical Equipment)....................... 357,105
60,000 Mori Seiki (Machinery & Tools)............... 620,452
8,400 Sony Corporation (Electronics)............... 746,381
-------
1,723,938
Netherlands - 10.7%
11,800 ASM Lithography Holding N.V.+
(Electronics Equipment)...................... 797,238
15,200 International Nederlanden Groep N.V.
(Banks)...................................... 640,174
25,400 Ispat International N.V.+ (Steel)............ 549,275
10,450 Philips Electronics N.V. (Electronics)....... 626,680
12,600 Unilever N.V. (Cosmetics & Personal Care).... 786,713
-------
3,400,080
Portugal - 2.1%
6,100 Telecel-Communicacaoes Pessoais S.A.+
(Telephone/Wireless)......................... 649,938
Spain - 2.4%
26,240 Telefonica de Espana, ORD
(Telephone/Networks)......................... 749,222
Sweden - 3.2%
12,700 Ericsson (L.M.) Telephone Company,
Class B (Telecommunications Equipment)....... 477,456
23,900 Sparbanken Sverige AB, Swedbank (Banks)...... 543,325
-------
1,020,781
Switzerland - 6.2%
412 Baer (Julius) Holdings AG-B
(Diversified Financial Services)............. 763,876
266 Baloise Holding Ltd.+ (Insurance)............ 491,908
440 Novartis AG (Pharmacy/Drugs)................. 713,440
-------
1,969,224
TOTAL COMMON STOCKS
(Cost $26,905,909)......................................... 29,453,687
----------
PREFERRED STOCK - 1.8%
(Cost $682,811)
Brazil - 1.8%
4,600,000 Telec de Minas Gerais S.A.
(Telephone/Regional-Local)................... 581,157
-------
CONVERTIBLE BONDS - 6.3%
Principal Amount
Japan - 6.3%
$116,000,000 Asahi Bank, 0.500% due 08/01/07 (Banks)..... 668,633
72,000,000 Sumitomo Bank & Trust,
0.750% due 05/31/01 (Banks)................. 583,225
100,000,000 Sumitomo Bank & Trust,
0.500% due 10/01/07*** (Banks).............. 570,663
30,000,000 Sumitomo Bank & Trust,
0.500% due 10/01/07 (Banks)................. 171,199
-------
TOTAL CONVERTIBLE BONDS
(Cost $2,148,177).......................................... 1,993,720
---------
TOTAL INVESTMENTS - 101.0%
(Cost $29,736,897*)........................................ 32,028,564
OTHER ASSETS AND LIABILITIES - (1.0%)
(Net)...................................................... (330,962)
-------
NET ASSETS - 100%.......................................... $ 31,697,602
==========
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1997, which have an aggregate market
value of $250,716, represent 0.8% of the total net assets of the Fund (see
note 5 to Financial Statements).
*** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Non-income producing security.
Abbreviations:
ADR American Depositary Receipt
ORD Ordinary
26
The accompanying notes are an integral part of these financial statements.
<PAGE>
--------------------
The Montgomery Funds
--------------------
International
Small Cap Fund
--------------------
P o r t f o l i o H i g h l i g h t s
(Unaudited)
I N V E S T M E N T R E V I E W
Q: How did the International Small Cap Fund perform over the latter half of
1997?
A: It outperformed its benchmark, the unmanaged Salomon Smith Barney World
Extended (ex-U.S.) Market Index, though both posted a loss. The Fund also
outperformed the index over the full-year period, by a margin of nearly six
percentage points.
Q: What factors drove that performance?
A: The Asian crisis wreaked havoc on world markets in the late summer and fall,
putting international small-cap shares under some pressure. Japanese equities
fell steeper into their decline. We have kept the portfolio very light on Japan
for several years, but the Fund still had about 18% of its assets there in
mid-1997. That exposure worked against us. Largely due to price depreciation,
the Fund's weighting in Japan declined to 11.9% by December 31. The Fund also
had roughly 5% of its assets in China/Hong Kong, another volatile market during
the second half.
These Asian holdings were offset by some of the Fund's European stocks. Its
largest holding at year end, a U.K. transportation company called National
Express, performed well in the second half. This company has benefited from the
United Kingdom's moves to deregulate its transportation system. That trend is
occurring in other sectors and countries such as Germany, where another of our
large holdings, Vossloh, is based. We have a positive outlook for this firm,
which manufactures rail equipment and electrical components; it may profit from
deregulation and increased demand for cross-border transportation with the
advent of the European Economic & Monetary Union (EMU).
Q: There's been a lot of talk about the "flight to quality" in the U.S. market
during the second half. Did the same thing happen overseas?
A: Yes, but it might be more aptly called a "flight to blue chips." In Europe
investors favored export-oriented companies and financial services firms over
cyclicals, and large-cap stocks over small. We do think investors were somewhat
justified in being wary of cyclicals, as Asia's slowdown is likely to reduce
demand for basic materials and other cycle-sensitive goods. But we think
investors were misguided in applying the same rationale to international
small-caps (with the exception of those in Japan). Most European small
companies have little or no exposure to Asia, but are instead much more
domestically driven. As a result, they may benefit from potentially more-robust
economic activity in many European countries this year, despite Asia's
slowdown.
In our view it's also mistaken to assume that a "flight to quality"
necessarily means a flight from small-caps. We apply the same strategy to
finding investments for this Fund as we use for the larger-cap International
Growth Fund: It entails looking for companies that exhibit strength and
stability through a clean balance sheet, a leading competitive position and
capable
================================================
PORTFOLIO MANAGEMENT
------------------------------------------------
John D. Boich, CFA .... Senior Portfolio Manager
================================================
F U N D P E R F O R M A N C E
------------------------------------------------
Average annual total returns
for the period ended 12/31/97
------------------------------------------------
Montgomery
International Small Cap Fund
Since inception (9/30/93) .... 5.46%
One year .................... (0.78%)
Three years .................. 8.42%
------------------------------------------------
MSCI EAFE Index
Since 9/30/93 ................. 6.46%
One year ...................... 1.78%
Three years ................... 6.27%
------------------------------------------------
Salomon Smith Barney World
Extended (ex-U.S.) Market Index
Since 9/30/93 ................. 2.51%
One year ..................... (6.61%)
Three years .................. 1.77%
------------------------------------------------
Past performance is no guarantee of future
results. Net asset value, investment return and
principal value will fluctuate, so shares, when
redeemed, may be worth more or less than their
original cost.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY INT'L SMALL CAP(R)
Initial Investment: $10,000 Period: 09/30/93 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date Nav Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/93 12.00 $10,000 $0 $10,000
09/93 12.00 $10,000 $0 $10,000
10/93 12.52 $10,433 $0 $10,433
11/93 12.59 $10,492 $0 $10,492
12/93 13.61 $11,342 $0 $11,342
01/94 14.54 $12,117 $0 $12,117
02/94 14.50 $12,083 $0 $12,083
03/94 13.39 $11,158 $0 $11,158
04/94 12.98 $10,817 $0 $10,817
05/94 12.75 $10,625 $0 $10,625
06/94 12.02 $10,017 $0 $10,017
07/94 12.54 $10,450 $0 $10,450
08/94 12.99 $10,825 $0 $10,825
09/94 12.62 $10,517 $0 $10,517
10/94 12.77 $10,662 $0 $10,642
11/94 11.94 $9,950 $1 $9,951
12/94 11.80 $9,833 $2 $9,835
01/95 11.18 $9,317 $1 $9,318
02/95 11.29 $9,408 $1 $9,409
03/95 11.16 $9,300 $1 $9,301
04/95 11.45 $9,542 $1 $9,543
05/95 11.56 $9,633 $2 $9,635
06/95 11.75 $9,792 $1 $9,793
07/95 12.34 $10,283 $2 $10,285
08/95 12.31 $10,258 $2 $10,260
09/95 12.90 $10,750 $1 $10,751
10/95 12.78 $10,650 $1 $10,651
11/95 12.68 $10,567 $19 $10,586
12/95 13.16 $10,967 $20 $10,987
01/96 13.67 $11,392 $21 $11,413
02/96 13.69 $11,408 $21 $11,429
03/96 13.98 $11,650 $21 $11,671
04/96 14.57 $12,142 $22 $12,164
05/96 14.96 $12,467 $23 $12,490
06/96 14.86 $12,383 $23 $12,406
07/96 14.37 $12,975 $22 $11,997
08/96 14.79 $12,325 $23 $12,348
09/96 14.88 $12,400 $23 $12,423
10/96 14.71 $12,258 $23 $12,281
11/96 15.30 $12,750 $23 $12,773
12/96 15.13 $12,608 $23 $12,631
01/97 15.62 $13,017 $24 $13,041
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FROM FROM
1 MONTH INCEPTION INCEPTION 1 YEAR 3 YEAR 3 YEAR
RETURN DATE VALUE CUMULATIVE ANNUALIZED CUMULATIVE CUMULATIVE ANNUALIZED
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
9/30/93 10,000.00
-0.3600% 10/31/93 9,964.00 -0.3600%
-8.3700% 11/30/93 9,130.01 -8.6999%
6.4400% 12/31/93 9,717.99 -2.8201%
9.9900% 1/31/94 10,688.81 6.8881%
0.7000% 2/28/94 10,763.63 7.6363%
-1.6400% 3/31/94 10,587.11 5.8711%
3.0000% 4/30/94 10,904.72 9.0472%
-1.4300% 5/31/94 10,748.79 7.4879%
2.1000% 6/30/94 10,974.51 9.7451%
1.1400% 7/31/94 11,099.62 10.9962%
1.0600% 8/31/94 11,217.28 12.1728%
-2.8600% 9/30/94 10,896.46 8.9646% 8.9646% 8.9646%
1.8100% 10/31/94 11,093.69 10.9369% 10.0392% 11.3377%
-6.2400% 11/30/94 10,401.44 4.0144% 3.4299% 13.9258%
1.3400% 12/31/94 10,540.82 5.4082% 4.2965% 8.4671%
-3.2500% 1/31/95 10,198.24 1.9824% 1.4791% -4.5895%
-1.4600% 2/28/95 10,049.35 0.4935% 0.3488% -6.6361%
4.2500% 3/31/95 10,476.45 4.7645% 3.1545% -1.0453%
3.0000% 4/30/95 10,790.74 7.9074% 4.9319% -1.0453%
-1.7500% 5/31/95 10,601.90 6.0190% 3.5711% -1.3665%
-1.2300% 6/30/95 10,471.50 4.7150% 2.6708% -4.5834%
5.8300% 7/31/95 11,081.99 10.8199% 5.7652% -0.1589%
-2.5300% 8/31/95 10,801.61 8.0161% 4.1027% -3.7056%
0.7800% 9/30/95 10,885.87 8.8587% 4.3354% -0.0972%
-2.8800% 10/31/95 10,572.35 5.7235% 2.7055% -4.6994%
1.0600% 11/30/95 10,684.42 6.8442% 3.1020% 2.7206%
3.8300% 12/31/95 11,093.63 10.9363% 4.7164% 5.2445%
1.7800% 1/31/96 11,291.10 12.9110% 5.3334% 10.7161%
1.5600% 2/29/96 11,467.24 14.6724% 5.8293% 14.1093%
2.2970% 3/31/96 11,730.64 17.3064% 6.5893% 11.9716%
5.2588% 4/30/96 12,347.54 23.4754% 8.5044% 14.4271%
-0.8120% 5/31/96 12,247.27 22.4727% 7.8927% 15.5196%
0.0130% 6/30/96 12,248.87 22.4887% 7.6532% 16.9734%
-3.7815% 7/31/96 11,785.68 17.8568% 5.9653% 6.3498%
1.0143% 8/31/96 11,905.22 19.0522% 6.1531% 10.2170%
0.5558% 9/30/96 11,971.39 19.7139% 6.1755% 9.9719% 19.7139% 6.1930%
-0.3928% 10/31/96 11,924.37 19.2437% 8.8657% 12.7882% 19.6745% 6.1813%
1.6355% 11/30/96 12,119.40 21.1940% 6.2517% 13.4305% 32.7424% 9.9203%
-1.8394% 12/31/96 11,896.48 18.9648% 5.4803% 7.2370% 22.4171% 6.9878%
-2.1610% 1/31/97 11,639.40 16.3940% 4.6505% 3.0847% 8.8932% 2.8860%
1.6800% 2/28/97 11,834.94 18.3494% 5.0548% 3.2065% 9.9530% 3.2103%
-1.3259% 3/31/97 11,678.01 16.7801% 4.5300% -0.4487% 10.3041% 3.3200%
-1.4950% 4/30/97 11,503.43 15.0343% 3.9858% -6.8362% 5.4903% 1.7959%
6.4076% 5/31/97 12,240.52 22.4052% 5.6656% -0.0551% 13.8782% 4.4230%
2.2608% 6/30/97 12,517.26 25.1726% 6.1690% 2.1911% 14.0575% 4.4778%
1.5131% 7/31/97 12,706.65 27.0665% 6.4443% 7.8144% 14.4783% 4.6060%
-4.2700% 8/31/97 12,164.08 21.6408% 5.1238% 2.1743% 8.4406% 2.7354%
1.7800% 9/30/97 12,380.60 23.8060% 5.4799% 3.4182% 13.6204% 4.3443%
-3.9500% 10/31/97 11,891.57 18.9157% 4.3293% -0.2751% 7.1922% 2.3399%
-4.4600% 11/30/97 11,361.20 13.6120% 3.1078% -6.2560% 9.2272% 2.9829%
-2.2100% 12/31/97 11,110.12 11.1012% 2.5050% -6.6100% 5.4009% 1.7672%
</TABLE>
<TABLE>
<CAPTION>
INDEX HYPOTHETICAL GROWTH FOR 10,000
INT'L SMALL CAP FUND INT'L SMALL CAP
LIPPER
INTERNATIONAL SMALL CAP MSCI EAFE IX ND
AVE AVE
9/93-12/97 9/93-12/97
DATE RETURN VALUE DATE RETURN VALUE
------------------------------------------------------------------------------
<S> <C> <C> <C>
Sep-92 $10,000 Sep-92 $10,000
Oct-93 $10,421 Oct-93 $10,308
Nov-93 $10,197 Nov-93 $ 9,407
Dec-93 $11,145 Dec-93 $10,086
Jan-94 $12,063 Jan-94 $10,939
Feb-94 $12,106 Feb-94 $10,909
Mar-94 $11,534 Mar-94 $10,439
Apr-94 $11,662 Apr-94 $10,882
May-94 $11,539 May-94 $10,819
Jun-94 $11,318 Jun-94 $10,972
Jul-94 $11,530 Jul-94 $11,078
Aug-94 $11,825 Aug-94 $11,340
Sep-94 $11,528 Sep-94 $10,983
Oct-94 $11,614 Oct-94 $11,349
Nov-94 $10,930 Nov-94 $10,803
Dec-94 $10,794 Dec-94 $10,871
Jan-95 $10,310 Jan-95 $10,453
Feb-95 $10,318 Feb-95 $10,423
Mar-95 $10,294 Mar-95 $11,073
Apr-95 $10,607 Apr-95 $11,490
May-95 $10,688 May-95 $11,353
Jun-95 $10,755 Jun-95 $11,154
Jul-95 $11,275 Jul-95 $11,848
Aug-95 $11,159 Aug-95 $11,396
Sep-95 $11,368 Sep-95 $11,619
Oct-95 $11,082 Oct-95 $11,307
Nov-95 $10,940 Nov-95 $11,621
Dec-95 $11,299 Dec-95 $12,089
Jan-96 $11,677 Jan-96 $12,139
Feb-96 $11,912 Feb-96 $12,180
Mar-96 $12,129 Mar-96 $12,439
Apr-96 $12,567 Apr-96 $12,800
May-96 $12,791 May-96 $12,565
Jun-96 $12,860 Jun-96 $12,635
Jul-96 $12,404 Jul-96 $12,266
Aug-96 $12,589 Aug-96 $12,293
Sep-96 $12,647 Sep-96 $12,620
Oct-96 $12,617 Oct-96 $12,490
Nov-96 $12,996 Nov-96 $12,987
Dec-96 $13,022 Dec-96 $12,820
Jan-97 $13,176 Jan-97 $12,372
Feb-97 $13,366 Feb-97 $12,574
Mar-97 $13,294 Mar-97 $12,620
Apr-97 $13,130 Apr-97 $12,687
May-97 $13,875 May-97 $13,512
Jun-97 $14,210 Jun-97 $14,257
Jul-97 $14,162 Jul-97 $14,488
Aug-97 $13,647 Aug-97 $13,406
Sep-97 $14,006 Sep-97 $14,157
Oct-97 $13,303 Oct-97 $13,069
Nov-97 $12,899 Nov-97 $12,935
Dec-97 $12,774 Dec-97 $13,048
</TABLE>
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY INT'L SMALL CAP(R)
Initial Investment: $10,000 Period: 09/30/93 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date Nav Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
02/97 15.81 $13,175 $24 $13,199
03/97 15.61 $13,008 $24 $13,032
04/97 15.48 $12,900 $24 $12,924
05/97 16.72 $13,933 $26 $13,959
06/97 17.16 $14,300 $26 $14,326
07/97 17.00 $14,167 $26 $14,193
08/97 16.64 $13,867 $25 $13,892
09/97 16.91 $14,092 $26 $14,118
10/97 15.86 $13,217 $24 $13,241
11/97 14.99 $12,492 $23 $12,515
12/97 12.68 $10,567 $1,966 $12,533
</TABLE>
/1/ The Morgan Stanley Capital International EAFE Index is composed of 21
developed market countries in Europe, Australasia and the Far East. The
returns are presented net of dividend withholding taxes.
/2/ The Lipper International Small Cap Funds Average universe consists of five
funds.
/3/ The Salomon Smith Barney World Extended (ex-U.S.) Market Index is a
comprehensive float-weighted equity consisting of every company with an
investable market capitalization of over $100 million in 21 countries.
Within this index, the Extended (ex-U.S.) Market Index defines the small
capitalization stock universe
27
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
International
Small Cap Fund
- --------------------
P o r t f o l i o H i g h l i g h t s
====================================================
TOP TEN HOLDINGS
----------------------------------------------------
(as percentage of total net assets)
National Express Group PLC .................... 3.3%
Vossloh AG .................................... 2.8%
Choice Hotels Scandinavia ASA ................. 2.4%
CN Selmer A.S ................................. 2.2%
ECsoft Group PLC, ADR ......................... 2.1%
Cognos, Inc. .................................. 2.0%
Telecel-Comunicacaoes Pessoais SA ............. 2.0%
Azkoyen S.A. .................................. 1.9%
Assurances Banque Populaire ................... 1.9%
Editoriale L'Espresso SpA ..................... 1.9%
====================================================
TOP FIVE COUNTRIES
----------------------------------------------------
(as a percentage of total net assets)
Great Britain ................................ 16.3%
Japan ........................................ 11.9%
Sweden ....................................... 8.0%
Germany ...................................... 7.1%
Italy ........................................ 6.5%
management, among other qualities. In other words, we don't have to lower our
standards to find attractive small-cap investments. Whatever the market segment,
one of our goals is to find companies that we think will be able to thrive in a
variety of economic environments.
Q: Did the second half's volatility prompt you to use any special
investment tactics?
A: No, but we did accelerate our research itinerary to better understand the
risks and opportunities that the volatility might be creating. Our analysts
traveled extensively in Asia and Europe during the autumn. We also took
advantage of market volatility to build positions in companies whose shares we
thought had been oversold. With investors favoring large-caps over small-caps in
the second half, there seemed to be a great deal of buying opportunities in the
international small-cap universe. We put emphasis on companies that we think may
be able to deliver consistent earnings--sometimes called "earnings
visibility"--even in a less robust global economic environment.
Q: What do you think 1998 might hold for international small-cap investors?
A: We think that global markets may remain volatile as investors and economists
factor the potential impact of Asia's slowdown into their expectations for 1998.
Prior to the crisis, the consensus among economists was that the global economy
would grow by 2.93% in 1998. As of early January, they had reduced that to
2.66%. This largely reflects lower expectations for Japan and the emerging
markets, but we think economists will also have to lower their forecasts for the
United States and Europe in the coming months. Investors, in turn, may be
disappointed by lower-than-expected corporate earnings once Asia's slowdown is
fully factored into the equation. That said, "lower than expected" may not
necessarily mean weak; it could simply mean moderate.
We think that stock selection will be paramount in this climate. When the
outlook is uncertain, investors often turn to firms that they believe will
achieve consistent earnings growth. That's a quality we've sought in our
holdings since the Fund's inception. We seek out firms that we believe have
strong, consistent earnings and cash-flow growth, top management teams,
commanding market positions and attractive valuations. These companies may
become market leaders in the coming years and, as such, could provide excellent
long-term growth potential.
28
The accompanying notes are an integral part of these unancial statements.
<PAGE>
---------------------
The Montgomery Funds
---------------------
International
Small Cap Fund
---------------------
I n v e s t m e n t s
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
COMMON STOCKS - 82.4%
Shares Value (Note 1)
Australia -- 1.8%
523,045 Tyndall Australia Ltd.***
(Diversified Financial Services).............$ 818,147
Austria -- 1.8%
9,393 Voest Alpine Eisenbahnsystem
(Heavy Construction)......................... 825,415
Belgium -- 1.0%
22,900 Virgin Express Holdings PLC, Sponsored
ADR+ (Transportation)........................ 469,450
Canada -- 2.1%
39,800 Cognos, Inc.+ (Software Systems)............. 917,888
51,640 InMedia Presentations Inc.+
(Software Systems)........................... 46,073
------
963,961
China/Hong Kong -- 5.2%
1,813,000 Esprit Asia Holdings Ltd. (Retail Trade)..... 590,763
1,380,000 Four Seas Mercantile Holdings Ltd.
(Food & Beverage)............................ 667,828
1,351,000 Goldlion Holdings, Ltd., ORD***
(Apparel & Textiles)......................... 448,939
315,500 Smartone Telecommunications+
(Telephone/Wireless)......................... 608,688
2,316,218
France -- 3.5%
7,800 Assurances Banque Populaire
(Diversified Financial Services)............. 855,150
23,000 Dassault Systems SA, ADR***
(Software Systems)........................... 714,438
-------
1,569,588
Germany -- 6.9%
805 Axel Springer Verlag, Class A***
(Newspapers/Publishing)...................... 541,440
30,250 Eurobike AG+ (Apparel & Textiles)............ 539,758
34,200 Turbon International AG
(Computers & Office Equipment)............... 739,511
22,860 Vossloh AG (Building Materials).............. 1,277,059
---------
3,097,768
Great Britain -- 16.3%
632,400 Aegis Group (Broadcasting/Advertising)....... 711,456
230,100 Avis Europe PLC (Retail Trade)............... 653,775
18,700 Dr. Solomon's Group PLC, ADR+
(Software Systems)........................... 598,400
52,400 ECsoft Group PLC, ADR+
(Software Systems)........................... 926,825
63,430 Eidos PLC+
(Computers & Office Equipment)............... 697,967
1,529,000 Freepages Group PLC +
(Broadcasting/Advertising)................... 822,402
103,074 Henlys Group PLC
(Automobile Dealerships)..................... 701,680
130,000 London Forfeiting Company PLC+
(Diversified Financial Services)............. 757,944
129,850 National Express Group PLC
(Transportation)............................. 1,461,890
---------
7,332,339
Ireland -- 1.7%
326,107 Anglo Irish Bank Corporation (Banks)......... 635,882
11,500 Warner Chilcott Laboratories,
Sponsored ADR+ (Medical Products)............ 142,313
-------
778,195
Israel -- 0.1%
1,000 Tecnomatix Technologies Ltd.+
(Software Systems)........................... 33,375
Italy -- 6.5%
174,700 Editoriale L' Espresso SpA
(Newspapers/Publishing)...................... 839,429
13,600 Gucci Group (Retail Trade)................... 569,500
34,000 Industrie Natuzzi SpA, Sponsored ADR
(Furniture).................................. 701,250
222,000 Manuli Rubber Industries SpA, Sponsored
ADR+ (Rubber Products)....................... 825,755
-------
2,935,934
Japan -- 10.4%
21,700 Fast Retailing Company Ltd. (Retail Trade)... 347,399
106,000 Fuso Lexel Inc. (Real Estate)................ 604,902
39,600 Justsystem Corporation+ (Software Systems)... 500,498
101,000 Laox*** (Retail Trade)....................... 812,332
45,550 Mirai Industry Company, Ltd. (Electronics)... 505,917
24,500 Nichiha Corporation (Building Materials)..... 149,759
26,040 Nissin Company
(Diversified Financial Services)............. 538,552
13,600 Otsuka Kagu Ltd. (Retail Trade).............. 505,247
92,000 Sawako Corporation***
(Heavy Construction)......................... 606,051
10,000 Tohoku Misawa Homes***
(Heavy Construction)......................... 37,534
------
4,608,191
New Zealand -- 1.2%
46,300 Trans Rail Holdings, ADR (Railroad).......... 526,663
Norway -- 4.6%
320,000 Choice Hotels Scandinavia ASA+ (Lodging)..... 1,084,746
101,200 CN Selmer A.S. (Heavy Construction).......... 974,264
---------
2,059,010
Poland -- 1.2%
48,000 Prokom Software, ADR+ (Software Systems)..... 538,800
The accompanying notes are an integral part of these unancial statements.
29
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
International
Small Cap Fund
- ---------------------
Investments
<TABLE>
<CAPTION>
COMMON STOCKS -- continued
Shares Value (Note 1)
<S> <C> <C>
Portugal -- 2.0%
8,400 Telecel-Comunicacaoes Pessoais SA+
(Telecommunications)............................$ 894,996
Spain -- 5.3%
8,275 Azkoyen S.A. (Consumer Services)................ 874,483
41,350 Baron de Ley SA+ (Food & Beverage).............. 781,674
35,500 Cortefiel SA (Retail Trade)..................... 713,029
---------
2,369,186
Sweden -- 8.0%
59,000 Allgon AB, B Shares (Telecommunications)........ 795,098
64,100 Hemkopskedjan AB+ (Food & Beverage)............. 791,169
63,000 Munters AB+ (Environmental Monitoring).......... 543,521
48,800 Nobel Biocare AB+ (Medical Products)............ 639,202
10,952 Prosolvia AB**+ (Software Systems)............ 437,258
16,400 Scandic Hotels AB+ (Lodging).................... 400,710
---------
3,606,958
Switzerland -- 1.4%
2,900 Fotolabo SA (Film Processing)................... 644,819
United States -- 1.4%
52,800 Rofin-Sinar Technologies Inc.+
(Machinery and Tools)........................... 640,200
TOTAL COMMON STOCKS
(Cost $38,415,305)...................................................... 37,029,213
----------
PREFERRED STOCK -- 0.2%
(Cost $87,677)
Germany -- 0.2%
575 Villeroy & Boch AG (Household Products)........ 70,317
------
CORPORATE BONDS -- 1.5%
(Cost $747,505)
Principal Amount
Japan -- 1.5%
$1,000,000 Sugimoto & Company (Metal Products),
0.375% due 09/30/00............................. 673,896
-------
WARRANTS -- 0.4%
(Cost $177,771)
Shares
Canada -- 0.4%
196,096 InMedia Presentations Inc.,
Expires 01/01/98**+ (Software Systems)........ 174,957
-------
RIGHTS -- 0.0% #
(Cost $7,953)
France -- 0.0%#
1,472 Assurances Banque Populaire, Expires
01/06/98 (Diversified Financial Services).......$ 8,312
-----
TOTAL SECURITIES
(Cost $39,436,211)...................................................... 37,956,695
----------
REPURCHASE AGREEMENTS -- 14.4%
Principal Amount
$3,226,000 Agreement with Bear Stearns, Tri-Party,
6.850% dated 12/31/97, to be repurchased
at $3,227,228 on 01/02/98, collateralized
by $3,360,367 market value of U.S.
government securities, having various
maturities and various interest rates........... 3,226,000
3,226,000 Agreement with United Bank of Switzerland,
Tri-Party, 6.900% dated 12/31/97, to be
repurchased at $3,227,237 on 01/02/98,
collateralized by $3,290,572 market value
of U.S. government securities, having various
maturities and various interest rates........... 3,226,000
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $6,452,000)....................................................... 6,452,000
----------
TOTAL INVESTMENTS -- 98.9%
(Cost $45,888,211*)..................................................... 44,408,695
OTHER ASSETS AND LIABILITIES -- 1.1%
(Net)................................................................... 498,024
-------
NET ASSETS -- 100.0% $ 44,906,719
==========
</TABLE>
* Aggregate cost for federal tax purposes.
** Illiquid security or special situation security (see note 7 to
Financial Statements).
*** Security on loan at December 31, 1997, has an aggregate market value of
$2,551,964, which represents 5.7% of the total net assets of the Fund
(see note 5 to Financial Statements).
+ Non-income producing security.
# Amount represents less than 0.1%.
Abbreviations:
ADR American Depositary Receipt
ORD Ordinary
30
<PAGE>
---------------------
The Montgomery Funds
---------------------
Emerging Markets Fund
---------------------
Portfolio Highlights
(Unaudited)
INVESTMENT REVIEW
Q: How did the Fund perform during the second half of 1997?
A: The Fund led its benchmark, the IFC Global Composite Index, over that period,
though both posted a loss. For 1997 as a whole, the Fund outperformed the index
by a significant margin--more than 11 percentage points--while keeping its
losses contained to the low single digits.
Q: What main factors contributed to that performance?
A: The Fund's underweighting in Southeast Asia was the single most positive
factor in its outperformance during the second half of 1997 and for the year as
a whole. As far back as late 1996, we had become concerned that countries such
as Thailand were overextended and we began to reduce the portfolio's exposure
there. By mid-1997 the Fund had just 1.8% in Thailand and a collective 15.6% in
Southeast Asia. As a result, the Fund was somewhat buffered from the initial
wave of volatility.
The volatility spread to other emerging markets later in the year. Investors
began to sell off Latin American and eastern European countries out of fear that
their currencies might be vulnerable to devaluation. The Brazilian real came
under some of the heaviest pressure as investors became more and more concerned
about the country's sizable current account deficit. As a result, Brazil's stock
market dropped 22% in U.S. dollar terms in just one week--October 27-31--
according to the International Finance Corporation (IFC). That erased much of
the strong gains it had racked up earlier in the year; as late as mid-October,
its year-to-date return had been as much as 52% in U.S. dollar terms. It
nonetheless closed 1997 up about 24.5%.
Throughout 1997 Brazil was the Fund's largest country weighting, averaging about
20% of its assets. So while the Fund initially benefited from its underweighting
in Southeast Asia, it did not escape the decline in Brazil and other emerging
markets later in the year.
Q: Has the recent sell-off changed your opinion of Brazil?
A: No. We continue to believe there may be great long-term potential in Brazil's
market, which is why it remains the Fund's largest country weighting. We think
this year will be especially exciting there. The government has agreed to speed
up its privatization program, which could create significant opportunities for
investors. By our calculations, Brazil's stock market is also one of the world's
cheapest right now.
Brazil does need to reduce its large budget deficits, and we are encouraged that
its government has already taken at least two significant steps to do so. On
November 10 it announced a fiscal package that includes budget cuts and tax
increases totaling $18 billion. In addition, the government passed fiscal
reforms designed to reduce the country's excessive government payrolls. We feel
that these and the other policy measures that Brazil is implementing clearly
differentiate it from other countries that have not made the difficult choices
investors are demanding.
==============================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------------------
Josephine S. Jimenez, CFA...............................Senior
Portfolio Manager
Bryan S. Sudweeks, Ph.D., CFA...........................Senior
Portfolio Manager
Angeline Ee..................................Portfolio Manager
Frank Chiang.................................Portfolio Manager
Jes(Pounds)s Duarte..........................Portfolio Manager
==============================================================
FUND PERFORMANCE
- --------------------------------------------------------------
Average annual total returns
for the period ended 12/31/97
- --------------------------------------------------------------
Montgomery
Emerging Markets Fund
Since inception (3/1/92).................................6.61%
One year................................................(3.14%)
Five years...............................................7.69%
- --------------------------------------------------------------
IFC Global Composite Index
Since 3/1/92.............................................3.26%
One year...............................................(14.54%)
Five years...............................................6.13%
- --------------------------------------------------------------
Past performance is no guarantee of future results.
Net asset value, investment return and principal
value will fluctuate, so shares, when redeemed, may
be worth more or less than their original cost.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY EMERGING MKTS(R)
Initial Investment: $10,000 Period: 03/01/92 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
08/95 13.01 $13,010 $988 $13,998
09/95 12.86 $12,860 $977 $13,837
10/95 12.38 $12,380 $940 $13,320
11/95 12.00 $12,000 $912 $12,912
12/95 12.41 $12,410 $943 $13,353
01/96 13.23 $13,230 $1,005 $14,235
02/96 12.93 $12,930 $982 $13,912
03/96 13.17 $13,170 $1,000 $14,170
04/96 13.84 $13,840 $1,051 $14,891
05/96 14.09 $14,090 $1,070 $15,160
06/96 14.19 $14,190 $1,078 $15,268
07/96 13.31 $13,310 $1,011 $14,321
08/96 13.73 $13,730 $1,043 $14,773
09/96 13.82 $13,820 $1,050 $14,870
10/96 13.46 $13,460 $1,095 $14,555
11/96 13.76 $13,760 $1,119 $14,879
12/96 13.87 $13,870 $1,128 $14,998
01/97 14.94 $14,940 $1,215 $16,155
02/97 15.43 $15,430 $1,255 $16,685
03/97 15.07 $15,070 $1,226 $16,296
04/97 15.08 $15,080 $1,226 $16,306
05/97 15.64 $15,640 $1,272 $16,912
06/97 16.85 $16,850 $1,370 $18,220
07/97 17.45 $17,450 $1,419 $18,869
08/97 15.58 $15,580 $1,267 $16,847
09/97 16.20 $16,200 $1,318 $17,518
10/97 13.38 $13,380 $1,088 $14,468
11/97 12.93 $12,930 $1,052 $13,982
12/97 12.93 $12,930 $1,597 $14,527
</TABLE>
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
IFC-GLOBAL COMP INDEX T/R
Initial Investment: $10,000 Period: 02/92 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
02/92 370.28 $10,000 $0 $10,000
03/92 372.97 $10,073 $0 $10,073
04/92 366.88 $ 9,908 $0 $ 9,908
05/92 355.97 $ 9,614 $0 $ 9,614
06/92 342.40 $ 9,247 $0 $ 9,247
07/92 327.86 $ 8,854 $0 $ 8,854
08/92 321.30 $ 8,677 $0 $ 8,677
09/92 314.18 $ 8,485 $0 $ 8,485
10/92 330.09 $ 8,915 $0 $ 8,915
11/92 326.31 $ 8,813 $0 $ 8,813
12/92 331.44 $ 8,951 $0 $ 8,951
01/93 329.20 $ 8,891 $0 $ 8,891
02/93 344.84 $ 9,313 $0 $ 9,313
03/93 351.76 $ 9,500 $0 $ 9,500
04/93 358.02 $ 9,669 $0 $ 9,669
05/93 360.82 $ 9,745 $0 $ 9,745
06/93 368.61 $ 9,955 $0 $ 9,955
07/93 373.85 $10,096 $0 $10,096
08/93 390.94 $10,558 $0 $10,558
09/93 403.89 $10,908 $0 $10,908
10/93 435.27 $11,755 $0 $11,755
11/93 465.51 $12,572 $0 $12,572
12/93 555.15 $14,993 $0 $14,993
01/94 571.69 $15,439 $0 $15,439
02/94 552.20 $14,913 $0 $14,913
03/94 506.31 $13,674 $0 $13,674
04/94 509.18 $13,751 $0 $13,751
05/94 522.59 $14,113 $0 $14,113
06/94 512.95 $13,853 $0 $13,853
07/94 545.52 $14,733 $0 $14,733
08/94 604.90 $16,336 $0 $16,336
09/94 623.87 $16,849 $0 $16,849
10/94 610.66 $16,492 $0 $16,492
11/94 584.52 $15,786 $0 $15,786
12/94 552.23 $14,914 $0 $14,914
01/95 489.45 $13,218 $0 $13,218
02/95 483.33 $13,053 $0 $13,053
03/95 481.38 $13,000 $0 $13,000
04/95 488.94 $13,205 $0 $13,205
05/95 507.45 $13,704 $0 $13,704
06/95 506.46 $13,678 $0 $13,678
07/95 516.09 $13,938 $0 $13,938
</TABLE>
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
IFC-GLOBAL COMP INDEX T/R
Initial Investment: $10,000 Period: 02/92 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
08/95 496.00 $13,395 $0 $13,395
09/95 499.02 $13,477 $0 $13,477
10/95 484.30 $13,079 $0 $13,079
11/95 470.52 $12,707 $0 $12,707
12/95 484.17 $13,076 $0 $13,076
01/96 509.11 $13,749 $0 $13,749
02/96 505.91 $13,663 $0 $13,663
03/96 513.93 $13,880 $1 $13,879
04/96 552.19 $14,913 $0 $14,913
05/96 541.57 $14,626 $0 $14,626
06/96 549.50 $14,840 $0 $14,840
07/96 515.22 $13,914 $0 $13,914
08/96 526.68 $14,224 $0 $14,224
09/96 531.38 $14,351 $0 $14,351
10/96 519.53 $14,031 $0 $14,031
11/96 526.98 $14,232 $0 $14,232
12/96 522.36 $14,107 $0 $14,107
01/97 557.50 $15,056 $0 $15,056
02/97 582.83 $15,740 $0 $15,740
03/97 572.49 $15,461 $0 $15,461
04/97 572.59 $15,464 $0 $15,464
05/97 582.02 $15,718 $0 $15,718
06/97 611.77 $16,522 $0 $16,522
07/97 621.39 $16,782 $0 $16,782
08/97 554.12 $14,965 $0 $14,965
09/97 556.77 $15,036 $0 $15,036
10/97 471.98 $12,747 $0 $12,747
11/97 444.78 $12,012 $0 $12,012
12/97 446.37 $13,055 $0 $13,055
</TABLE>
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY EMERGING MKTS(R)
Initial Investment: $10,000 Period: 03/01/92 - 12/97
<TABLE>
<CAPTION>
Growth of Vaule of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distribution Reinvested
<S> <C> <C> <C> <C>
03/01/92 10.00 $10,000 $0 $10,000
03/92 9.97 $ 9,970 $0 $ 9,970
04/92 10.01 $10,010 $0 $10,010
05/92 10.14 $10,140 $0 $10,140
06/92 9.96 $ 9,960 $0 $ 9,960
07/92 9.75 $ 9,750 $0 $ 9,750
08/92 9.62 $ 9,620 $0 $ 9,620
09/92 9.57 $ 9,570 $0 $ 9,570
10/92 9.95 $ 9,950 $0 $ 9,950
11/92 9.88 $ 9,880 $0 $ 9,880
12/92 10.02 $10,020 $11 $10,031
01/93 10.23 $10,230 $12 $10,242
02/93 10.33 $10,330 $12 $10,342
03/93 10.47 $10,470 $12 $10,482
04/93 10.69 $10,690 $12 $10,702
05/93 10.91 $10,910 $12 $10,922
06/93 11.07 $11,070 $13 $11,083
07/93 11.25 $11,250 $13 $11,263
08/93 11.92 $11,920 $14 $11,934
09/93 12.31 $12,310 $14 $12,324
10/93 13.28 $13,280 $15 $13,295
11/93 13.40 $13,400 $289 $13,689
12/93 15.58 $15,580 $336 $15,916
01/94 15.77 $15,770 $340 $16,110
02/94 15.28 $15,280 $329 $15,609
03/94 14.14 $14,140 $305 $14,445
04/94 14.07 $14,070 $303 $14,373
05/94 14.42 $14,420 $311 $14,731
06/94 13.68 $13,680 $295 $13,975
07/94 14.47 $14,470 $312 $14,782
08/94 15.87 $15,870 $342 $16,212
09/94 16.09 $16,090 $347 $16,437
10/94 16.02 $16,020 $345 $16,365
11/94 14.49 $14,490 $1,101 $15,591
12/94 13.65 $13,650 $1,037 $14,687
01/95 12.24 $12,240 $930 $13,170
02/95 12.26 $12,260 $931 $13,191
03/95 12.18 $12,180 $925 $13,105
04/95 12.39 $12,390 $941 $13,331
05/95 13.16 $13,160 $1,000 $14,160
06/95 13.17 $13,170 $1,000 $14,170
07/95 13.54 $13,540 $1,029 $14,569
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
EMERGING MARKETS
LIPPER
EMERGING MRKTS
AVE
2/92-12/97
<TABLE>
<CAPTION>
DATE RETURN VALUE
-----------------------------------------------
<S> <C> <C>
Feb-92 $10,000
Mar-92 $9,965
Apr-92 $10,114
May-92 $10,380
Jun-92 $10,184
Jul-92 $9,917
Aug-92 $9,682
Sep-92 $9,571
Oct-92 $9,733
Nov-92 $9,589
Dec-92 $9,640
Jan-93 $9,867
Feb-93 $10,313
Mar-93 $10,524
Apr-93 $10,974
May-93 $11,292
Jun-93 $11,374
Jul-93 $11,573
Aug-93 $12,490
Sep-93 $12,742
Oct-93 $13,847
Nov-93 $14,421
Dec-93 $16,749
Jan-94 $17,100
Feb-94 $16,624
Mar-94 $15,169
Apr-94 $14,882
May-94 $15,169
Jun-94 $14,425
Jul-94 $15,281
Aug-94 $16,717
Sep-94 $16,910
Oct-94 $16,531
Nov-94 $15,718
Dec-94 $14,573
Jan-95 $13,170
Feb-95 $13,114
Mar-95 $13,163
Apr-95 $13,560
May-95 $14,165
Jun-95 $14,196
Jul-95 $14,698
Aug-95 $14,344
Sep-95 $14,???
Oct-95 $13,712
Nov-95 $13,468
Dec-95 $13,980
Jan-96 $13,392
Feb-96 $13,197
Mar-96 $15,263
Apr-96 $15,815
May-96 $15,921
Jun-96 $15,938
Jul-96 $14,975
Aug-96 $13,427
Sep-96 $15,609
Oct-96 $15,191
Nov-96 $15,628
Dec-96 $15,815
Jan-97 $16,945
Feb-97 $17,594
Mar-97 $16,961
Apr-97 $16,838
May-97 $17,342
Jun-97 $17,922
Jul-97 $18,447
Aug-97 $16,157
Sep-97 $16,772
Oct-97 $13,848
Nov-97 $13,190
Dec-97 $13,297
</TABLE>
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Emerging Markets Fund
- ---------------------
Portfolio Highlights
================================================
TOP TEN HOLDINGS
------------------------------------------------
(as a percentage of total net assets)
Telefonos de Mexico S.A., Series L..........6.2%
Telec Brasileiras-Telebras ON...............4.3%
Compania Anonima Nacional
Telefonos de Venezuela, ADR.................3.4%
Tatneft, Sponsored ADS......................3.2%
Petroleo Brasileiro.........................2.8%
Alfa S.A. de C.V............................2.6%
Telebras, ADR...............................1.9%
Banco Bradesco..............................1.8%
Mahanagar Telephone Nigam, Ltd..............1.6%
Turk Sise ve Cam............................1.5%
================================================
TOP FIVE COUNTRIES
------------------------------------------------
(as a percentage of total net assets)
Brazil.....................................21.4%
Mexico.....................................13.8%
Russia.....................................10.9%
India.......................................7.6%
Turkey......................................6.2%
Q: And what's your outlook for Asia?
A: At the moment, we believe the dust there is far from settled. During the
first few weeks of 1998, for example, Indonesia's stock market once again came
under intense pressure as its currency weakened drastically. Furthermore, some
Southeast Asian countries haven't yet made credible moves to address their
problems. Until we believe that the situation has stabilized, we will continue
to significantly underweight the region. As of December 31, the Fund had just
1.1% of its assets in Southeast Asia. In addition, it had virtually no exposure
to South Korea, a north Asian market that is grappling with severe structural
faults in its economy.
Q: Besides Brazil, what other markets are you favoring?
A: We continue to find Russia very intriguing. It's now the Fund's third largest
country weighting, accounting for about 11% of assets. As many shareholders
know, the Russian market went up like a rocket in 1996 and 1997. As a result,
it's somewhat more expensive than it used to be, but we still believe that
Russia offers tremendous asset values, especially in the energy sector. The
country is blessed with huge deposits of crude oil, natural gas and other
natural resources. We're aiming to benefit from the long-term development of
those resources by investing in Russian companies such as oil producer Tatneft,
which was one of the Fund's top five holdings at the end of 1997.
We've also added significantly to the portfolio's weighting in Turkey. The Fund
had just 2.2% of assets there in mid-1997; by year's end, the weighting was up
to 6.2%. Turkey's stock market can be quite volatile, but we believe that the
country will gain long-term benefits from its continued integration with greater
Europe and from potentially growing economic momentum on the Continent.
Q: There's no denying that 1997 was a difficult year for investors in the
emerging markets. Is there still a justification for investing there?
A: Yes. We are still convinced that there are many compelling reasons for
long-term investors to include at least some emerging markets exposure in their
portfolios. Most of the arguments we've made in the past for this asset
class--including the huge demographic, economic and political changes going on
in the world's developing countries--are still in place, despite last year's
turbulence. Although we believe that these trends can't easily be derailed
overnight, we also think they are not likely to unfold overnight, either.
Our advice to investors time and again has been to focus on the long term, in
the emerging markets as elsewhere. That may be easy to say, but it can be
difficult to put into practice. If history is any guide, though, patience may
prove to be the most rewarding course. Had investors pulled out of the U.S.
stock market during the 1973/74 bear market, for example, they would have
missed its extraordinary run over most of the following 23 years. Of course, we
can't be certain that a similar rally will occur in the emerging markets, but
we do believe that the possibility is there.
32
<PAGE>
---------------------
The Montgomery Funds
---------------------
Emerging Markets Fund
---------------------
I n v e s t m e n t s
---------------------
P O R T F O L I O I N V E S T M E N T S
<TABLE>
<CAPTION>
December 31, 1997 (unaudited)
COMMON STOCKS -- 82.4%
Shares Value (Note 1)
<S> <C> <C>
Argentina -- 2.4%
1,530,483 Cresud S.A.+ (Real Estate).............................$ 3,061,548
249,006 Inversiones y Representaciones (Real Estate)........... 926,478
49,413 Inversiones y Representaciones, GDR (Real Estate)...... 1,859,164
26,413 Inversiones y Representaciones, GDR (Euro) (Real Estate) 993,789
773,851 Siderar S.A. (Steel)................................... 3,289,492
155,800 Telefonica de Argentina, Sponsored ADR
(Telephone/Networks)................................... 5,803,550
224,800 Y.P.F. Sociedad Anonima, ADS (Oil).................... 7,685,350
---------
23,619,371
Bangladesh -- 0.1%
98,080 Apex Tannery (Apparel & Textiles)..................... 893,682
Brazil -- 8.4%
21,596,000 Cia Saneamento Basico Estado (Water Utilities)......... 5,127,853
159,800,000 Electrobras (Electric Utilities)....................... 7,946,687
47,830 Electrobras, GDS*** (Electric Utilities)............... 5,213,470
114,100 Souza Cruz S.A. (Tobacco).............................. 920,120
164,511 Telebras, ADR (Telephone/Networks)..................... 19,155,250
418,630,000 Telec Brasileiras-Telebras ON
(Telephone/Networks)................................... 42,573,814
4,562,257 Telec de Ceara S.A.**+
(Telecommunications Equipment)......................... 1,839,537
1,166,225 Telec de Sao Paulo S.A.
(Telephone/Regional-Local)............................. 265,409
-------
83,042,140
Chile -- 1.3%
208,700 Empresa Nacional Electricidad S.A.,
ADR (Electric Utilities)............................... 3,691,381
142,900 Linea Aerea Nacional ChileS.A.+(Airlines).............. 1,947,013
89,416 Sociedad Quimica Minera de Chile (Chemicals)........... 3,934,304
288,200 Supermercados Unimarc S.A.+ (Retail Trade)............. 3,548,463
---------
13,121,161
China/Hong Kong -- 5.0%
6,848,000 Anhui Conch Cement Company,Ltd.+ (Cement).............. 1,193,031
349,000 Cheung Kong Holdings (Real Estate)..................... 2,285,682
1,425,000 China Light and Power Company
(Electric Utilities)................................... 7,907,472
206,000 China National Aviation Corporation+ (Airlines)........ 43,598
2,250,000 China Resources Enterprises Ltd.(Holding).............. 5,023,229
176,600 China Telecom ADR+ (Telecommunications/Wireless)....... 5,927,138
1,113,000 Citic Pacific Ltd. (Holding)........................... 4,423,848
279,400 HSBC Holdings (Banks).................................. 6,886,747
945,000 Hutchinson Whampoa Ltd. (Conglomerates)................ 5,926,829
1,580,000 New World Development Company Ltd. (Holding)........... 5,464,447
1,199,000 Shanghai Industrial Holdings Ltd. (Conglomerates)...... 4,456,214
---------
49,538,235
Colombia -- 1.4%
876,000 Almacenes Exito S.A. (Retail Trade).................... 2,905,024
945,705 Bavaria (Food & Beverage).............................. 9,700,287
50,700 Bell Canada International Inc.+
(Telecommunications/Wireless).......................... 782,681
-------
13,387,992
Czech Republic -- 2.5%
215,400 Komercni Banka, GDR (Banks)............................ 2,638,650
291,000 Komercni Banka, GDR*** (Banks)......................... 3,564,750
132,942 Komercni Banka I.F.+ (Mutual Funds).................... 2,633,010
367,010 PIF+ (Mutual Funds).................................... 4,435,615
712,500 The Czech Value Fund+ (Mutual Funds)................... 4,453,125
1,209,524 Vseobecny I.F. (Mutual Funds)......................... 2,979,571
671,076 Vynosovy I.F.+ (Mutual Funds).......................... 3,624,501
---------
24,329,222
Egypt -- 3.0%
35,000 Al-Ahram Beverages Company, GDR (Food & Beverage)...... 988,750
227,000 Al-Ahram Beverages Company, GDR*** (Food & Beverage)... 6,412,750
72,385 Al-Ahram Pyramid Beverages Company (Food & Beverage)... 4,127,168
349,926 Amreya Cement (Cement)................................. 8,176,081
520,000 Paints and Chemical Industries Company*** (Paint)...... 5,460,000
195,860 Tora Cement (Cement)................................... 4,489,382
---------
29,654,131
Greece -- 0.2%
80,000 Hellenic Telecommunication Organization
S.A. (Telephone/Networks).............................. 1,640,303
Hungary -- 1.1%
193,220 Borsodchem Rt.+ (Chemicals)............................ 6,962,712
24,000 Zalakeramia Rt.+ (Building Materials).................. 1,113,956
281,700 Zalakeramia Rt., GDR*** (Building Materials)........... 2,612,768
---------
10,689,436
India -- 7.6%
602,525 Bajaj Auto, Ltd.** (Auto/Auto Parts)................... 9,299,174
747,900 Bharat Petroleum Corporation Ltd. (Oil)................ 7,941,668
771,100 Carrier Aircon, Ltd. (Home Appliance).................. 4,258,754
297,350 Castrol (India) Ltd.** (Chemicals)..................... 5,651,167
100 HDFC Bank, Ltd. (Banks)................................ 199
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Emerging Markets Fund
- ---------------------
Investments
<TABLE>
<CAPTION>
COMMON STOCKS - continued
Shares Value (Note 1)
India - continued
<S> <C> <C>
420,000 Hindustan Petroleum Corporation Ltd.**
(Oil)..................................................$ 5,191,071
59,170 Housing Development and Finance
Corporation** (Banks)..............l................... 4,645,298
246,384 Indian Hotels Company Ltd. (Lodging)................... 3,915,746
10,800 Indian Hotels, GDS (Euro) (Lodging).................... 203,175
226,700 Indian Hotels, GDS*** (Lodging)........................ 4,264,794
485,000 ITC Ltd.**+ (Holding).................................. 7,652,360
350,000 Kirloskar Cummins Ltd.**+ (Auto/Auto Parts)............ 4,241,071
20,015 Madras Cement Ltd.** (Cement).......................... 2,335,934
2,345,900 Mahanagar Telephone Nigam, Ltd.**
(Telephone/Regional-Local)............................. 15,439,852
4,060 Oil and Natural Gas Corporation Ltd.** (Oil)........... 29,518
200 State Bank of India** (Banks).......................... 1,240
210 Tata Engineering & Locomotive Company,
Ltd.** (Auto/Auto Parts)............................... 1,587
-----------
75,072,608
Indonesia - 0.1%
36,600 Gulf Indonesia Resources Ltd.+ (Oil)................... 805,200
360,500 Lippo Bank (F)** (Banks)............................... 39,327
1,086,800 London Sumatra Indonesia (Agriculture Commodities)..... 617,500
------------
1,462,027
Israel - 1.7%
2,390,000 Bank Leumi Le-Israel (Banks)........................... 4,014,649
2,298,600 Supersol Ltd. (Retail Trade)........................... 6,519,699
108,700 Teva Pharmaceuticals (Pharmacy/Drugs).................. 5,158,040
18,000 Teva Pharmaceuticals, ADR (Pharmacy/Drugs)............. 851,625
------------
16,544,013
Kazakhstan - 0.3%
240,807 Central Asia Growth Fund+ (Mutual Funds)............... 2,287,662
42,285 Kazkommerts Bank+ (Banks).............................. 887,985
------------
3,175,647
Korea - 0.0%#
50,000 Korea Special Opportunities Fund (Mutual Funds)........ 237,500
56 Samsung Electronics Ltd., New, GDS ***+
(Electronics).......................................... 907
------------
238,407
Malaysia - 0.1%
3,870,000 IJM Corporation Berhad (Heavy Construction)............ 1,283,533
Mexico - 13.7%
725,000 Acer Computer Latino America S.A. de C.V.+
(Computers & Office Equipment)......................... 2,156,000
3,806,141 Alfa S.A. de C.V. (Conglomerates)..................... 25,608,507
230,000 Cifra S.A. de C.V., ADR+ (Retail Trade)................ 5,520,000
494,000 Corpacion Interamericana Entertainment
S.A., Series B+ (Entertainment)........................ 3,831,782
260,000 Empresas ICA Sociedad Controladora
S.A. de C.V., ADR (Heavy Construction)................. 4,273,750
357,000 Empresas La Moderna S.A. de C.V., Class A+
(Tobacco).............................................. 1,906,536
2,168,000 Grupo Financiero Banorte S.A. de C.V.,
Class B+ (Holding)..................................... 3,787,721
370,000 Grupo Industrial Maseca S.A. de C.V.
(Food & Beverage)...................................... 5,735,000
520,000 Grupo Industrial Maseca S.A. de C.V.,
Class B (Food & Beverage).............................. 537,364
330,000 Grupo Radio Central S.A. de C.V., ADR
(Broadcasting/Advertising)............................. 4,702,500
788,900 Industrias Penoles CPO (Metals & Mining)............... 3,567,914
1,208,000 Kimberly Clark de Mexico, Class A (Pulp & Paper)....... 5,762,716
798,000 San Luis Corporacion S.A. de C.V.
(Metals & Mining)...................................... 6,555,653
1,089,870 Telefonos de Mexico S.A., Series L
(Telephone/Long Distance).............................. 61,100,837
------------
135,046,280
Morocco - 0.0%#
2 Banque Marocaine du Commerce Exterieur,
GDR*** (Banks)......................................... 41
Pakistan - 1.2%
2,968 Adamjee Insurance Company** (Insurance)................ 5,837
242 Engro Chemicals Pakistan** (Chemicals)................. 628
3,709,800 Fauji Fertilizer Company Ltd.**
(Agriculture Commodities).............................. 7,102,455
480,866 Pakistan State Oil** (Oil)............................. 4,092,270
------------
11,201,190
Peru - 0.9%
1,768,080 Ferreyros Enrique S.A. (Holding)....................... 1,868,650
52,487 Ferreyros Enrique S.A. ADS***
(Metals & Mining)...................................... 1,243,286
939,610 Telefonica del Peru S.A., Class B
(Telephone/Networks)................................... 2,099,899
143,800 Telefonica del Peru S.A., Series B, ADR
(Telephone/Networks)................................... 3,343,350
------------
8,555,185
Philippines - 0.6%
10,461,000 Belle Corporation+ (Real Estate)....................... 402,942
4,742,000 DMCI Holdings+ (Heavy Construction).................... 140,504
3,717,750 International Container Terminal
Services, Inc.+ (Shipping)............................. 458,981
2,039,600 Ionics Circuit, Inc.+ (Electronics).................... 830,948
78,039 Keppel Philippines Holdings, Inc.,
Class B(**)+ (Shipping)................................ 4,702
6,413,000 Music Semiconductors Corporation+
(Semiconductor)........................................ 2,296,012
6,905,000 PCI Leasing and Finance, Inc.+
(Diversified Financial Services)....................... 136,395
78,038 Philippine Long Distance Telephone,
ADR (Telephone/Long Distance).......................... 1,755,850
------------
6,026,334
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Emerging Markets Fund
- ---------------------
Investments
<TABLE>
<CAPTION>
COMMON STOCKS -- continued
Shares Value (Note 1)
<S> <C> <C>
Poland -- 0.3%
40,000 NIF Privatization+ (Mutual Funds)......................$ 1,418,440
142,500 Prokom ADR+ (Software Systems)......................... 1,599,563
-------------
3,018,003
Portugal -- 2.9%
135,750 Brisa-Auto Estradas+ (Heavy Construction).............. 4,862,808
10,682 Capital Portugal Fund+ (Mutual Funds).................. 1,762,838
141,000 Cia de Segros Tranquilidade (Insurance)................ 3,386,145
439,000 Cimpor-Cimentos de Portugal (Building Materials)....... 11,506,308
5,000 Lusomundo-SGPS, SA+ (Entertainment).................... 46,183
186,150 Sonae InvestImentos (Retail Trade)..................... 7,528,936
-------------
29,093,218
Romania -- 0.1%
168,811 Romania Growth Fund PLC+ (Mutual Funds)................ 1,139,474
Russia -- 10.4%
5,100,000 Bashkirenergo+ (Electric Utilities).................... 2,754,000
46,389 Global Telesystems Group, Inc.**+
(Telephone/Networks)................................... 907,902
145,000 Irkutskenergo, ADR (Electric Utilities)................ 1,395,625
198 Irkutskenergo, RDC***+ (Electric Utilities)........... 7,801,200
99,800 Krasny Oktyabr+ (Food & Beverage)...................... 1,384,725
95,700 LukOil Company, ADR (Oil).............................. 8,816,363
111 LukOil Company, RDC*** (Oil)........................... 12,767,775
575 Russian Regional Telecommunications
Certificates*** (Telephone/Regional-Local)............. 5,178,958
29,400 Samarasvyazinform+ (Telephone/Local)................... 2,293,200
1,115,700 Surgutneftegaz, ADR (Oil).............................. 11,368,983
92,900 Tatneft, ADR+ (Oil).................................... 13,238,250
219,400 Tatneft, Sponsored ADS*** (Oil)........................ 31,264,500
302,100 Uralmas Zavody+ (Holding).............................. 2,794,425
-------------
101,965,906
South Africa -- 3.6%
655,000 Barlow, Ltd. (Building Materials)...................... 5,558,718
12,386,641 Consolidated African Mining Company+ (Holding)......... 3,563,402
445,000 De Beers Centenary AG (Holding)........................ 9,052,707
5,895,000 Highstone Property Fund (Real Estate).................. 1,817,014
953,724 JCI Ltd. (Diversified Financial Services).............. 4,262,508
1,852,976 Lonrho (Conglomerates)................................. 2,817,635
32,000 Pepsi International Bottlers**+
(Food & Beverage)...................................... 2,784,000
359,036 Sasol, Ltd. (Oil)...................................... 3,762,629
7,330,063 South Africa Iron and Steel Industrial
Corporation (Steel).................................... 2,168,970
-------------
35,787,583
Taiwan -- 2.4%
973,800 ASE+ (Semiconductor)................................... 3,417,628
2,064,800 Delta Electronic Industrial
(Electrical Equipment)................................. 8,227,556
2,250,420 Taiwan Semiconductor Company+ (Semiconductor).......... 7,725,580
962,040 Yageo Corporation+ (Electronics)....................... 2,182,098
188,500 Yageo Corporation, GDR***+ (Electronics).............. 2,144,188
-------------
23,697,050
Thailand -- 0.2%
309,300 Central Pattana Public Company, Ltd. (F)
(Real Estate).......................................... 162,354
384,000 Hemaraj Land and Development Public
Company Ltd. (F)**+ (Real Estate)...................... 396,958
164,900 Pizza Public Company Ltd. (Food & Beverage)............ 300,300
904,800 Regional Container Lines (F)** (Shipping).............. 736,634
861,600 Tipco Asphalt Public Company Ltd. (F)+
(Heavy Construction)................................... 683,004
------------
2,279,250
Turkey -- 6.3%
69,425,000 Akcansa Cimento A.S. (Cement).......................... 9,714,475
57,875,000 Haci Omer Sabanci Holding A.S.+
(Diversified Financial Services)....................... 3,560,464
42,403,897 Koc Holdings (Holding)................................. 9,923,228
9,356,950 Migros Turk T.A.S. (Retail Trade)...................... 8,465,274
207,117,186 Turk Sise ve Cam+ (Glass).............................. 15,240,227
383,324,379 Yapi Ve Kredi Bankasi A.S. (Banks)..................... 14,611,641
------------
61,515,309
Ukraine -- 0.1%
721,000 Ukraine Enterprise Corporation+
(Mutual Funds)......................................... 945,996
Venezuela -- 4.5%
805,000 Compania Anonima Nacional Telefonos
de Venezuela, ADR (Telephone/Networks)................ 33,508,125
8,889,450 Electricidad de Caracas (Electric Utilities)........... 10,664,518
------------
44,172,643
Vietnam -- 0.0%#
38,000 The Vietnam Frontier Fund+ (Mutual Funds).............. 237,500
TOTAL COMMON STOCKS
(Cost $770,480,589)............................................................ 812,372,870
PREFERRED STOCKS -- 13.9%
Brazil -- 13.0%
1,805,201,596 Banco Bradesco (Banks)................................. 17,792,409
97,500,000 CESP-Cia Energetica de Sao Paulo (Electric Utilities).. 5,853,232
347,120,000 Cia Energetica de Minas Gerais (Electric Utilities).... 15,081,626
419,583,000 Cia Paranaense de Energi (Electric Utilities).......... 5,695,697
5,766,500 Cia Rio Grandense de Telecomunicacoes+
(Telephone/Networks)................................... 7,104,464
127,920,000 Electrobras, "B" (Electric Utilities).................. 6,533,256
52,043,843 Industrias Romi, S.A. (Machinery & Tools).............. 1,142,488
9,488,000 Itausa Investimentos Itau (Holding).................... 7,396,228
50,500 Kepler Weber S.A.**+ (Machinery & Tools)............... 205,430
91,972,000 Lojas Renner S.A. (Retail Trade)....................... 2,884,297
96,937,500 Odebrecht S.A. (Heavy Construction).................... 651,433
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Emerging Markets Fund
- ---------------------
Investments
<TABLE>
<CAPTION>
PREFERRED STOCKS - continued
Shares Value (Note 1)
Brazil -- continued
<S> <C> <C>
117,921,300 Petroleo Brasileiro (Oil)..............................$ 27,577,133
45,515,194 Telebras (Telephone/Networks).......................... 5,191,599
66,859,988 Telec de Minas Gerais S.A.
(Telephone/Regional-Local)............................. 8,446,986
32,675,828 Telec de Sao Paulo S.A.
(Telephone/Regional-Local)............................. 8,695,304
70,126,737 Telec do Rio Janeiro S.A.
(Telephone/Networks)................................... 7,288,832
487,888 Vale do Rio Doce, "B" (Metals & Mining)................ 0
223,000 Weg S.A. (Furniture)................................... 135,872
------------
127,676,286
Greece -- 0.1%
122,000 Delta Dairy S.A.+ (Food & Beverage).................... 1,096,001
Portugal -- 0.3%
290,000 Lusomundo-SGPS+ (Entertainment)........................ 2,654,985
Russia -- 0.5%
134,800 LukOil Company, ADR (Oil).............................. 4,347,300
237,800 Orenburgneftegaz+ (Oil)................................ 630,170
6,000 Samarasvyazinform+ (Telephone/Local)................... 300,000
------------
5,277,470
TOTAL PREFERRED STOCKS
(Cost $108,504,580)............................................................ 136,704,742
------------
CONVERTIBLE BONDS -- 0.2%
Principal Amount
Mexico -- 0.1%
$750,000 Alfa S.A. de C.V., 8.000% due 09/15/00(***)
(Conglomerates)........................................ 873,750
Thailand -- 0.1%
2,660,000 Central Pattana Public Company, Ltd.,
2.750% due 04/10/01(***) (Real Estate)................. 1,463,000
50,000 Central Pattana Public Company, Ltd.,
2.750% due 04/10/01(***) (Real Estate)................ 27,500
------------
1,490,500
TOTAL CONVERTIBLE BONDS
(Cost $3,518,040).............................................................. 2,364,250
------------
RIGHTS -- 0.0%#
Shares
Brazil -- 0.0%#
77,181,701 Banco Bradesco, Rights,
Expire 02/06/98+ (Banks)............................... 276,625
114,100 Souza Cruz S.A., Rights, Expire 01/29/98+
(Tobacco).............................................. 899
TOTAL RIGHTS
(Cost $196,774)................................................................ 277,524
WARRANTS -- 0.0%#
Shares
Czech Republic -- 0.0%#
81,300 The Czech Value Fund, Warrants
Expire 09/13/98+ (Mutual Funds).........................$ 20,732
Malaysia -- 0.0%#
500 Development and Commercial Bank
Holdings Corporation, Warrants
Expire 12/27/99+ (Banks)............................... 72
------------
TOTAL WARRANTS
(Cost $171,000)................................................................ 20,804
TOTAL SECURITIES
(Cost $882,870,983)............................................................ 951,740,190
REPURCHASE AGREEMENTS -- 1.6%
Principal Amount
$7,659,500 Agreement with Bear Stearns, Tri-Party,
6.850% dated 12/31/97, to be repurchased
at $7,662,415 on 01/02/98, collateralized
by $7,978,528 market value of U.S. government
securities, having various maturities and
various interest rates................................. 7,659,500
7,659,500 Agreement with United Bank of Switzerland,
Tri-Party, 6.900% dated 12/31/97, to be
repurchased at $7,662,436 on 01/02/98,
collateralized by $7,812,814 market value
of U.S. government securities, having various
maturities and various interest rates.................. 7,659,500
TOTAL REPURCHASE AGREEMENTS
(Cost $15,319,000)............................................................. 15,319,000
TOTAL INVESTMENTS -- 98.1%
(Cost $898,189,983*)........................................................... 967,059,190
OTHER ASSETS AND LIABILITIES -- 1.9%
(Net).......................................................................... 19,216,612
-------------
NET ASSETS -- 100.0%...........................................................$ 986,275,802
=============
</TABLE>
* Aggregate cost for federal tax purposes.
** Illiquid security or special situation security (see note 7 to Financial
Statements).
*** Security exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Amount represents less than 0.1%.
+ Non-income producing security.
Abbreviations:
ADR American Depositary Receipt
ADS American Depositary Share
EURO Euro Trades through Euroclear
(F) Foreign or Alien Shares
GDR Global Depositary Receipt
GDS Global Depositary Share
ORD Ordinary
RDC Russian Depository Certificate
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
--------------------
The Montgomery Funds
--------------------
Emerging Asia Fund
--------------------
Portfolio Highlights
I N V E S T M E N T R E V I E W (Unaudited)
Q: How did the Fund perform over the second half of 1997 and over the year as a
whole?
A: Over the second half, the Fund underperformed its benchmark, the MSCI
All-Country Asia Free (ex-Japan) Index. Both posted a loss, however. For the
year, we managed to contain the portfolio's losses relative to its benchmark.
Over that period the Fund outperformed the index by 12 percentage points.
Q: Southeast Asian markets were the epicenter of the recent currency crisis. How
much exposure did the Fund have to them over this period?
A: Relatively little. When the crisis began in July, the Fund had 20% of its
assets in Southeast Asian markets (Singapore, Indonesia, Thailand, Malaysia and
the Philippines). The volatility was initially confined to these countries, so
that underweighting helped the Fund in the third quarter. Throughout the period
we reduced what little exposure the Fund had to the hardest-hit markets. By year
end, 9.9% of its assets were in Southeast Asian markets.
Unfortunately, the volatility spread to north Asian markets in the fourth
quarter. Investors began to speculate that the Hong Kong dollar might be
devalued, a threat that led Hong Kong's monetary authorities to sharply boost
interest rates. Cracks also appeared in South Korea's economy, sending its
equity market plummeting and forcing the country to seek a bailout, led by the
International Monetary Fund (IMF). Investors panicked, sparing few Asian markets
or stocks.
Q: What's your outlook for the region in 1998?
A: We believe that Asian markets will remain volatile for some time, but we
expect some of them to stabilize as the year progresses. In South Korea, for
example, recent political developments suggest that its government may be able
to form a consensus and lead the country toward the economic reforms the IMF is
requiring it to undertake. The international community has also supported South
Korea by rolling over the country's outstanding loans, among other things.
We are being selective about new investments, but we do see some potentially
attractive opportunities emerging. The real-estate firms that dominate Hong
Kong's market have come under intense pressure from higher interest rates.
Although that puts them in difficult straits over the short term, we expect
interest rates to decline fairly soon. We are still intrigued by the long-term
growth potential of these companies, as they may benefit from often-intense
demand for property in the former colony. We've thus been taking advantage of
the market's weakness to build positions in them.
Q: On that note, China/Hong Kong has been by far the Fund's largest country
weighting since the Fund's inception. Do you expect that to remain the case in
1998? If so, why?
A: Yes. No matter how tumultuous the past few months have been in Asia, we do
not believe that the currency crisis has derailed China/Hong Kong's long-term
growth prospects. Powerful demographic trends are still under way in China, and
the country's leaders now seem more willing to undertake key economic reforms.
==========================================
PORTFOLIO MANAGEMENT
------------------------------------------
Frank Chiang ........... Portfolio Manager
==========================================
FUND PERFORMANCE
------------------------------------------
Average annual total returns
for the period ended 12/31/97
------------------------------------------
Montgomery Emerging Asia Fund
Since inception (9/30/96) ....... (10.71%)
One year ........................ (28.30%)
------------------------------------------
MSCI All-Country Asia Free
(ex-Japan) Index
Since 9/30/96 .................. (32.56%)
One year ....................... (40.31%)
------------------------------------------
Past performance is no guarantee of future
results. Net asset value, investment
return and principal value will fluctuate,
so shares, when redeemed, may be worth
more or less than their original cost.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY EMERGING ASIA(R)
Initial Investment: $10,000 Period: 09/30/96 -12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/96 12.00 $10,000 $ 0 $10,000
09/96 12.00 $10,000 $ 0 $10,000
10/96 12.17 $10,142 $ 0 $10,142
11/96 14.10 $11,750 $ 0 $11,750
12/96 14.50 $12,083 $ 23 $12,106
01/97 15.34 $12,783 $ 24 $12,807
02/97 15.78 $13,150 $ 25 $13,175
03/97 15.90 $13,250 $ 25 $13,275
04/97 16.14 $13,450 $ 25 $13,475
05/97 17.37 $14,475 $ 27 $14,502
06/97 18.90 $15,750 $ 30 $15,780
07/97 19.47 $16,225 $ 31 $16,256
08/97 17.88 $14,900 $ 28 $14,928
09/97 16.81 $14,008 $ 27 $14,035
10/97 11.72 $ 9,767 $ 18 $ 9,785
11/97 10.77 $ 8,975 $ 17 $ 8,992
12/97 9.30 $ 7,750 $930 $ 8,680
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
EMERGING ASIA EMERGING AREA
LIPPER
PACIFIC EX-JAPAN MSCI ASIA FR EX-JAPAN
AVE AVE
9/96-12/97 9/96-12/97
DATE RETURN VALUE DATE RETURN VALUE
<S> <C> <C> <C> <C> <C>
Sep-96 $10,000 Sep-96 $10,000
Oct-96 $ 9,834 Oct-96 $ 9,810
Nov-96 $10,332 Nov-96 $10,274
Dec-96 $10,406 Dec-96 $10,238
Jan-97 $10,563 Jan-97 $10,450
Feb-97 $10,643 Feb-97 $10,539
Mar-97 $10,144 Mar-97 $ 9,944
Apr-97 $ 9,986 Apr-97 $ 9,795
May-97 $10,599 May-97 $10,238
Jun-97 $10,925 Jun-97 $10,613
Jul-97 $11,096 Jul-97 $10,702
Aug-97 $ 9,424 Aug-97 $ 8,804
Sep-97 $ 9,344 Sep-97 $ 8,764
Oct-97 $ 7,318 Oct-97 $ 6,816
Nov-97 $ 6,886 Nov-97 $ 6,349
Dec-97 $ 6,720 Dec-97 $ 6,112
</TABLE>
/1/ The MSCI All-Country Asia Free (ex-Japan) Index comprises equities in 12
countries in the Asia Pacific region.
/2/ The Lipper All-Pacific (ex-Japan) Funds Average universe consists of 69
funds.
37
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
Emerging Asia Fund
- ----------------------
Investments
Q: What other markets are you favoring?
A: We find Taiwan attractive right now. Its market ended 1997 down a relatively
moderate 7%, supported by the country's strong industrial base. It is also home
to several world-class technology firms such as ASE, which manufactures
integrated-circuit products and notebook computers. As of December 31, the Fund
had 5.2% of its assets in Taiwan.
Q: It's been a very rough stretch for Asian markets. What advice can you offer
investors who may be having second thoughts about investing there?
A: These kinds of broad sell-offs can indeed be unsettling. In fact, we think
investors may be justifiably surprised at the extent and severity of the
declines, which suggest to us that Asian markets have been oversold. Some of
them were driven down so quickly that panic, not logic, seemed to be at work.
That sort of irrationality tends to create opportunities for investors who know
these markets and firms intimately.
Asian markets are not the first to go through a crisis, and we doubt that they
will be the first to collapse. Mexico, for example, devalued its currency in
late 1994. That caused its stock market to plummet and weakened its economy the
following year. Both stabilized fairly quickly; in fact, its market posted a 54%
gain (in U.S. dollar terms) in 1997. Of course, there is no guarantee that
Asia's markets will recover as quickly or dramatically as Mexico did, but we do
believe they will get back on track fairly soon. At times like these, investors
may find the impulse to cut their losses tempting, but they may regret that
decision down the road.
====================================================
TOP TEN HOLDINGS
----------------------------------------------------
(as a percentage of total net assets)
Shangai Haixing Shipping ...................... 7.2%
China Telecom Ltd., Sponsored ADR ............. 5.6%
Hutchison Whampoa Ltd. ........................ 3.9%
New World Development Company Ltd. ............ 3.8%
China Light and Power Company ................. 3.5%
Citic Pacific Ltd. ............................ 3.1%
Cheung Kong Holdings .......................... 3.1%
Hindustan Petroleum Corporation Ltd. .......... 2.9%
Hub Power Company, GDR ........................ 2.7%
China Everbright-IHD Holdings Ltd. ............ 2.5%
====================================================
TOP FIVE COUNTRIES
----------------------------------------------------
(as a percentage of total net assets)
China/Hong Kong ............................... 63.3%
India ......................................... 10.8%
Taiwan ......................................... 5.2%
Pakistan ....................................... 4.2%
Philippines .................................... 4.1%
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
COMMON STOCKS - 84.5%
Shares Value (Note 1)
China/Hong Kong -- 63.3%
3,200,000 An Hui Conch Cement Company Ltd.+
(Building Products)............................ $ 557,491
9,000,000 Benefun International Holdings Ltd.+
(Apparel Manufacturers)........................ 499,419
40,000 Bengang Steel Plate+ (Steel)................... 8,879
150,000 Cheung Kong Holdings (Real Estate)............. 982,385
1,000,000 China Everbright-IHD Holdings Ltd.+
(Holding)...................................... 806,555
200,000 China Light and Power Company
(Electric Utilities)........................... 1,109,821
400,000 China Merchants Holdings (Chemicals)........... 410,376
190,000 China National Aviation+ (Air Freight)......... 40,212
1,100,000 China Resources Beijing Land (Real Estate)..... 525,229
350,000 China Resources Enterprises Ltd. (Holding)..... 781,391
251,000 Citic Pacific Ltd. (Holding)................... 997,651
20,000 China Southern Airlines Company Ltd.,
ADR+ (Transportation).......................... 263,750
53,900 China Telecom Ltd., Sponsored ADR+
(Telephone).................................... 1,809,019
1,499,000 Concord Land Development Company
Ltd. (Real Estate)............................. 590,005
6,000,000 DC Finance Holdings Ltd.+ (Real Estate)........ 410,375
800,000 First Tractor Company Ltd.+
(Heavy Construction)........................... 482,643
2,000,000 Giordano International Ltd. (Retail Trade)..... 690,412
1,000,000 Guangdong Investment Company Ltd.
(Real Estate).................................. 664,602
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
---------------------
The Montgomery Funds
---------------------
Emerging Asia Fund
---------------------
I n v e s t m e n t s
COMMON STOCKS -- continued
Shares Value (Note 1)
China/Hong Kong -- continued
32,300 HSBC Holdings (Banks)......................... $ 796,141
200,000 Hutchison Whampoa Ltd. (Conglomerates)........ 1,254,355
350,000 New World Development Company Ltd.
(Holding)..................................... 1,210,479
241,000 New World Infrastructure Ltd.+
(Heavy Construction).......................... 542,709
2,500,000 Pacific Concord Holdings (Conglomerates)...... 590,399
9,000,000 Shangai Haixing Shipping+ (Shipping).......... 2,299,652
200,000 Shanghai Industrial Holdings Ltd.
(Conglomerates)............................... 743,322
50,000 Sun Hung Kai Properties (Real Estate)......... 348,432
200,000 Television Broadcasts Ltd. (Television)....... 570,396
799,800 Wafangdian Bearing Group Company, Ltd.+
(Auto/Auto Parts)............................. 319,961
-------
20,306,061
Indonesia -- 1.5%
360,000 London Sumatra Ord
(Agriculture Commodities)..................... 204,546
25,000 PT Telekomunikas Indonesia, ADR (Telephone)... 276,563
-------
481,109
Korea -- 2.0%
18,260 Pohang Iron & Steel Company Ltd. (Steel)...... 504,364
5,571 Samsung Electronics Company (Electronics)..... 126,210
-------
630,574
Pakistan -- 4.2%
250,000 Fauji Fertilizer Company Ltd.**
(Agriculture Commodities)..................... 478,628
28,000 Hub Power Company, GDR+
(Electric Utilities).......................... 871,500
-------
1,350,128
Philippines -- 4.1%
1,230,000 International Container Terminal
Services, Inc.+ (Shipping)..................... 151,852
200,000 Manila Electric Company, Class B
(Electric Utilities)........................... 661,728
2,600 Philippine Long Distance Telephone
(Telephone/Long Distance)...................... 56,494
20,000 Philippine Long Distance Telephone, ADR
(Telephone/Long Distance)...................... 450,000
-------
1,320,074
Singapore -- 2.5%
64,000 Singapore Press Holdings Ltd. (Publishing)..... 801,187
Taiwan -- 5.1%
135,480 ASE+ (Semiconductor)........................... 475,478
97,600 Delta Electronic Industrial
(Electrical Equipment)......................... 388,904
247,000 Hung Sheng Construction Ltd.
(Real Estate).................................. 397,471
225,005 United World Chinese Commercial Bank
(Banks)........................................ 393,112
-------
1,654,965
Thailand -- 1.8%
130,000 Bangkok Bank Company Ltd. (Banks)............... 334,226
30,000 Siam Cement Public Company Ltd.
(Building Materials)............................ 244,242
-------
578,468
TOTAL COMMON STOCKS
(Cost $36,105,748)............................................. 27,122,566
----------
PREFERRED STOCK -- 0.0%#
(Cost $3,142)
Korea -- 0.0%#
60 Samsung Electronics Corporation
(Electronics)................................... 1,318
-----
RIGHTS -- 0.1%
(Cost $29,874)
Taiwan -- 0.1%
45,001 United World Chinese Commercial Bank+
(Banks)......................................... 23,448
------
TOTAL SECURITIES
(Cost $36,138,764)............................................. 27,147,332
----------
REPURCHASE AGREEMENTS -- 8.4%
Principal Amount
$1,340,500 Agreement with Bear Stearns, Tri-Party,
6.850% dated 12/31/97, to be repurchased
at $1,341,010 on 01/02/98, collateralized by
$1,396,333 market value of U.S. government
securities, having various maturities and
various interest rates.......................... 1,340,500
1,340,500 Agreement with BZW Securities, Tri-Party,
6.900% dated 12/31/97, to be repurchased
at $1,341,014 on 01/02/98, collateralized by
$1,367,310 market value of U.S. government
securities, having various maturities and
various interest rates.......................... 1,340,500
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $2,681,000).............................................. 2,681,000
---------
TOTAL INVESTMENTS -- 93.0%
(Cost $38,819,764*)............................................ 29,828,332
OTHER ASSETS AND LIABILITIES -- 7.0%
(Net).......................................................... 2,255,648
---------
NET ASSETS -- 100.0%...........................................$ 32,083,980
==========
* Aggregate cost for federal tax purposes.
** Illiquid security or special situation security (see note 7 to Financial
Statements).
+ Non-income producing security.
# Amount represents less than 0.1%.
Abbreviations:
ADR American Depositary Receipt
GDR Global Depositary Receipt
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Latin America Fund
- ---------------------
Portfolio Highlights
(Unaudited)
==================================================
PORTFOLIO MANAGEMENT
--------------------------------------------------
Jesus Duarte ................... Portfolio Manager
==================================================
FUND PERFORMANCE
--------------------------------------------------
Average annual total returns
for the period ended 12/31/97
--------------------------------------------------
Montgomery Latin America Fund
Since inception (6/30/97) ................ (6.46%)
--------------------------------------------------
IFCG Latin America Index
Since 6/30/97 ............................ (7.77%)
--------------------------------------------------
Performance is cumulative and for a limited period
of time. Past performance is no guarantee of future
results. Net asset value, investment return and
principal value will fluctuate, so shares, when
redeemed, may be worth more or less than their
original cost.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
Montgomery IFCG Latin Lipper
Latin America America Latin America
Dates Fund Index/1/ Funds Average/2/
----- -------------- ---------- -----------------
INDEX HYPOTHETICAL GROWTH FOR 10,000
LATIN AMERICA FUND
LIPPER
LATIN AMERICA GROWTH
AVE
6/97-12/97
DATE RETURN VALUE
---------------------------------
Jun-97 $10,000
Jun-97 $10,646
Aug-97 $ 9,681
Sep-97 $10,547
OCt-97 $ 8,472
Nov-97 $ 8,751
Dec-97 $ 9,259
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY LATIN AMERICA(R)
Initial Investment: $10,000 Period: 06/30/97 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date Nav Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
06/30/97 12.00 $10,000 $ 0 $10,000
06/97 12.00 $10,000 $ 0 $10,000
07/97 12.24 $10,200 $ 0 $10,000
08/97 11.69 $ 9,742 $ 0 $ 9,742
09/97 12.85 $10,708 $ 0 $10,708
10/97 10.13 $ 8,442 $ 0 $ 8,442
11/97 10.63 $ 8,858 $ 0 $ 8,858
12/97 11.00 $ 9,167 $ 187 $ 9,354
</TABLE>
- --------------------------------------------------------------------------------
IFC LATIN AMERICA GLOBAL REGIONAL
---------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
FROM FROM
MONTHLY INCEPTION INCEPTION 1 YEAR 3 YEAR 3 YEAR
RETURN DATE VALUE CUMULATIVE ANNUALIZED CUMULATIVE CUMULATIVE ANNUALIZED
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
6/30/97 10,000.00
5.7546% 7/31/97 10,575.46 5.7546%
-8.3710% 8/31/97 9,690.19 -3/0981%
8.0116% 9/30/97 10,466.53 4.6653%
-18.9500% 10/31/97 8,483.12 -15.1688%
2.7154% 11/30/97 8,713.47 -12.8653%
5.8529% 12/31/97 9,223.46 -7.7654%
</TABLE>
/1/ The IFCG Latin America Index measures the performance of selected
stocks of seven countries in Latin America.
/2/ The Lipper Latin America Funds Average universe consists of 35 funds.
I N V E S T M E N T R E V I E W
Q: How did the Fund perform from its inception-June 30, 1997-through the end of
the year?
A: It outperformed its benchmark, the International Finance Corporation Global
Latin America Index. Both the Fund and the index posted a loss over that period,
however.
Q: What factors drove the Fund in the second half of 1997?
A: When the Southeast Asian currency crisis unfolded during the summer, Latin
American markets were not much affected at first. Eventually, the ripple effects
spread. The fear among investors-so far unrealized-was that Latin America's
economies could be heading for the same problems as those in Southeast Asia.
These sell-offs created a difficult environment for the Fund in October and
November, but it began to stabilize in December as Latin American markets
recovered.
Q: Since the Fund's inception, Brazil has been its largest country weighting.
How did that market react to the Asian crisis?
A: As Latin America's largest and most liquid stock market, Brazil-which had
been one of the world's best-performing markets in the first half of 1997-bore
the brunt of the sell-offs. The news from Asia heightened investors' concerns
about Brazil's sizable current account deficit. There was also speculation about
the stability of its currency, the real, which prompted the central bank to
defend it. It also doubled interest rates (from 20% to more than 40% annually)
to keep capital in the country, draw in dollars and help shrink its current
account deficit, among other goals. Brazil continues to run a budget deficit,
though. Its outstanding short- and medium-term debt has also increased, in some
cases requiring rollovers. Nonetheless, we have been encouraged by Brazil's
recent efforts to address its budget imbalances. We feel that its policy
measures clearly differentiate it from emerging markets that have not yet heeded
investors' demands for economic reform.
We believe that there are other reasons to be positive about Brazil. By our
calculations, it is one of the cheapest markets in the world right now. On a
research trip to the country, we were also encouraged by the overall optimism of
the business executives we met. Like us, many of them believe that the
government is resolved to privatize, achieve further productivity gains and open
up the economy. Given our positive outlook, Brazil remains the Fund's largest
country weighting.
Q: Mexico has been the portfolio's second largest country weighting since the
Fund's inception. What's your view of that market now?
A: We think it's important to be selective in Mexico right now. On a recent
research trip there, we concluded that its economic growth in 1998 may be lower,
and its inflation higher, than most economists expect. Many of the country's
firms have accumulated heavy foreign liabilities in recent years, and a number
of its banks face bad debts, which could cause the peso to weaken. As a result,
we're avoiding highly leveraged firms. We're also steering clear of cyclical
companies that we think may be vulnerable to Asia's slowdown. We do like a few
40
<PAGE>
---------------------
The Montgomery Funds
---------------------
Latin America Fund
---------------------
I n v e s t m e n t s
domestically oriented companies that have some exposure to other Latin American
countries and are situated in high-growth sectors, such as our second largest
holding at year end, Corporacion Interamericana Entertainment. Given the other
issues facing Mexico, however--such as the government's ongoing military
presence in the states of Chiapas and Guerrero--we are taking a cautious stance
toward the country. In January we reduced the Fund's stake in Mexico to about
24% of assets from roughly 32% at year end and redistributed assets to markets
that we believe are healthier, such as Brazil, Venezuela and Colombia.
Q: Do you think the Asian crisis will have a significant impact on other Latin
American markets? If so, is there still a good reason to invest in Latin
America?
A: With the exception of Peru, Latin American countries trade very little with
Asia, so we don't think most of them are directly vulnerable to lower demand
from the region. That said, Asia's currency devaluations could put Latin
American manufacturers at a competitive disadvantage in markets where they vie
with Asian exporters. Generally, however, the export volume of countries such as
Mexico depends on demand from the United States, and we expect that to remain
healthy in 1998.
The issue in Latin America and other emerging markets now appears to be one of
investors' confidence, or lack thereof. We have seen some evidence that
sentiment is recovering in early 1998, and inflows into Latin America are
increasing. In addition, we think that the many long-term arguments for
investing in the region are still valid. Many countries continue to implement
reforms such as privatization and deregulation. The political situation in Latin
America is generally much more stable than it was just a decade ago. So despite
last year's volatility, we still have great confidence in Latin America's
long-term potential.
=============================================
TOP TEN HOLDINGS
---------------------------------------------
(as a percentage of total net assets)
Telec Brasileiras--Telebras ON ........ 12.6%
Corporacion Interamericana
Entertainment S.A., Series B ........... 9.4%
Pepsi-Gemex S.A., GDR .................. 6.8%
Grupo Fernandez Editores
S.A. de C.V., Series B ................. 5.1%
Electrobras ............................ 5.0%
Petroleo Brasileiro .................... 4.6%
Grupo Televisa S.A., GDR ............... 4.2%
Telebras, ADR .......................... 4.0%
Confab Industrial S.A. ................. 3.9%
Ericsson Telecomunicacoes .............. 3.5%
==============================================
TOP FIVE COUNTRIES
---------------------------------------------
(as a percentage of total net assets)
Brazil ................................ 54.3%
Mexico ................................ 32.0%
Columbia ............................... 5.4%
Venezuela .............................. 5.1%
Argentina .............................. 1.5%
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
COMMON STOCKS -- 79.0%
Shares Value (Note 1)
Argentina -- 1.5%
4,100 Banco Frances del Rio de la Plata,
ADR (Banks)........................................$ 112,238
Brazil -- 35.0%
26,500,000 Banco do Brasil S.A. (Banks)....................... 195,892
14,000 CESP-Cia Energetica de Sao Paulo, ADR
(Electric Utilities)............................... 258,125
7,630,000 Electrobras (Electric Utilities)................... 379,432
2,100 Electrobras, GDS** (Electric Utilities).......... 228,900
2,600 Telebras, ADR (Telephone/Networks)................. 302,738
9,330,000 Telec Brasileiras-Telebras ON
(Telephone/Networks)............................... 948,842
413,362 Telec de Sao Paulo S.A.
(Telephone/Regional-Local)......................... 109,999
37,000 TV Filme, Inc., ADR+ (Cable Television)............ 219,688
---------
2,643,616
Colombia -- 5.4%
13,000 Bell Canada International Inc.+
(Telecommunications/Wireless)...................... 200,687
52,000 Carulla Y Cia S.A., ADR (Retail)................... 208,000
---------
408,687
Mexico -- 32.0%
55,000 Acer Computer Latino America S.A. de
C.V.+ (Computers & Office Equipment).............. 163,559
91,200 Corporacion Interamericana Entertainment
S.A., Series B+ (Entertainment).................... 707,406
1,659,000 Grupo Fernandez Editores S.A. de C.V.,
Series B+ (Newspapers/Publishing).................. 388,515
115,000 Grupo Financiero Banorte S.A. de C.V.,
Class B+ (Holding)................................. 200,917
8,200 Grupo Televisa S.A., GDR+
(Broadcasting/Advertising)......................... 317,237
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
- ---------------------
The Montogomery Funds
- ---------------------
Latin America Fund
- ---------------------
I n v e s t m e n t s
COMMON STOCKS - continued
Shares Value (Note 1)
Mexico - continued
35,400 Pepsi-Gemex S.A., GDR (Food & Beverage) $ 511,087
2,200 Telefonos de Mexico S.A., ADR
(Telephone/Long Distance).......................... 123,337
-------
2,412,058
Venezuela - 5.1%
42,000 Corimon C.A., ADR+ (Paint)......................... 246,750
34,000 Sivensa, ADR+ (Auto/Auto Parts).................... 136,000
-------
382,750
TOTAL COMMON STOCKS
(Cost$6,485,057).................................................. 5,959,349
---------
PREFERRED STOCKS - 19.3%
Brazil - 19.3%
28,000,000 Banco de Credito Nacional (Banks).................. 243,358
181,000 Cia Riograndense de Telecomunicacoes+
(Telephone/Networks)............................... 222,996
166,000 Confab Industrial S.A.+ (Steel).................... 294,503
8,200,000 Ericsson Telecomunicacoes+
(Telecommunications)............................... 263,035
1,492,000 Petroleo Brasileiro (Oil).......................... 348,920
1,030,000 Telec do Rio Janeiro S.A.+
(Telephone/Networks)............................... 90,444
------
TOTAL PREFERRED STOCKS
(Cost $1,900,178) ................................................ 1,463,256
---------
TOTAL INVESTMENTS - 98.3%
(Cost $8,385,235*) ............................................... 7,422,605
OTHER ASSETS AND LIABILITIES - 1.7%
(Net) ............................................................ 125,353
NET ASSETS - 100.0% ..............................................$ 7,547,958
=========
(*) Aggregate cost for federal tax purposes.
(**) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Non-income producing security.
Abbreviations:
ADR American Depositary Receipt
GDR Global Depositary Receipt
GDS Global Depositary Share
42
The accompanying notes are an integral part of these financial statements.
<PAGE>
-------------------------
The Montgomery Fund
-------------------------
Global Opportunities Fund
-------------------------
Portfolio Highlights
(Unaudited)
INVESTMENT REVIEW
Q: The Fund underperformed its benchmark, the MSCI World Index, during the
second half. Why?
A: Probably the most significant factor was the Fund's underweighting in the
United States relative to the index. At the end of 1997, the United States made
up about 50% of the MSCI World Index, which weights stocks (and, by extension,
countries) by their market capitalizations. Although the U.S. was one of the
Fund's largest country weightings throughout 1997, it still accounted for only
about 15 to 18% of the portfolio. As a result, the Fund was at somewhat of a
disadvantage to the index, given the U.S. market's resiliency during the second
half and its strength earlier in the year.
Q: Why did you underweight the United States relative to the index?
A: The foundation of our investment process is bottom-up stock picking, so we
don't target countries or sectors per se. We seek firms that we think have
improving earnings and cash-flow growth, a leading competitive position and
reasonably valued shares, among other qualities. Although a number of U.S.
companies have met our first few criteria, relatively few of them trade at
valuations we find attractive.
We believe that there are more opportunities in Europe. The region's economies
appear to be gaining momentum, especially in relation to the United States.
They're also at the early stages of restructuring and deregulation, two trends
that, as they played out in the United States, helped fuel the market's rally.
Of course, there's no guarantee that the same thing will happen in Europe, but
we do think that these trends create a positive backdrop for the companies in
which we invest.
Q: You said you don't target particular sectors, but the Fund seems to be
overweighted in some industries. Is that a contradiction?
A: No. Our bottom-up investment process occasionally turns up a number of
potentially attractive stocks that happen to be concentrated in one sector.
Right now, for instance, we believe that there are several exciting pockets of
opportunity in our investment universe. European fee-based asset managers are
particularly intriguing to us. Investors tend to focus on the banking and
insurance operations of firms such as Switzerland's Julius Baer and Sweden's
Swedbank, overlooking their entry into the asset gathering business. As a
result, we think that many of these firms are trading at significant discounts
to their cash-flow and earnings potential. We believe that they could reap
profits from the deregulation of Europe's financial services industry under the
European Economic & Monetary Union (EMU).
Deregulation may also create opportunities for European electric utilities and
transportation firms, another area in which we've found potentially attractive
stocks. We also think that there may be pockets of opportunity among wireless
technology and equipment providers, which could benefit from the need of many
countries to construct or upgrade their communications networks. The Fund also
has significant exposure to health-care providers and pharmaceutical makers.
Many of these companies are restructuring and merging to reduce costs
(especially in the area of drug development) and
====================
PORTFOLIO MANAGEMENT
--------------------
John D. Boich, CFA .....................................Senior Portfolio Manager
Oscar A. Castro, CFA .....................................................Senior
Portfolio Manager
============================
FUND PERFORMANCE
----------------------------
Average annual total returns
for the period ended 12/31/97
----------------------------
Montgomery
Global Opportunities Fund
Since inception (9/30/93) ............................................. 13.23%
One year .............................................................. 11.05%
Three years ........................................................... 16.10%
----------------------------
MSCI World Index
Since 9/30/93 ......................................................... 13.19%
One year .............................................................. 15.76%
Three years ........................................................... 16.62%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY GLOBAL OPPORTUNITIES(R)
Initial Investment: $10,000 Period: 09/30/93 -12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
09/30/93 12.00 $10,000 $ 0 $10,000
09/93 12.00 $10,000 $ 0 $10,000
10/93 12.83 $10,692 $ 0 $10,692
11/93 12.85 $10,708 $ 0 $10,708
12/93 14.22 $11,850 $ 0 $11,850
01/94 15.04 $12,533 $ 0 $12,533
02/94 14.82 $12,350 $ 0 $12,350
03/94 13.81 $11,508 $ 0 $11,508
04/94 13.98 $11,650 $ 0 $11,650
05/94 13.82 $11,517 $ 0 $11,517
06/94 12.92 $10,767 $ 0 $10,767
07/94 13.46 $11,217 $ 0 $11,217
08/94 14.23 $11,858 $ 0 $11,858
09/94 13.93 $11,608 $ 0 $11,608
10/94 14.26 $11,883 $ 0 $11,883
11/94 12.83 $10,692 $ 404 $11,096
12/94 12.53 $10,442 $ 394 $10,836
01/95 11.90 $ 9,917 $ 375 $10,292
02/95 12.05 $10,042 $ 379 $10,421
03/95 11.96 $ 9,967 $ 376 $10,343
04/95 12.33 $10,275 $ 388 $10,663
05/95 12.70 $10,583 $ 400 $10,983
06/95 13.25 $11,042 $ 417 $11,459
07/95 13.97 $11,642 $ 440 $12,082
08/95 13.72 $11,433 $ 433 $11,866
09/95 14.24 $11,867 $ 448 $12,315
10/95 13.91 $11,592 $ 438 $12,030
11/95 14.27 $11,892 $ 511 $12,403
12/95 14.62 $12,183 $ 524 $12,707
01/96 14.94 $12,450 $ 535 $12,985
02/96 15.29 $12,742 $ 547 $13,289
03/96 15.80 $13,167 $ 566 $13,733
04/96 16.74 $13,950 $ 600 $14,550
05/96 17.17 $14,308 $ 615 $14,923
06/96 16.96 $14,133 $ 608 $14,741
07/96 15.84 $13,200 $ 568 $13,768
08/96 16.43 $13,692 $ 588 $14,280
09/96 17.12 $14,267 $ 613 $14,880
10/96 16.43 $13,692 $1,130 $14,822
11/96 17.13 $14,275 $1,178 $15,453
12/96 16.73 $13,942 $1,329 $15,271
01/97 17.48 $14,567 $1,389 $15,956
02/97 17.20 $14,333 $1,367 $15,700
03/97 16.99 $14,158 $1,350 $15,508
04/97 17.05 $14,208 $1,355 $15,563
05/97 18.30 $15,250 $1,454 $16,704
06/97 19.17 $15,975 $1,523 $17,498
07/97 20.04 $16,700 $1,592 $18,292
08/97 19.15 $15,958 $1,522 $17,480
09/97 20.18 $16,817 $1,603 $18,420
10/97 18.35 $15,292 $1,458 $16,750
11/97 18.56 $15,467 $1,474 $16,941
12/97 14.63 $12,192 $4,767 $16,959
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
GLOBAL OPPORTUNITIES GLOBAL OPPORTUNITIES
LIPPER
GLOBAL MSCI WORLD IX ND
AVE AVE
9/93-12/97 9/93-12/97
DATE RETURN VALUE DATE RETURN VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sep-93 $10,000 Sep-93 $10,000
Oct-93 $10,404 Oct-93 $10,273
Nov-93 $10,118 Nov-93 $ 9,690
Dec-93 $10,898 Dec-93 $10,161
Jan-94 $11,409 Jan-94 $10,829
Feb-94 $11,159 Feb-94 $10,687
Mar-94 $10,679 Mar-94 $10,224
Apr-94 $10,851 Apr-94 $10,337
May-94 $10,835 May-94 $10,562
Jun-94 $10,625 Jun-94 $10,530
Jul-94 $10,993 Jul-94 $10,728
Aug-94 $11,324 Aug-94 $11,049
Sep-94 $11,114 Sep-94 $10,756
Oct-94 $11,284 Oct-94 $11,059
Nov-94 $10,784 Nov-94 $10,577
Dec-94 $10,687 Dec-94 $10,677
Jan-95 $10,376 Jan-95 $10,514
Feb-95 $10,552 Feb-95 $10,665
Mar-95 $10,827 Mar-95 $11,177
Apr-95 $11,174 Apr-95 $11,563
May-95 $11,407 May-95 $11,660
Jun-95 $11,587 Jun-95 $11,654
Jul-95 $12,177 Jul-95 $12,234
Aug-95 $12,005 Aug-95 $11,959
Sep-95 $12,245 Sep-95 $12,305
Oct-95 $11,998 Oct-95 $12,108
Nov-95 $12,207 Nov-95 $12,526
Dec-95 $12,436 Dec-95 $12,890
Jan-96 $12,777 Jan-96 $13,120
Feb-96 $12,919 Feb-96 $13,197
Mar-96 $13,164 Mar-96 $13,414
Apr-96 $13,585 Apr-96 $13,727
May-96 $13,741 May-96 $13,736
Jun-96 $13,696 Jun-96 $13,803
Jul-96 $13,104 Jul-96 $13,312
Aug-96 $13,435 Aug-96 $13,462
Sep-96 $13,825 Sep-96 $13,987
Oct-96 $13,844 Oct-96 $14,081
Nov-96 $14,513 Nov-96 $14,868
Dec-96 $14,519 Dec-96 $14,627
Jan-97 $14,343 Jan-97 $14,800
Feb-97 $14,931 Feb-97 $14,968
Mar-97 $14,697 Mar-97 $14,669
Apr-97 $14,914 Apr-97 $15,146
May-97 $15,771 May-97 $16,078
Jun-97 $16,430 Jun-97 $16,877
Jul-97 $17,243 Jul-97 $17,651
Aug-97 $16,230 Aug-97 $16,468
Sep-97 $17,190 Sep-97 $17,360
Oct-97 $16,073 Oct-97 $16,443
Nov-97 $16,136 Nov-97 $16,731
Dec-97 $16,342 Dec-97 $16,933
</TABLE>
/1/ The Morgan Stanley Capital International World Index measures the
performance of selected stocks in 23 developed countries. The Index is
presented net of dividend withholding taxes.
/2/ The Lipper Global Funds Average universe consists of 69 Funds.
43
<PAGE>
- ------------------------------
The Montgomery Funds
- ------------------------------
Global Opportunities Fund
- ------------------------------
Investments
=====================================
TOP TEN HOLDINGS
-------------------------------------
(as a percentage of total net assets)
National Express Group ................................................... 2.9%
Unilever NV ADR .......................................................... 2.6%
United Utilities PLC, ORD ................................................ 2.6%
Glaxo Wellcome PLC ....................................................... 2.5%
ASM Lithography Holding N.V .............................................. 2.4%
Portugal Telecom ......................................................... 2.4%
Mannesmann AG ............................................................ 2.4%
Telefonica Nacional de Espana ............................................ 2.4%
Nokia Corporation AB, Series A ........................................... 2.3%
General Nutrition Center, Inc. ........................................... 2.3%
=====================================
TOP FIVE COUNTRIES
-------------------------------------
(as a percentage of total net assets)
United States ............................................................ 18.4%
Great Britain ............................................................ 14.0%
Netherlands .............................................................. 10.3%
Italy .................................................................... 9.5%
France ................................................................... 6.2%
strengthen their competitive positions. The portfolio also holds a number of
information-technology firms, which may benefit from the trend toward
outsourcing in Europe.
Q: Doesn't the volatility of international markets in 1997 refute the argument
that an investor can diversify his or her portfolio by investing overseas?
A: When discussing the merits or demerits of investing in foreign markets, it's
important to make a distinction between their return potential and their
diversification potential. From the first perspective, there's no denying that
some foreign markets-Asian exchanges in particular-were very disappointing last
year. That wasn't true of all international markets, however. Europe's markets
posted strong gains for the year. In fact, the unmanaged Eurotrack 100 Index
(composed of Europe's 100 largest listed firms) outperformed the S&P 500 in
1997. The Eurotrack gained roughly 49% to the S&P's 33%. That's really the
unsung story of 1997. And we believe European markets may continue to be strong
in 1998.
From the second perspective-that of diversification-it's also hard to make the
case that international equities didn't live up to their billing in 1997. Last
year the performance of international markets varied widely, suggesting that
they may still be useful diversifiers. If all foreign markets had mimicked the
rallying U.S. market, they might be more likely to follow the United States on
the downside too. Consider Japan: While the U.S. market (as represented by the
S&P 500) gained 33% in 1997, the Japanese market (as represented by the Nikkei
225 Index) lost roughly a quarter of its value in U.S. dollar terms. In fact,
throughout the 1990s the U.S. market has been enjoying one of its strongest and
longest-lived rallies in history, while Japan has been grappling with one of its
grisliest bear markets ever. It can be difficult to see the value of investing
overseas when the U.S. market has been performing so well and a market such as
Japan's has been performing so poorly. But when the tables are turned, we
believe that investors will be grateful they diversified.
PORTFOLIO INVESTMENTS
December 31, 1997 (unaudited)
COMMON STOCKS - 100.3%
Shares Value (Note 1)
Canada - 1.9%
18,700 Cognos, Inc.+ (Software Systems).................. $ 431,269
Finland - 4.5%
90,600 Merita PLC+ (Banks)............................... 494,632
7,500 Nokia Corporation AB, Series A**
(Telecommunications Equipment).................... 532,305
-------
1,026,935
France - 6.2%
2,873 Atos (Ex-Amime)+ (Computer Services) ............. 370,340
5,470 AXA S.A. (Insurance) ............................. 423,153
2,186 Eaux (Cie Generale des) (Conglomerates) . ........ 305,023
8,200 France Telecom SA (Telephone-Integrated) ......... 297,352
-------
1,395,868
Germany - 5.2%
380 Axel Springer Verlag, Class A**
(Newspapers/Publishing)........................... 255,586
20,700 Deutsche Lufthansa AG (Airlines).................. 396,971
1,065 Mannesmann AG (Auto/Auto Parts)................... 538,124
-------
1,190,681
Great Britain - 14.0%
358,400 Aegis Group (Broadcasting/Advertising)............ 403,203
23,800 Glaxo Wellcome PLC (Pharmacy/Drugs)............... 562,866
59,110 National Express Group PLC
(Transportation Services)......................... 665,478
300 National Power PLC, ORD (Electric Utilities)...... 2,956
102,000 Orange PLC+ (Telephone/Wireless).................. 442,252
32,642 Reckitt and Colman PLC
(Cosmetics & Personal Care)....................... 511,971
44
The accompanying notes are an integral part of these financial statements.
<PAGE>
-------------------------
The Montgomery Funds
-------------------------
Global Opportunities Fund
-------------------------
I n v e s t m e n t s
COMMON STOCKS -- continued
Shares Value (Note 1)
Great Britain -- continued
45,324 United Utilities PLC, ORD (Water Utilities) $ 580,615
-------
3,169,341
Hong Kong -- 5.8%
614,000 China Southern Airlines Ltd. ORD**+
(Air Freight) ......................................... 158,472
834,000 Goldlion Holdings Ltd. Ord
(Wholesale Distributions) ............................. 277,139
207,000 New World Infrastructure Ltd.**+
(Building-Heavy Construction) ......................... 466,144
213,500 Smartone Telecommunications
(Cellular Communications) ............................. 411,902
-------
1,313,657
Ireland -- 2.0%
1,100 Axogen Limited Units+
(Cosmetics & Personal Care) ........................... 43,725
7,800 Elan Corporation PLC, ADR**+
(Pharmacy/Drugs) ...................................... 399,263
-------
442,988
Italy -- 9.5%
354,000 Banco Di Roma (Money Center Banks) .................... 357,202
11,500 Gucci Group (Retail Trade) ............................ 481,563
63,200 Telecom Italia Mobile Di Risp
(Telephone/Wireless) .................................. 179,704
95,000 Telecom Italia Mobile SpA
(Telephone/Wireless) .................................. 438,482
45,100 Telecom Italia Di Risp (Telephone) .................... 198,858
78,200 Telecom Italia SpA (Telephone) ........................ 499,525
-------
2,155,334
Japan -- 4.9%
4,500 Advantest Corporation (Semiconductor).................. 255,075
32,000 Mori Seiki** (Machinery & Tools) ...................... 330,908
5,800 Sony Corporation (Electronics) ........................ 515,358
-------
1,101,341
Netherlands -- 10.3%
8,200 ASM Lithography Holding N.V.+
(Semiconductor) ....................................... 554,013
10,300 ING NV (Money Center Banks) ........................... 433,802
15,100 Ispat International NV+ (Steel Production) ............ 326,537
7,300 Philips Electronics NV
(Electronic Components-Miscellaneous).. ............... 437,777
9,400 Unilever NV ADR
(Consumer Products-Miscellaneous) ..................... 586,913
-------
2,339,042
Portugal -- 4.4%
11,800 Portugal Telecom S.A. (Telephone-Integrated) 547,525
4,280 Telecel-Comunicacaoes Pessoais S.A.+
(Cellular Telecommunications).......................... 456,022
-------
1,003,547
Spain -- 4.1%
21,100 Baron De Ley+ (Beverages-Wine/Spirits).. 398,871
18,800 Telefonica Nacional de Espana**
(Telephone/Networks)................................... 536,790
-------
935,661
Sweden -- 5.3%
33,000 Allgon AB, Class B (Electronic
Components-Miscellaneous) 444,716
9,448 Ericsson (L.M.) Telephone Company,
Class B (Telecommunications Equipment) ................ 355,197
17,200 ForeningsSparbanken AB
(Commercial Banks-Europe) ............................. 391,012
-------
1,190,925
Switzerland -- 3.8%
190 Baloise Holding+ (Multi-Line Insurance).. ............. 351,363
315 Novartis AG (Pharmacy/Drugs) .......................... 510,758
-------
862,121
United States -- 18.4%
5,300 Anchor Gaming+ (Casino Services) ...................... 295,475
41,600 Carson, Inc.+ (Cosmetics & Personal Care) ............. 278,200
8,250 Cisco Systems Inc.+
(Computers & Office Equipment) ........................ 460,453
17,000 Galileo International Inc. (Travel Services) .......... 469,625
15,400 General Nutrition Center, Inc.+ (Retail Trade) ........ 522,637
13,200 Itron, Inc.**+
(Information/Business Services) ....................... 240,075
14,600 Office Depot, Inc.+ (Retail Office Supplies) .......... 349,487
24,600 Rofin-Sinar Technologies Inc.+
(Machinery & Tools) ................................... 298,275
12,500 Sola International, Inc.+
(Cosmetics & Personal Care) ........................... 406,250
17,400 TMP Worldwide Inc.+ (Advertising Services) ............ 398,025
12,400 Valassis Communications Inc.+
(Printing-Commercial) ................................. 458,800
-------
4,177,302
TOTAL COMMON STOCKS
(Cost $20,756,247) ................................................. 22,736,012
----------
PREFERRED STOCKS -- 1.8%
(Cost $508,293)
Brazil -- 1.8%
3,270,000 Telec de Minas Gerais S.A.
(Telephone/Regional-Local) ............................ 413,127
-------
TOTAL INVESTMENTS -- 102.1%
(Cost $21,264,540*) ................................................ 23,149,139
OTHER ASSETS AND LIABILITIES -- (2.1%)
(Net) .............................................................. (485,376)
--------
NET ASSETS -- 100.0% ...............................................$22,663,763
==========
* Aggregate cost for federal tax purposes.
** Securities on loan at December 31, 1997, which have an aggregate market value
of $1,981,424, represent 8.7% of the total net asset value of the Fund (see
note 5 to Financial Statements).
+ Non-income producing security.
Abbreviations:
ADR American Depositary Receipt
ORD Ordinary
45
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------
The Montgomery Funds
- ---------------------
Global Communications
Fund
- ---------------------
Portfolio Highlights
(Unaudited)
==================================================
PORTFOLIO MANAGEMENT
--------------------------------------------------
Oscar A. Castro, CFA........................Senior
Portfolio Manager
==================================================
FUND PERFORMANCE
--------------------------------------------------
Average annual total returns
for the period ended 12/31/97
--------------------------------------------------
Montgomery
Global Communications Fund
Since inception (6/1/93) .................. 12.39%
One year .................................. 15.83%
Three years ............................... 13.51%
--------------------------------------------------
MSCI World Index
Since 5/31/93 ............................. 13.09%
One year .................................. 15.76%
Three years ............................... 16.62%
--------------------------------------------------
MSCI Telecommunications Index
Since 5/31/93 ............................. 10.82%
One year .................................. 19.33%
Three years ............................... 16.32%
Performance is cumulative and for a limited period of time. Past performance is
no guarantee of future results. Net asset value, investment return and principal
value will fluctuate, so shares, when redeemed, may be worth more or less than
their original cost.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY GLOBAL COMMUNICATION(R)
Initial Investment: $10,000 Period: 06/01/93 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
06/01/93 12.00 $10,000 $0 $10,000
06/93 12.45 $10,375 $0 $10,375
07/93 12.75 $10,625 $0 $10,625
08/93 14.01 $11,675 $0 $11,675
09/93 14.42 $12,017 $0 $12,017
10/93 15.44 $12,867 $0 $12,867
11/93 14.48 $12,067 $0 $12,067
12/93 16.18 $13,483 $0 $13,483
01/94 16.86 $14,050 $0 $14,050
02/94 16.27 $13,558 $0 $13,558
03/94 15.07 $12,558 $0 $12,558
04/94 15.29 $12,742 $0 $12,742
05/94 15.13 $12,608 $0 $12,608
06/94 14.20 $11,833 $0 $11,833
07/94 14.81 $12,342 $0 $12,342
08/94 15.86 $13,217 $0 $13,217
09/94 15.54 $12,950 $0 $12,950
10/94 15.74 $13,117 $0 $13,117
11/94 14.45 $12,042 $26 $12,068
12/94 13.98 $11,650 $25 $11,675
01/95 13.18 $10,983 $24 $11,007
02/95 13.15 $10,958 $24 $10,982
03/95 13.46 $11,217 $24 $11,241
04/95 14.01 $11,675 $25 $11,700
05/95 14.68 $12,233 $27 $12,260
06/95 15.42 $12,850 $28 $12,878
07/95 16.25 $13,542 $29 $13,571
08/95 16.28 $13,567 $29 $13,596
09/95 17.12 $14,267 $30 $14,297
10/95 16.32 $13,600 $29 $13,629
11/95 16.48 $13,733 $30 $13,763
12/95 16.34 $13,617 $29 $13,646
01/96 16.70 $13,917 $30 $13,947
02/96 16.84 $14,033 $31 $14,064
03/96 16.98 $14,150 $30 $14,180
04/96 18.15 $15,125 $33 $15,158
05/96 18.11 $15,092 $32 $15,124
06/96 18.05 $15,042 $32 $15,074
07/96 16.97 $14,142 $30 $14,172
08/96 17.31 $14,425 $31 $14,456
09/96 17.88 $14,900 $32 $14,932
10/96 16.70 $13,917 $582 $14,499
</TABLE>
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY GLOBAL COMMUNICATION(R)
Initial Investment: $10,000 Period: 06/01/93 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
11/96 17.40 $14,500 $607 $15,107
12/96 16.74 $13,950 $790 $14,740
01/97 17.60 $14,667 $830 $15,497
02/97 17.24 $14,367 $813 $15,180
03/97 16.88 $14,067 $796 $14,863
04/97 17.25 $14,375 $814 $15,189
05/97 18.67 $15,558 $882 $16,440
06/97 19.59 $16,325 $925 $17,250
07/97 20.75 $17,292 $979 $18,271
08/97 19.44 $16,200 $918 $17,118
09/97 20.78 $17,317 $980 $18,297
10/97 19.15 $15,958 $904 $16,862
11/97 19.07 $15,892 $900 $16,792
12/97 15.57 $12,975 $4,099 $17,074
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
GLOBAL COMMUNICATIONS GLOBAL COMMUNICATIONS
LIPPER
GLOBAL MSCI WORLD IX ND
AVE AVE
6/93-12/97 5/93-12/97
DATE RETURN VALUE DATE RETURN VALUE
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
May-93 $10,000 May-93 $10,000
Jun-93 $9,859 Jun-93 $9,914
Jul-93 $10,032 Jul-93 $10,115
Aug-93 $10,618 Aug-93 $10,576
Sep-93 $10,659 Sep-93 $10,378
Oct-93 $11,097 Oct-93 $10,662
Nov-93 $10,783 Nov-93 $10,056
Dec-93 $11,690 Dec-93 $10,546
Jan-94 $12,17? Jan-94 $11,239
Feb-94 $11,904 Feb-94 $11,091
Mar-94 $11,384 Mar-94 $10,610
Apr-94 $11,553 Apr-94 $10,936
May-94 $11,543 May-94 $10,962
Jun-94 $11,320 Jun-94 $10,929
Jul-94 $11,647 Jul-94 $11,134
Aug-94 $12,070 Aug-94 $11,467
Sep-94 $11,855 Sep-94 $11,163
Oct-94 $12,034 Oct-94 $11,478
Nov-94 $11,494 Nov-94 $10,977
Dec-94 $11,371 Dec-94 $11,081
Jan-95 $11,016 Jan-95 $10,912
Feb-95 $11,202 Feb-95 $11,069
Mar-95 $11,504 Mar-95 $11,599
Apr-95 $11,884 Apr-95 $12,001
May-95 $12,120 May-95 $12,101
Jun-95 $12,309 Jun-95 $12,095
Jul-95 $12,961 Jul-95 $12,697
Aug-95 $12,771 Aug-95 $12,411
Sep-95 $19,012 Sep-95 $12,770
Oct-95 $12,728 Oct-95 $12,566
Nov-95 $12,945 Nov-95 $13,000
Dec-95 $13,184 Dec-95 $13,377
Jan-96 $13,543 Jan-96 $13,617
Feb-96 $13,687 Feb-96 $13,697
Mar-96 $13,947 Mar-96 $13,922
Apr-96 $14,401 Apr-96 $14,246
May-96 $14,562 May-96 $14,256
Jun-96 $14,503 Jun-96 $14,325
Jul-96 $13,861 Jul-96 $13,816
Aug-96 $14,218 Aug-96 $13,972
Sep-96 $14,619 Sep-96 $14,516
Oct-96 $14,624 Oct-96 $14,614
Nov-96 $15,323 Nov-96 $15,430
Dec-96 $15,335 Dec-96 $15,180
Jan-97 $15,648 Jan-97 $15,360
Feb-97 $15,739 Feb-97 $15,534
Mar-97 $15,479 Mar-97 $15,224
Apr-97 $15,686 Apr-97 $15,719
May-97 $16,600 May-97 $16,686
Jun-97 $17,285 Jun-97 $17,516
Jul-97 $18,144 Jul-97 $18,319
Aug-97 $17,075 Aug-97 $17,091
Sep-97 $18,093 Sep-97 $18,017
Oct-97 $16,871 Oct-97 $17,066
Nov-97 $16,915 Nov-97 $17,365
Dec-97 $17,195 Dec-97 $17,573
</TABLE>
Performance Analysis
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
MSCI Telecom Price Index Montg Global Comm FundNet
- ------------------------------------------------------------------
<S> <C> <C>
May 93 $10,000.00 -
- ------------------------------------------------------------------
Jun 93 $10,222.42 $10,375.00
- ------------------------------------------------------------------
Jul 93 $10,322.50 $10,625.00
- ------------------------------------------------------------------
Aug 93 $10,926.62 $11,675.00
- ------------------------------------------------------------------
Sep 93 $10,753.92 $12,016.67
- ------------------------------------------------------------------
Oct 93 $11,224.74 $12,866.67
- ------------------------------------------------------------------
Nov 93 $10,633.67 $12,066.36
- ------------------------------------------------------------------
Dec 93 $10,826.21 $13,482.95
- ------------------------------------------------------------------
Jan 94 $11,289.13 $14,049.60
- ------------------------------------------------------------------
Feb 94 $10,524.82 $13,557.66
- ------------------------------------------------------------------
Mar 94 $10,179.59 $12,557.29
- ------------------------------------------------------------------
Apr 94 $10,495.95 $12,740.63
- ------------------------------------------------------------------
May 94 $10,540.39 $12,606.85
- ------------------------------------------------------------------
Jun 94 $10,474.40 $11,831.53
- ------------------------------------------------------------------
Jul 94 $10,772.38 $12,340.29
- ------------------------------------------------------------------
Aug 94 $11,096.25 $13,215.21
- ------------------------------------------------------------------
Sep 94 $10,762.79 $12,948.58
- ------------------------------------------------------------------
Oct 94 $10,984.54 $13,115.22
- ------------------------------------------------------------------
Nov 94 $10,218.92 $12,066.29
- ------------------------------------------------------------------
Dec 94 $10,178.04 $11,673.82
- ------------------------------------------------------------------
Jan 95 $10,394.72 $11,005.78
- ------------------------------------------------------------------
Feb 95 $10,376.05 $10,980.73
- ------------------------------------------------------------------
Mar 95 $10,567.71 $11,239.59
- ------------------------------------------------------------------
Apr 95 $10,692.30 $11,698.86
- ------------------------------------------------------------------
May 95 $10,844.01 $12,258.34
- ------------------------------------------------------------------
Jun 95 $11,012.18 $12,876.27
- ------------------------------------------------------------------
Jul 95 $11,262.25 $13,569.35
- ------------------------------------------------------------------
Aug 95 $11,507.81 $13,594.40
- ------------------------------------------------------------------
Sep 95 $12,184.28 $14,295.83
- ------------------------------------------------------------------
Oct 95 $12,031.70 $13,627.80
- ------------------------------------------------------------------
Nov 95 $12,101.60 $13,761.40
- ------------------------------------------------------------------
Dec 95 $12,471.68 $13,644.50
- ------------------------------------------------------------------
Jan 96 $12,681.42 $13,945.11
- ------------------------------------------------------------------
Feb 96 $12,569.04 $14,062.02
- ------------------------------------------------------------------
Mar 96 $12,376.44 $14,178.92
- ------------------------------------------------------------------
Apr 96 $12,767.54 $15,155.91
- ------------------------------------------------------------------
May 96 $12,627.68 $15,122.57
- ------------------------------------------------------------------
</TABLE>
Unit Value Base: May 93 = $10,000.00
Source: Micropal
Performance Analysis
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
MSCI Telecom Price Index Montg Global Comm FundNet
- ------------------------------------------------------------------
<S> <C> <C>
Jun 96 $12,589.88 $15,072.47
- ------------------------------------------------------------------
Jul 96 $11,739.67 $14,170.63
- ------------------------------------------------------------------
Aug 96 $11,792.36 $14,454.54
- ------------------------------------------------------------------
Sep 96 $12,221.62 $14,930.51
- ------------------------------------------------------------------
Oct 96 $12,457.80 $14,497.95
- ------------------------------------------------------------------
Nov 96 $13,129.67 $15,105.64
- ------------------------------------------------------------------
Dec 96 $13,421.90 $14,747.35
- ------------------------------------------------------------------
Jan 97 $13,551.05 $15,495.72
- ------------------------------------------------------------------
Feb 97 $13,693.86 $15,178.77
- ------------------------------------------------------------------
Mar 97 $13,259.87 $14,861.81
- ------------------------------------------------------------------
Apr 97 $13,402.58 $15,187.57
- ------------------------------------------------------------------
May 97 $14,220.08 $16,437.79
- ------------------------------------------------------------------
Jun 97 $14,820.55 $17,247.80
- ------------------------------------------------------------------
Jul 97 $15,087.85 $18,269.11
- ------------------------------------------------------------------
Aug 97 $14,140.41 $17,115.73
- ------------------------------------------------------------------
Sep 97 $15,097.11 $18,295.52
- ------------------------------------------------------------------
Oct 97 $14,484.38 $16,860.40
- ------------------------------------------------------------------
Nov 97 $15,451.15 $16,789.97
- ------------------------------------------------------------------
Dec 97 $16,017.01 $17,071.80
- ------------------------------------------------------------------
</TABLE>
Unit Value Base: May 93 = $10,000.00
Source: Micropal
/1/ The Morgan Stanley Capital International World Index measures the
performance of selected stocks in 23 developed countries. The Index is
presented net of dividend withholding taxes.
/2/ The MSCI Telecommunications Index measures the performance of equity
securities of approximately 25 communications companies in developed
countries.
/3/ The Lipper Telecommunication Funds Average universe consists of 67 funds.
INVESTMENT REVIEW
Q: How did the Fund perform over the six months ended December 31, 1997?
A: It lagged its benchmark, the MSCI World Index, over that period by about two
and a half percentage points. The Fund outperformed the index over the full-year
period, though.
Q: What explains that performance?
A: The MSCI World Index is very comprehensive, encompassing stocks from the
United States, Europe and developed Pacific Rim countries. It is also widely
diversified across sectors. The Fund focuses on one sector, albeit a broad one.
That put it at a disadvantage to the index during the second half, when
investors turned from growth-oriented stocks (like some communications shares)
toward more-defensive areas. The Fund also has less exposure to the United
States than the index does, and a bit more to the emerging markets. That worked
against the Fund, given the U.S. market's relative strength and the emerging
markets' weakness during the second half.
Shares in the communications arena were not totally immune to Asia's crisis.
Some in the emerging markets came under intense pressure, but their declines
were partly a function of their size. In many emerging markets, telephone
utilities have the largest capitalizations. So when sentiment toward a country
cools, these shares are often the first to sell off--even if their fundamentals
are healthy. When sentiment recovers, on the other hand, they often lead the
market upward. The opposite is usually true in developed markets. Many
investors consider telephone utilities such as AT&T and France Telecom to be
defensive holdings when the outlook is uncertain. This was the case in the
fourth quarter. Though Asia's problems may hamper some communications firms in
the short term, we believe that this may encourage consolidation. We also think
that many of the world's economies will expand at a healthy rate in 1998,
providing what should be a solid base for the communications sector.
Q: Several high-profile communications mergers and acquisitions took place in
1997. What implications might this have for the industry?
A: As we've said before, M&A activity appears to be a proxy for sentiment within
the communications industry. It suggests to us that these companies believe in
the sector's long-term growth potential and are taking steps to capitalize on
it. So we view this M&A activity as a strong vote of confidence.
Q: In the past you've mentioned "technological innovation" as an argument for
investing in the global communications sector. What do you mean?
A: We believe that technological innovation will help fuel the sector's growth
into the next century. Digitalization, for example, is displacing traditional
analog technologies in many industries, thereby creating new avenues for sales
and revenue growth. We think that this shift will gain momentum in 1998, as
businesses and consumers upgrade from analog cellular to digital wireless
technology. In the U.S., digital cable television may soon become the dominant
technology. Digitalization is also revolutionizing consumer electronics, with
DVD (digital videodisc) technology, digital cameras and so on. In our view, this
46
[CAPTION]
<PAGE>
---------------------
The Montgomery Funds
---------------------
Global Communications
Fund
---------------------
Investments
bodes well for firms that develop cutting-edge digital technology. The Fund
invests in several of them, such as Sony.
Q: Some might say that last year's turmoil argues against diversifying overseas.
Wouldn't investing in the U.S. alone work just as well as, if not better than, a
global strategy?
A: We believe that the Fund's global scope may potentially minimize its risk.
Sector funds confined to one country are doubly vulnerable: The sector there may
slump or the entire market may decline. That's why we invest around the world,
in markets at different stages of the economic cycle.
We also believe that a global strategy may increase the Fund's long-term
returns. In our view, some of the world's most exciting opportunities lie
outside the U.S. The argument for investing in the emerging markets is
especially compelling if one believes, as we do, that their demand for
communications will be huge. Many of these countries have also embraced new
communications technology more quickly and enthusiastically than we in the U.S.
have. The goal of our global strategy is to help investors take advantage of
those trends.
================================================
TOP TEN HOLDINGS
------------------------------------------------
(as a percentage of total net assets)
Global Telesystems Group, Inc. .............6.5%
Grupo Iusacell, Series L, ADR...............3.3%
Telec de Minas Gerais S.A ..................3.2%
Telecom Italia SpA .........................3.1%
Sony Corporation ...........................3.0%
Valassis Communications Inc ................2.7%
Galileo International Inc ..................2.7%
ASM Lithography Holding N.V ................2.7%
Portugal Telecom SA ........................2.6%
Veba AG ....................................2.6%
================================================
TOP FIVE COUNTRIES
------------------------------------------------
(as a percentage of total net assets)
United States .............................17.7%
Great Britain ..............................9.5%
Russia .....................................9.3%
Germany ....................................7.7%
Italy ......................................5.8%
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
COMMON STOCKS - 92.3%
Shares Value (Note 1)
Brazil - 1.5%
17,700 Telebras, ADR (Telephone/Networks) .................. $ 2,060,944
Canada - 2.1%
119,800 Cognos, Inc.+ (Software Systems) .................... 2,762,887
China/Hong Kong - 3.3%
79,400 China Telecom Ltd.***+
(Telecommunications/Wireless) ....................... 2,664,863
972,500 Smartone Telecommunications
(Telecommunications/Wireless) ....................... 1,876,226
---------
4,541,089
Colombia - 1.2%
106,000 Bell Canada+
(Telecommunications/Wireless) ....................... 1,636,375
Finland - 2.5%
47,100 Nokia Corporation AB, Series A***
(Telecommunications Equipment) ...................... 3,342,862
France - 5.8%
24,717 Axime (Ex Segin)+ (Software Systems) ................ 3,186,112
20,819 Eaux (Cie Generale des) (Conglomerates).. ........... 2,904,977
48,000 France Telecom SA+ (Telephone/Networks) ............. 1,740,598
---------
7,831,687
Germany - 6.3%
2,345 Axel Springer Verlag, Class A
(Newspapers/Publishing) .............................$ 1,577,237
6,740 Mannesmann AG (Auto/Auto Parts) ..................... 3,405,592
52,250 Veba AG*** (Electric Utilities) ..................... 3,557,879
---------
8,540,708
Great Britain - 9.5%
74,400 Colt Telecom Group PLC, ADR+
(Telephone/Regional-Local) .......................... 3,148,050
86,100 Dr. Solomon's Group PLC, ADR+
(Software Systems) .................................. 2,755,200
235,000 Flextech Holdings Ltd.+ (Semiconductor) ............. 2,033,967
4,230,000 Freepages Group PLC+
(Broadcasting/Advertising) .......................... 2,275,187
628,900 Orange PLC+ (Telephone/Wireless) .................... 2,726,785
---------
12,939,189
Italy - 5.8%
285,600 Telecom Italia Mobile SpA
(Telephone/Wireless) ................................ 812,079
430,000 Telecom Italia Mobile SpA
(Telephone/Wireless) ................................ 1,984,709
652,361 Telecom Italia SpA
(Telephone/Regional-Local) .......................... 4,167,145
219,613 Telecom Italia SpA Risp
(Telephone/Regional-Local) .......................... 968,333
-------
7,932,266
47
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Global Communications
Fund
- ---------------------
I n v e s t m e n t s
COMMON STOCKS - continued
Shares Value (Note 1)
Japan -- 4.1%
25,000 Advantest Corporation (Semiconductor)... ............$ 1,417,081
46,500 Sony Corporation*** (Electronics) ................... 4,131,750
---------
5,548,831
Malaysia -- 0.2%
1,294,000 Time Engineering Berhad (Conglomerate) .............. 332,691
Mexico -- 3.3%
206,600 Grupo Iusacell, Series L, ADR***+
(Telephone/Wireless) ................................ 4,480,637
105,000 Grupo Mexicano de Video**+ (Leisure Time) ........... 10,276
---------
4,490,913
Netherlands -- 4.8%
53,600 ASM Lithography Holding N.V.+
(Semiconductor) ..................................... 3,621,350
47,400 Philips Electronics N.V.
(Telecommunications Equipment) ...................... 2,842,551
---------
6,463,901
Poland -- 1.3%
152,000 Prokom Software, GDR+ (Software Systems) ............ 1,706,200
Portugal -- 4.6%
77,100 Portugal Telecom SA
(Telephone/Long Distance) ........................... 3,577,474
25,600 Telecel-Comunicacaoes Pessoais SA+
(Telecommunications/Wireless) ....................... 2,727,607
---------
6,305,081
Russia -- 9.3%
450,987 Global Telesystems Group, Inc.**+
(Telephone/Networks) ................................ 8,826,487
200,000 Russian Telecommunications Development
Corporation**+ (Telephone/Networks) ................. 1,434,549
66,321 Vimpel-Communications, ADR**+
(Telecommunications/Wireless) ....................... 2,362,686
---------
12,623,722
Spain -- 2.4%
113,700 Telefonica de Espana, ORD***
(Telephone/Networks) ................................ 3,246,439
Sweden -- 4.1%
215,000 Allgon AB, Class B
(Telecommunications Equipment) ...................... 2,897,392
70,220 Ericsson (L.M.) Telephone Company,
Class B (Telecommunications Equipment) .............. 2,639,916
---------
5,537,308
United States -- 17.7%
74,500 Airtouch Communications, Inc.+
(Telephone/Wireless) ................................ 3,096,406
64,400 Brooks Fiber Properties Inc.+
(Telephone/Networking) .............................. 3,548,038
50,826 Cisco Systems, Inc.+
(Computers & Office Equipment) ...................... 2,836,726
132,300 Galileo International Inc. (Software Systems) ....... 3,654,787
50,000 McLeod, Inc.+ (Telecommunications/
Regional-Local) ..................................... 1,606,250
90,000 Montgomery Emerging Communications
Fund++ (Holding) .................................... 1,018,125
55,100 Scripps Company (E.W.)
(Broadcasting/Advertising) .......................... 2,668,906
100,000 Valassis Communications Inc.+
(Broadcasting/Advertising) .......................... 3,700,000
62,408 Worldcom, Inc.+ (Telephone/Long Distance) ........... 1,889,792
---------
24,019,030
Venezuela -- 2.5%
83,100 Compania Anonima Telefonos de
Venezuela ADR*** (Telephone/Networks) ............... 3,459,038
TOTAL COMMON STOCKS
(Cost $97,878,217) ............................................... 125,321,161
-----------
PREFERRED STOCKS -- 5.7%
Brazil -- 4.3%
34,809,077 Telec de Minas Gerais S.A.
(Telephone/Regional-Local) .......................... 4,397,724
5,172,562 Telec de Sao Paulo S.A.
(Telephone/Regional-Local) .......................... 1,376,461
---------
5,774,185
Germany -- 1.4%
40,000 Prosieben Media AG (Television) ..................... 1,867,704
---------
TOTAL PREFERRED STOCKS
(Cost $7,509,454) ................................................ 7,641,889
---------
TOTAL SECURITIES
(Cost $105,387,671) ............................................. 132,963,050
-----------
REPURCHASE AGREEMENT -- 0.4%
Principal Amount
$597,000 Agreement with Bear Stearns, Tri-Party, 6.850%
dated 12/31/97, to be repurchased at $597,227
on 01/02/98, collateralized by $621,866 market
value of U.S. government securities, having
various maturities and various interest rates ....... 597,000
-------
TOTAL INVESTMENTS -- 98.4%
(Cost $105,984,671*) ............................................. 133,560,050
OTHER ASSETS AND LIABILITIES -- 1.6%
(Net) ............................................................ 2,197,554
---------
NET ASSETS -- 100.0% ............................................. $135,757,604
-----------
* Aggregate cost for federal tax purposes.
** Illiquid security or special situation security (see note 7 to Financial
Statements).
*** Securities on loan at December 31, 1997, which have an aggregate market
value of $22,431,488, represent 16.5% of the total net assets of the Fund
(see note 5 to Financial Statements).
+ Non-income producing security.
++ See note 2 to Financial Statements.
Abbreviations:
ADR American Depositary Receipt
ORD Ordinary
48
The accompanying notes are an intergral part of these financial statements.
<PAGE>
--------------------------------------
The Montgomery Funds
--------------------------------------
Select 50 Fund
--------------------------------------
P o r t f o l i o H i g h l i g h t s
(Unaudited)
I N V E S T M E N T R E V I E W
Q: How did the Select 50 Fund perform over the second half of 1997?
A: The Fund gained 3.6%, lagging the benchmark S&P 500 Index. The Fund also
underperformed the index by a fairly small margin for 1997 as a whole, though
its gain over that period, 29.3%, was solid in absolute terms. In fact, the
Fund's 1997 return puts its average annualized gains since inception at 30%--
more than two percentage points ahead of the S&P 500 over the same period.
Q: Asia's crisis made headlines in 1997. How did it affect the Fund?
A: The crisis had repercussions around the world in the second half--some
obvious, some not. At first, the volatility was confined to Southeast Asia. In
mid-1997 just 6.2% of the Fund's assets were in Asia, and an Indian telephone
utility accounted for more than half of that weighting. So the Fund was
initially somewhat sheltered from Southeast Asia's currency devaluations and
subsequent market declines.
As the crisis appeared to worsen, investors began to retreat from emerging
markets around the world. The fear was that countries such as Brazil and Russia
would devalue their currencies, too. As a result, the portion of Select 50
devoted to emerging markets had a difficult time during the second half. For the
full year, however, this segment of the Fund did very well, due in part to its
strong exposure to Russia and Brazil. And despite Asia's problems, we continue
to see positive developments in other emerging markets (such as greater
political stability, privatizations and corporate restructuring) that we believe
will create a solid backdrop for their equity markets over the long term.
Although developed markets also felt repercussions from Asia in the second half,
the Fund's diversification across countries, sectors and asset classes lent it
some stability during this period. In the late summer and fall, U.S. investors
turned away from cyclicals and smaller-caps toward companies that they believed
could deliver consistent, predictable earnings. Many investors viewed
consumer-oriented blue chips as a potential haven against Asia's slowdown. These
inflows benefited some of the stocks that make up the Equity Income and U.S.
Growth Equity segments of the Select 50 Fund.
Q: What's your outlook for cyclicals and smaller-caps now?
A: We do think that the outlook for companies involved in producing basic
materials such as steel and paper has become more uncertain as demand from Asia
slows. For these and other reasons, we reduced the Fund's position in former top
10 holding International Paper. Oil companies also faced slackening Asian demand
last fall, at a time when higher OPEC production quotas and a potential
resumption of Iraqi crude oil exports threatened to boost supply. As of December
31, however, oil was still the Fund's largestest sector weighting. About half of
that is the Fund's top holding, Tatneft. By our calculations this Russian oil
company is trading at a deep discount to its underlying assets. We estimate that
its oilfields hold roughly 35 years of reserves at current production rates, but
its share price still doesn't reflect those assets. So even if Tatneft is
=======================================
P O R T F O L I O M A N A G E M E N T
---------------------------------------
Kevin T. Hamilton, CFA, Chair
Investment Oversight Committee
Montgomery U.S. Growth Equity
Montgomery U.S. Small Cap
Montgomery U.S. Equity Income
Montgomery International/Global
Montgomery Emerging Markets
=======================================
F U N D P E R F O R M A N C E
---------------------------------------
Average annual total returns
for the period ended 12/31/97
---------------------------------------
Montgomery Select 50 Fund
Since inception (10/2/95) .......30.01%
One year ........................29.27%
---------------------------------------
S&P 500 Index
Since 9/30/95 ...................27.85%
One year ........................33.35%
---------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY SELECT 50(R)
Initial Investment: $10,000 Period: 10/02/95 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
10/02/95 12.00 $10,000 $0 $10,000
10/95 12.50 $10,417 $0 $10,417
11/95 13.24 $11,033 $47 $11,080
12/95 13.83 $11,525 $49 $11,574
01/96 14.28 $11,900 $51 $11,951
02/96 14.53 $12,108 $52 $12,160
03/96 14.96 $12,467 $53 $12,520
04/96 15.87 $13,225 $56 $13,281
05/96 16.81 $14,008 $60 $14,068
06/96 16.46 $13,717 $58 $13,775
07/96 15.18 $12,650 $54 $12,704
08/96 15.89 $13,242 $56 $13,298
09/96 16.37 $13,642 $58 $13,700
10/96 15.67 $13,058 $571 $13,629
11/96 16.26 $13,550 $592 $14,142
12/96 16.03 $13,358 $584 $13,942
01/97 17.20 $14,333 $627 $14,960
02/97 17.39 $14,492 $633 $15,125
03/97 16.84 $14,033 $614 $14,647
04/97 17.21 $14,342 $627 $14,969
05/97 19.00 $15,833 $693 $16,526
06/97 20.01 $16,675 $729 $17,404
07/97 21.54 $17,950 $785 $18,735
08/97 21.37 $17,808 $779 $18,587
09/97 22.60 $18,833 $824 $19,657
10/97 21.15 $17,625 $771 $18,396
11/97 20.79 $17,325 $757 $18,082
12/97 18.83 $15,692 $2,331 $18,023
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
SELECT 50 SELECT 50
LIPPER
CAP APPRECIATION S&P 500
AVE AVE
9/95-12/97 9/95-12/97
DATE RETURN VALUE DATE RETURN VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sep-95 $10,000 Sep-95 $10,000
Oct-95 $ 9,795 Oct-95 $9,964
Nov-95 $10,166 Nov-95 $10,401
Dec-95 $10,285 Dec-95 $10,602
Jan-96 $10,467 Jan-96 $10,962
Feb-96 $10,756 Feb-96 $11,064
Mar-96 $10,903 Mar-96 $11,170
Apr-96 $11,378 Apr-96 $11,335
May-96 $11,755 May-96 $11,627
Jun-96 $11,404 Jun-96 $11,671
Jul-96 $10,599 Jul-96 $11,156
Aug-96 $11,052 Aug-96 $11,391
Sep-96 $11,624 Sep-96 $12,032
Oct-96 $11,528 Oct-96 $12,364
Nov-96 $12,024 Nov-96 $13,297
Dec-96 $11,950 Dec-96 $13,034
Jan-97 $12,462 Jan-97 $13,848
Feb-97 $12,153 Feb-97 $13,957
Mar-97 $11,549 Mar-97 $13,384
Apr-97 $11,703 Apr-97 $14,183
May-97 $12,633 May-97 $15,050
Jun-97 $13,097 Jun-97 $15,719
Jul-97 $14,068 Jul-97 $16,969
Aug-97 $13,827 Aug-97 $16,019
Sep-97 $14,643 Sep-97 $16,896
Oct-97 $14,035 Oct-97 $16,332
Nov-97 $14,044 Nov-97 $17,088
Dec-97 $14,174 Dec-97 $17,381
</TABLE>
/1/ The Standard & Poor's 500 Index is composed of 500 widely held common
stocks listed on the NYSE, AMEX and OTC markets.
/2/ The Lipper Capital Appreciation Funds Average universe consists of 154
funds.
49
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Select 50 Fund
- ---------------------
Investments
===========================================
TOP TEN HOLDINGS
-------------------------------------------
(as a percentage of total net assets)
Tatneft Sponsored, ADS ................5.5%
Masco Corporation .....................4.0%
Transportador de Gas, ADR .............3.9%
Cooper Companies, Inc .................3.1%
Caribiner International, Inc ..........2.8%
R&B Falcon Corporation ................2.7%
HA-LO Industries, Inc. ................2.5%
Linens 'N Things, Inc. ................2.5%
Philip Morris Companies Inc ...........2.4%
Du Pont (E.I.) de Nemours & Company ...2.3%
===========================================
TOP FIVE INDUSTRIES
-------------------------------------------
(as a percentage of total net assets)
Oil ...................................9.8%
Retail Trade ..........................6.6%
Building Materials ....................6.3%
Banks .................................6.1%
Software Systems ......................5.0%
faced with a temporarily unfavorable supply/demand situation, we believe
that it may be a very attractive investment over the long term.
Although the economy's potential moderation in 1998 may have warranted the
recent pullback from cyclicals, we're less convinced that weakness in
smaller-caps is supported by the fundamental picture. Most small U.S. companies
do not depend on Asia for much, if any, of their revenues. They instead tend to
be driven by domestic demand, which we still believe will remain fairly healthy
in 1998. In general, small-cap valuations also continue to be cheaper than those
of larger-cap stocks. That disparity suggests to us that small-caps could
outperform in coming quarters if investors begin to seek out better value.
Q: What's your outlook for global markets in 1998?
A: We think that continued uncertainty about the U.S. economy and about Asia's
impact on earnings will make stock selection crucial. We believe that the Select
50 Fund would be well positioned for this kind of environment, given our
disciplined investment strategies. Our portfolio managers use rigorous
fundamental analysis within a framework of macroeconomic, geopolitical and
company-specific research to construct each of the Fund's subportfolios. Over
the long term, we believe that this disciplined, diversified strategy will help
to minimize the Fund's risk and maximize shareholders' returns.
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
COMMON STOCKS -- 92.6%
Shares Value (Note 1)
Agricultural Commodities -- 0.5%
1,864,900 London Sumatra ORD (Indonesia) .....................$ 1,059,602
Auto/Auto Parts -- 2.1%
9,600 Mannesman AG (Germany) ............................. 4,850,695
Banks -- 6.1%
100,000 First Union Corporation (United States) ............ 5,125,000
108,300 International Nederlanden Groep N.V.
(Netherlands) ...................................... 4,561,237
40,000 Morgan (J.P.) & Company (United States)............. 4,515,000
---------
14,201,237
Broadcasting/Advertising -- 3.8%
5,511,900 Freepages Group PLC+ (Great Britain) ............... 2,964,682
226,312 HA-LO Industries, Inc.+ (United States) ............ 5,884,112
---------
8,848,794
Building Materials -- 6.3%
19,400 Encore Wire Corporation+ (United States) ........... 597,762
180,000 Masco Corporation (United States) .................. 9,157,500
85,600 Vossloh AG (Germany) ............................... 4,781,990
---------
14,537,252
Business Services -- 4.1%
145,000 Caribiner International, Inc.+
(United States) .................................... 6,452,500
Business Services -- continued
117,800 On Assignment, Inc.+ (United States) ............... 3,092,250
---------
9,544,750
Cement -- 2.0%
199,999 Amreya Cement (Egypt) .............................. 4,673,011
Chemicals -- 2.3%
90,000 Du Pont (E.I.) de Nemours & Company
(United States) .................................... 5,405,625
Consumer Services -- 1.8%
38,762 Azkoyen S.A. (Spain) ............................... 4,096,280
Electric Utilities -- 1.0%
66,700 Irkutskenergo, ADR (Russia) ........................ 641,987
40 Irkutskenergo, RDC**+ (Russia) ..................... 1,576,000
---------
2,217,987
Electrical Equipment -- 2.2%
90,000 Emerson Electric Company
(United States) .................................... 5,079,375
Electronics -- 2.7%
66,100 Moog Inc., Class A+ (United States) ................ 2,309,369
65,600 Philips Electronics N.V. (Netherlands) ............. 3,933,994
---------
6,243,363
50
The accompanying notes are an integral part of these financial statements.
<PAGE>
--------------------
The Montgomery Funds
--------------------
Select 50 Fund
--------------------
Investments
COMMON STOCKS - continued
Shares Value (Note 1)
Heavy Construction - 2.0%
127,000 Brisa-Auto Estradas+ (Portugal) .....................$ 4,549,367
Leisure Time - 1.6%
108,139 Cendant Corporation+ (United States) ................ 3,717,278
Machinery and Tools - 2.6%
92,700 Elevadores Atlas SA (Brazil) ........................ 1,121,321
148,450 Manitowoc Company, Inc. (United States).............. 4,824,625
---------
5,945,946
Medical Products - 3.1%
173,000 Cooper Companies, Inc.+ (United States).............. 7,071,375
Metals and Mining - 1.7%
184,600 ISPAT International N.V.+ (Netherlands).............. 3,991,975
Oil - 9.8%
60,000 Amerada Hess Corporation (United States) ............ 3,292,500
60,000 Chevron Corporation (United States) ................. 4,620,000
40,000 Phillips Petroleum Company (United States) .......... 1,945,000
89,300 Tatneft Sponsored, ADS(**) (Russia) ................. 12,725,250
----------
22,582,750
Oilfield Equipment - 2.7%
178,000 R&B Falcon Corporation+ (United States) ............. 6,241,125
Pharmacy/Drugs - 2.1%
101,500 Glaxo Wellcome PLC, Sponsored ADR
(Great Britain) ..................................... 4,859,313
Pipelines - 3.9%
810,700 Transportador de Gas, ADR (Argentina) ............... 9,069,706
Pulp and Paper - 3.1%
94,400 Boise Cascade Corporation (United States) ........... 2,855,600
100,000 International Paper Company (United States) ......... 4,312,500
---------
7,168,100
Real Estate - 0.0%#
52,000 Hemaraj Land and Development Public
Company Ltd. (F)(**)+ (Thailand) .................... 53,755
Retail Trade - 6.6%
115,100 Gucci Group (Italy) ................................. 4,819,813
130,000 Linens 'N Things, Inc.+ (United States) ............. 5,671,250
79,000 Nordstrom Inc. (United States) ...................... 4,759,750
---------
15,250,813
Semiconductor - 0.9%
5,340,000 Gul Technologies+ (Singapore) ...................... 2,027,647
Software Systems - 5.0%
185,000 Avid Technology Inc.+ (United States) ............... 4,960,312
125,000 Cybermedia Inc.+ (United States) .................... 1,871,094
350,000 Sybase Inc.+ (United States) ........................ 4,670,313
---------
11,501,719
Telecommunications Equipment - 3.9%
215,000 Aspect Telecommunications Corporation+
(United States)...................................... 4,515,000
56,300 Nokia Corporation, ADR (Finland) .................... 3,941,000
1,360,747 Teleceara PN `C'(**)+ (Brazil) ...................... 548,664
-------
9,004,664
Telephone/Networks - 4.0%
100,000 GTE Corporation (United States) ..................... 5,225,000
26,700 Telebras, ADR (Brazil) .............................. 3,108,881
10,000,000 Telec Brasileiras-Telebras ON (Brazil) .............. 1,016,979
---------
9,350,860
Telephone/Regional-Local - 1.4%
40,000 Ameritech Corporation (United States) ............... 3,220,000
3,300 Mahanagar Telephone Nigam Ltd.(***)+ (India) ........ 21,719
------
3,241,719
Tobacco - 3.3%
105,000 General Cigar Holdings, Inc.+ (United States) ....... 2,270,625
120,000 Philip Morris Companies Inc. (United States) ........ 5,437,500
---------
7,708,125
TOTAL COMMON STOCKS
(Cost $195,925,002) .............................................. 214,094,208
-----------
REPURCHASE AGREEMENTS - 4.6%
Principal Amount
$5,364,500 Agreement with Bear Stearns, Tri-Party,
6.850% dated 12/31/97, to be repurchased
at $5,366,541 on 01/02/98, collateralized by
$5,587,938 market value of U.S. government
securities, having various maturities and
various interest rates .............................. 5,364,500
5,364,500 Agreement with United Bank of Switzerland,
Tri-Party, 6.900% dated 12/31/97, to be
repurchased at $5,366,556 on 01/02/98,
collateralized by $5,471,877 market value of
U.S. government securities, having various
maturities and various interest rates................ 5,364,500
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $10,729,000) ............................................... 10,729,000
----------
TOTAL INVESTMENTS - 97.2%
(Cost $206,654,002*) ............................................. 224,823,208
OTHER ASSETS AND LIABILITIES - 2.8%
(Net) ............................................................ 6,499,306
---------
NET ASSETS - 100.0% ..............................................$ 231,322,514
===========
* Aggregate cost for federal tax purposes.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
*** Illiquid security or special situation security (see note 7 to Financial
Statements).
+ Non-income producing security.
# Amount represents less than 0.1%.
Abbreviations:
ADR American Depositary Receipt
ADS American Depositary Share
(F) Foreign or Alien Shares
ORD Ordinary
RDC Russian Depositary Certificate
51
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------
The Montgomery Funds
- --------------------------
U.S. Asset Allocation Fund
- ---------------------------
Portfolio Highlights
( Unaudited)
==============================================
PORTFOLIO MANAGEMENT
----------------------------------------------
Kevin T. Hamilton, CFA
Chair, Investment Oversight Committee
Growth Team
Fixed-Income Team
==============================================
FUND PERFORMANCE
----------------------------------------------
Average annual total returns
for the period ended 12/31/97
----------------------------------------------
Montgomery
U.S. Asset Allocation Fund
Since inception (3/31/94) ..............22.39%
One year ...............................19.01%
Three years ............................21.22%
----------------------------------------------
S&P 500 Index
Since 3/31/94 ..........................25.93%
One year ...............................33.35%
Three years ............................31.13%
----------------------------------------------
Lehman Brothers
Aggregate Bond Index
Since 3/31/94 ...........................8.23%
One year ................................9.65%
Three years ............................10.41%
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
Growth of a $10,000 Investment
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY U.S. ASSET ALLOCATION(R)
Initial Investment: $10,000 Period: 03/31/94 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
03/31/94 12.00 $10,000 $0 $10,000
03/94 12.00 $10,000 $0 $10,000
04/94 12.19 $10,158 $0 $10,158
05/94 12.45 $10,375 $0 $10,375
06/94 12.24 $10,200 $0 $10,200
07/94 12.89 $10,742 $0 $10,742
08/94 13.25 $11,042 $0 $11,042
09/94 13.37 $11,142 $0 $11,142
10/94 13.84 $11,533 $0 $11,533
11/94 14.05 $11,708 $226 $11,934
12/94 14.10 $11,750 $226 $11,976
01/95 14.24 $11,867 $228 $12,095
02/95 14.71 $12,258 $237 $12,495
03/96 15.16 $12,633 $244 $12,877
04/95 15.25 $12,708 $245 $12,953
05/95 15.82 $13,183 $254 $13,437
06/95 16.33 $13,608 $263 $13,871
07/95 16.83 $14,025 $270 $14,295
08/95 17.06 $14,217 $274 $14,491
09/95 17.41 $14,508 $280 $14,788
10/95 17.41 $14,508 $280 $14,788
11/95 17.49 $14,575 $978 $15,553
12/95 17.86 $14,883 $999 $15,882
01/96 17.84 $14,867 $997 $15,864
02/96 18.29 $15,242 $1,022 $16,264
03/96 18.54 $15,450 $1,036 $16,486
04/96 19.09 $15,908 $1,068 $16,976
05/96 19.51 $16,258 $1,091 $17,349
06/96 19.33 $16,108 $1,081 $17,189
07/96 18.74 $15,617 $1,047 $16,664
08/96 19.17 $15,975 $1,072 $17,047
09/96 19.64 $16,367 $1,098 $17,465
10/96 18.50 $15,417 $2,330 $17,747
11/96 19.11 $15,925 $2,407 $18,332
12/96 18.09 $15,075 $2,848 $17,923
01/97 18.37 $15,308 $2,893 $18,201
02/97 18.23 $15,192 $2,870 $18,062
03/97 17.84 $14,867 $2,808 $17,675
04/97 18.41 $15,342 $2,898 $18,240
05/97 19.45 $16,208 $3,063 $19,271
06/97 19.89 $16,575 $3,132 $19,707
07/97 21.35 $17,792 $3,361 $21,153
08/97 21.12 $17,600 $3,325 $20,925
09/97 21.86 $18,217 $3,441 $21,658
10/97 21.54 $17,950 $3,391 $21,341
11/97 21.59 $17,992 $3,399 $21,391
12/97 18.01 $15,008 $6,323 $21,331
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
U.S. U.S. U.S.
ASSET ALLOCATION ASSET ALLOCATION ASSET ALLOCATION
LIPPER
S&P 500 FLEXIBLE PORTFOLIOS LEHMAN AGG
AVE AVE AVE
3/94-12/97 3/94-12/97 3/94-12/97
DATE RETURN VALUE DATE RETURN VALUE DATE RETURN VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mar-94 $10,000 Mar-94 $10,000 Mar-94 $10,000
Apr-94 $10,128 Apr-94 $10,019 Apr-94 $ 9,920
May-94 $10,294 May-94 $10,059 May-94 $ 9,919
Jun-94 $10,042 Jun-94 $ 9,898 Jun-94 $ 9,897
Jul-94 $10,371 Jul-94 $10,099 Jul-94 $10,093
Aug-94 $10,796 Aug-94 $10,336 Aug-94 $10,106
Sep-94 $10,532 Sep-94 $10,174 Sep-94 $ 9,957
Oct-94 $10,768 Oct-94 $10,245 Oct-94 $ 9,948
Nov-94 $10,376 Nov-94 $10,009 Nov-94 $ 9,926
Dec-94 $10,530 Dec-94 $10,080 Dec-94 $ 9,995
Jan-95 $10,803 Jan-95 $10,192 Jan-95 $10,193
Feb-95 $11,223 Feb-95 $10,488 Feb-95 $10,435
Mar-95 $11,554 Mar-95 $10,695 Mar-95 $10,499
Apr-95 $11,894 Apr-95 $10,908 Apr-95 $10,646
May-95 $12,369 May-95 $11,281 May-95 $11,058
Jun-95 $12,656 Jun-95 $11,509 Jun-95 $11,139
Jul-95 $13,075 Jul-95 $11,811 Jul-95 $11,114
Aug-95 $13,108 Aug-95 $11,892 Aug-95 $11,248
Sep-95 $13,661 Sep-95 $12,165 Sep-95 $11,357
Oct-95 $13,612 Oct-95 $12,104 Oct-95 $11,505
Nov-95 $14,209 Nov-95 $12,485 Nov-95 $11,677
Dec-95 $14,482 Dec-95 $12,667 Dec-95 $11,841
Jan-96 $14,975 Jan-96 $12,919 Jan-96 $11,920
Feb-96 $15,114 Feb-96 $12,990 Feb-96 $11,713
Mar-96 $15,259 Mar-96 $13,070 Mar-96 $11,631
Apr-96 $15,484 Apr-96 $13,225 Apr-96 $11,566
May-96 $15,883 May-96 $13,399 May-96 $11,542
Jun-96 $15,943 Jun-96 $13,393 Jun-96 $11,697
Jul-96 $15,239 Jul-96 $13,019 Jul-96 $11,729
Aug-96 $15,561 Aug-96 $13,241 Aug-96 $11,710
Sep-96 $16,436 Sep-96 $13,710 Sep-96 $11,914
Oct-96 $16,890 Oct-96 $13,957 Oct-96 $12,178
Nov-96 $18,165 Nov-96 $14,620 Nov-96 $12,386
Dec-96 $17,805 Dec-96 $14,469 Dec-96 $12,271
Jan-97 $18,917 Jan-97 $14,953 Jan-97 $12,309
Feb-97 $19,065 Feb-97 $14,937 Feb-97 $12,339
Mar-97 $18,284 Mar-97 $14,515 Mar-97 $12,203
Apr-97 $19,374 Apr-97 $14,927 Apr-97 $12,385
May-97 $20,559 May-97 $15,572 May-97 $12,502
Jun-97 $21,473 Jun-97 $16,051 Jun-97 $12,651
Jul-97 $23,181 Jul-97 $16,974 Jul-97 $12,992
Aug-97 $21,883 Aug-97 $16,466 Aug-97 $12,881
Sep-97 $23,081 Sep-97 $17,153 Sep-97 $13,071
Oct-97 $22,311 Oct-97 $16,792 Oct-97 $13,261
Nov-97 $23,343 Nov-97 $17,076 Nov-97 $13,322
Dec-97 $23,743 Dec-97 $17,293 Dec-97 $13,456
</TABLE>
/1/ The Standard & Poor's 500 Index is composed of 500 widely held common
stocks listed on the NYSE, AMEX and OTC market.
/2/ The Lehman Brothers Aggregate Bond Index comprises all bonds that are
investment grade, are in excess of $25 million and have at least one year
to maturity.
/3/ The Lipper Flexible Portfolio Funds Average universe consists of 106 funds.
I N V E S T M E N T R E V I E W
Q: How did the Fund perform over the second half of 1997?
A: The Fund gained 8.2% over the period, slightly underperforming its custom
benchmark (60% S&P 500 and 40% Lehman Brothers Aggregate Bond Index), which
gained 8.9%. The Fund has outperformed its benchmark since inception, however.
Q: What role did asset allocation decisions play in that performance?
A: Our decision to increase the Fund's fixed-income exposure through the late
summer and early autumn was generally positive. In early July 45% of the
portfolio was in stocks, 50% was in fixed-income investments and 5% was in cash.
(A neutral weighting would be 60/40 stocks/bonds.) By October we had increased
the Fund's share of bonds to 60% of total assets and maintained that position
into early December. On the whole, the shift toward bonds paid off, as the
bellwether Lehman Brothers Aggregate Bond Index edged out the S&P 500 during
the fourth quarter. In fact, that was the first time in several years that bonds
(as measured by the Lehman Aggregate) had outperformed stocks (as represented by
the S&P 500) on a quarterly basis.
Despite continued turmoil in Asia, by early December we thought U.S. equities
were on the verge of recovery and we increased the Fund's exposure to them, for
a weighting of about 50/50 stocks/bonds. This shift also worked to our
advantage, as the stock market recovered some ground in the final month of the
year.
Q: What impact did individual stock selection have on the Fund's performance?
A: On the fixed-income side, the U.S. Asset Allocation Fund benefited from its
exposure (through the Montgomery Total Return Bond Fund) to bonds with longer
maturities. Medium- and long-term interest rates declined more than short-term
rates during late 1997. On a sector basis, the Total Return Bond Fund's
weighting in U.S. Treasuries (which made up about 40% of its portfolio on
September 30) was a plus; Treasuries were a magnet for anxious investors in the
fourth quarter. They also benefited from the growing belief among investors
that deflation was taking hold. As heavy demand for Treasuries drove down their
yields in late 1997, we took profits on many of our holdings in the sector and
redirected the proceeds into mortgage-backed bonds and other types of debt. By
December 31 the Fund had just 14% of its assets in Treasuries. That shift
represents the biggest change we've made recently to the bond component of the
U.S. Asset Allocation Fund.
On the equity side, the Fund's emphasis (through the Montgomery Growth Fund) on
smaller-cap stocks and cyclical shares put it at somewhat of a disadvantage in
the second half. Investors sought out domestically oriented companies
(especially large-cap utilities, food manufacturers and pharmaceuticals) that
they believed would be insulated from Asia's problems. We believe that there are
better bottom-up growth opportunities at cheaper prices in smaller-cap and
cyclical areas of the market. We still have confidence in the stocks we've
chosen, despite their underperformance in the latter half of 1997.
52
<PAGE>
---------------------
The Montgomery Funds
---------------------
U.S. Asset Allocation
Fund
---------------------
Investments
Q: How is the Fund positioned now, and how does that reflect your outlook for
the coming year?
A: As of mid-January the Fund had 50% of its assets in stocks and about 50% in
bonds. As we mentioned, a neutral weighting for the Fund would be 60/40 stocks/
bonds, so its current positioning means it is overweighted in bonds and
underweighted in equities. Those allocations are always subject to change, but
at the moment they reflect our view that bonds may rally in 1998 while equities
turn in a more moderate performance than they have over the past few years.
In large part, our outlook hinges on the assumption that interest rates may
continue to decline, at least during the early part of the year. Over the past
decade, falling interest rates have usually boosted both stocks and bonds. Now,
however, corporations face a tight labor market in which they may have to
increase wages even if productivity gains slow or stall. At the same time, many
companies have little or no pricing power through which to pass on the cost of
rising wages. As a result, we believe that corporate profit margins may come
under pressure in the coming year, making it possible that stocks will not
participate as strongly in an interest rate-led rally as they have in the recent
past.
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
INVESTMENT COMPANY SECURITIES -- 99.4%
Shares Value (Note 1)
Bond Mutual Fund-Taxable -- 50.5%
5,624,704 Montgomery Total Return Bond Fund ................$ 69,127,617
Equity Mutual Fund -- 48.9%
3,055,162 Montgomery Growth Fund ........................... 66,877,493
----------
TOTAL INVESTMENTS -- 99.4%
(Cost $143,569,814*) .............................................$ 136,005,110
OTHER ASSETS AND LIABILITIES -- 0.6%
(Net) ............................................................ 781,946
-------
NET ASSETS -- 100.0 % ............................................$ 136,787,056
===========
*Aggregate cost for federal tax purposes.
53
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ---------------------------------------
The Montgomery Funds
- ---------------------------------------
Global Asset Allocation Fund
- ---------------------------------------
P o r t f o l i o H i g h l i g h t s
(Unaudited)
======================================
PORTFOLIO MANAGEMENT
--------------------------------------
Kevin T. Hamilton, CFA
Chair, Investment Oversight Committee
U.S. Growth Team
International Team
Emerging Markets Team
U.S. Fixed-Income Team
======================================
FUND PERFORMANCE
--------------------------------------
Average annual total returns
for the period ended 12/31/97
--------------------------------------
Montgomery
Global Asset Allocation Fund
Since inception (1/2/97) .......11.17%
One year .......................11.17%
--------------------------------------
MSCI All-Country World Free Index
Since 1/2/97 ...................15.00%
One year .......................15.00%
--------------------------------------
Lehman Brothers
Aggregate Bond Index
Since 1/2/97 ....................9.65%
One year ........................9.65%
---------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY GLOBAL ASSET ALLOCATION(R)
Initial Investment: $10,000 Period: 12/31/96 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date Nav Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/31/96 12.00 $10,000 $0 $10,000
12/96 12.00 $10,000 $0 $10,000
01/97 12.36 $10,300 $0 $10,300
02/97 12.38 $10,317 $0 $10,317
03/97 12.29 $10,242 $0 $10,242
04/97 12.39 $10,325 $0 $10,325
05/97 12.90 $10,750 $0 $10,750
06/97 13.34 $11,117 $0 $11,117
07/97 13.89 $11,575 $0 $11,575
08/97 13.33 $11,108 $0 $11,108
09/97 13.89 $11,575 $0 $11,575
10/97 13.22 $11,017 $0 $11,017
11/97 13.22 $11,017 $0 $11,017
12/97 12.21 $10,175 $942 $11,117
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
GLOBAL ASSET ALLOCATION GLOBAL ASSET ALLOCATION GLOBAL ASSET ALLOCATION
LIPPER LEHMAN
GLOBAL FLEX PORTFOLIOS AGGREGATE BOND MSCI ALL CO FREE INDEX
AVE AVE AVE
12/96-12/97 12/96-12-97 12/96-12/97
DATE RETURN VALUE DATE RETURN VALUE DATE RETURN VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dec-96 $10,000 Dec-96 $10,000 Dec-96 $10,000
Jan-97 $10,161 Jan-97 $10,031 Jan-97 $10,168
Feb-97 $10,210 Feb-97 $10,056 Feb-97 $10,306
Mar-97 $10,067 Mar-97 $9,944 Mar-97 $10,100
Apr-97 $10,174 Apr-97 $10,093 Apr-97 $10,425
May-97 $10,606 May-97 $10,188 May-97 $11,047
Jun-97 $10,939 Jun-97 $10,309 Jun-97 $11,612
Jul-97 $11,391 Jul-97 $10,587 Jul-97 $12,137
Aug-97 $10,976 Aug-97 $10,497 Aug-97 $11,285
Sep-97 $11,482 Sep-97 $10,652 Sep-97 $11,887
Oct-97 $11,012 Oct-97 $10,806 Oct-97 $11,179
Nov-97 $11,048 Nov-97 $10,856 Nov-97 $11,350
Dec-97 $11,135 Dec-97 $10,965 Dec-97 $11,500
</TABLE>
/1/ The MSCI All-Country World Free Index measures the performance of selected
equities in 48 developed and emerging markets countries around the world.
/2/ The Lehman Brothers Aggregate Bond Index comprises all bonds that are
investment grade, are in excess of $25 million and have at least one year
to maturity.
/3/ The Lipper Global Flexible Portfolio Funds Average universe consists of 85
funds.
I N V E S T M E N T R E V I E W
Q: How did the Fund perform over the second half of 1997?
A: The Fund outperformed its benchmark, the MSCI All-Country World Free Index,
by a small margin.
Q: What role did asset allocation play in the Fund's performance?
A: At the start of the second half, 30% of the Fund's assets were in bonds
(through the Montgomery Total Return Bond Fund), 39% were in international
equities (through the Montgomery International Growth Fund), 17% were in U.S.
stocks (through the Montgomery Growth Fund) and 14% were in the emerging markets
(through the Montgomery Emerging Markets Fund). The Global Asset Allocation Fund
benefited over much of the second half from its overweighting in U.S. bonds and
international equities. The U.S. fixed-income market rallied in late 1997. With
the exception of Japanese equities, international stocks also performed fairly
well for much of the second half and, indeed, for the year as a whole.
The Fund's corresponding deemphasis on U.S. equities was less positive. Our
concern about the high level of U.S. equity valuations was a factor in that
decision. But the more compelling reason to scale back on U.S. stocks, in our
view, was that we believed there were potentially better risk-adjusted
opportunities in U.S. bonds and European equities. We thought that U.S. economic
conditions--especially declining inflation--would create a strong tailwind for
bonds into 1998. At the same time, we believed that Europe was gaining economic
momentum, especially in relation to the United States. As it turned out, certain
segments of the U.S. equity market continued to advance in late 1997, supported
by the so-called flight to quality.
The Fund's stake in the emerging markets also worked against it during the
second half. Although its weighting there--between 10 and 14% of assets over the
period--was light in absolute terms, the exposure amounted to an overweighting
versus the MSCI AC World Free Index. (At the end of 1997, the emerging markets
made up only about 4% of that index.) This put the Fund at a disadvantage to the
benchmark, though our portfolio managers' country and security selections within
the emerging markets did help minimize losses in this segment of the Global
Asset Allocation Fund.
Q: What impact did security selection have on the Fund's performance?
A: The Fund benefited from our portfolio managers' security selection in the
international and fixed-income arenas. Our stock choices in the U.S. growth
equity and small-cap segments did not help much, however, given the broad
underperformance of smaller-cap stocks and cyclicals during this period.
Q: How is the Fund positioned now?
A: In early January we made some changes to the Fund's allocations. It now has
20% of its assets in U.S. stocks, 33% in international equities, 7% in the
emerging markets and 40% in U.S. bonds. This positioning reflects our belief
that the U.S. bond market may keep up its rally in 1998, fueled by the
possibility of deflation and other positive economic trends. We think that
emerging markets may
54
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Global Asset Allocation
Fund
-----------------------
I n v e s t m e n t s
remain volatile for some time. That said, we believe that the volatility may be
toward the upside rather than the downside. As a result, the Fund continues to
be slightly overweighted in that asset class relative to the benchmark.
Although we think that U.S. equities may continue to advance in 1998, we believe
that their returns could be more moderate than they have been over the past
three years. In our view, European equities stand a chance of rallying in 1998
on the back of potentially stronger economic momentum there. Despite these
different outlooks, we believe that stock selection will be crucial whatever the
asset class. In this Fund we strive to give investors the best of both worlds:
careful allocation among asset classes and disciplined stock selection within
them.
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
INVESTMENT COMPANY SECURITIES -- 98.6%
Shares Value (Note 1)
Bond Mutual Fund-Taxable -- 34.9%
46,662 Montgomery Total Return Bond Fund ...................$ 573,474
Equity Mutual Fund -- 10.1%
12,747 Montgomery Emerging Markets Fund .................... 164,816
Equity Mutual Fund -- 19.3%
14,488 Montgomery Growth Fund .............................. 317,143
International Equity Mutual Fund -- 34.3%
38,087 Montgomery International
Growth Fund .......................................... 562,163
-------
TOTAL INVESTMENTS -- 98.6%
(Cost $1,696,242*) ...............................................$ 1,617,596
OTHER ASSETS AND LIABILITIES -- 1.4%
(Net) ............................................................ 23,514
------
NET ASSETS -- 100.0% ..............................................$ 1,641,110
=========
*Aggregate cost for federal tax purposes.
55
The accompanying notes are an integral part of these financial statements.
<PAGE>
- -----------------------------
The Montgomery Funds
- -----------------------------
Total Return Bond Fund
- -----------------------------
P o r t f o l i o
H i g h l i g h t s
(U n a u d i t e d)
===================================================
P O R T F O L I O M A N A G E M E N T
---------------------------------------------------
William C. Stevens.........Senior Portfolio Manager
Peter Wilson......................Portfolio Manager
===================================================
F U N D P E R F O R M A N C E
---------------------------------------------------
Average annual total returns
for the period ended 12/31/97
---------------------------------------------------
Montgomery
Total Return Bond Fund
Since inception (6/30/97).....................6.46%
---------------------------------------------------
Lehman Brothers
Aggregate Bond Index
Since 6/30/97.................................6.36%
---------------------------------------------------
Performance is cumulative and for a limited period of time. Past performance is
no guarantee of future results. Net asset value, investment return and principal
value will fluctuate, so shares, when redeemed, may be worth more or less than
their original cost.
I N V E S T M E N T R E V I E W
Q: The Fund debuted on June 30, 1997. How did it do in its first six months?
A: It gained 6.46%, slightly more than the Lehman Brothers Aggregate Bond Index.
Q: What factors drove the Fund's performance?
A: The bond market rallied during the second half of 1997. Investors sought out
U.S. Treasuries, which they often consider a haven in times of uncertainty.
Bonds were also boosted by positive economic trends in the U.S., especially
lower inflation. This rally helped our portfolio in absolute terms.
The Total Return Bond Fund also benefited from having slightly more exposure
than the index did to bonds with longer maturities. This was a plus during the
second half, as medium- and long-term interest rates declined more than short-
term rates. Our security selection also gave the Fund an edge over the index.
Q: How does this Fund differ from Montgomery's other Fixed-Income Funds?
A: The Total Return Bond Fund (TRB) is a bit more flexible than the others.
Unlike the other Funds, it actively uses corporate bonds. We can also invest up
to 20% of its assets in bonds denominated in foreign currencies, but so far
haven't exercised that option. In addition, the TRB will usually be more
interest rate sensitive than the other Funds. Under normal circumstances, we
plan to keep its effective duration--a measure of its rate sensitivity--between
four and five-and-a-half years. (The Short Duration Fund's effective duration is
typically comparable to or less than that of a three-year U.S. Treasury note.)
The TRB seeks maximum total return at reasonable to below-average risk, and we
believe that its flexibility will help it meet that goal over the long term.
Despite these differences, we employ the same core strategy at the TRB as we do
at the other Funds: We try to identify bond-market sectors where we think we may
have an edge over other investors and/or a passive indexing strategy, and then
attempt to capitalize on any market inefficiencies that exist.
Q: How is the Fund positioned now?
A: As of December 31, the Fund's duration was 4.62 years--near that of the
Lehman Brothers Aggregate Bond Index. We think that interest rates may drop in
1998, so we're comfortable with this stance.
The biggest change we've made recently in the Fund's sector weightings was to
reduce its Treasury position. On October 1 these bonds made up about 40% of the
portfolio. As heavy demand in late 1997 drove down Treasury yields, we took
profits on them. By December 31, the Fund had just 14% of its assets there.
With the proceeds, we built up the Fund's positions in areas that we think are
more attractive, such as collateralized mortgage obligations (CMOs), a type of
mortgage-backed security. We also added some corporate bonds. As investors
worried that Asia's slowdown would weigh on U.S. firms, they sold off corporates
across the credit spectrum. After carefully assessing Asia's potential impact on
this sector, we thought that higher-quality bonds had been oversold and we
increased the Fund's exposure to them. The portfolio's largest sector weightings
Growth of a $10,000 Investment
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
TOTAL RETURN BOND
LEHMAN
AGGREEGATE BOND
AVE
6/97-12/97
DATE RETURN VALUE
-----------------------------------
<S> <C> <C>
JUN-97 $10,000
JUL-97 $10,270
AUG-97 $10,182
SEP-97 $10,332
OCT-97 $10,482
NOV-97 $10,530
DEC-97 $10,636
</TABLE>
FIRST DATA INVESTOR SERVICE
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY TOTAL RETURN BOND (R)
Initial Investment: $10,000 Period: 06/30/97 - 12/97
<TABLE>
<CAPTION>
Date Nav Growth Of Value Of Growth Of
Initial Reinvested Investment With
Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
06/30/97 12.00 $10,000 $0 $10,000
06/97 12.00 $10,000 $0 $10,000
07/97 12.27 $10,225 $51 $10,276
08/97 12.09 $10,075 $101 $10,176
09/97 12.22 $10,183 $150 $10,333
10/97 12.35 $10,292 $201 $10,493
11/97 12.35 $10,292 $251 $10,543
12/97 12.29 $10,242 $404 $10,646
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
TOTAL RETURN BOND
LIPPER
INT. INVESTMENTS GRADE
AVE
6/97-12/97
<TABLE>
<CAPTION>
DATE RETURN VALUE
-----------------------------------
<S> <C> <C>
JUN-97 $10,000
JUL-97 $10,261
AUG-97 $10,170
SEP-97 $10,313
OCT-97 $10,436
NOV-97 $10,466
DEC-97 $10,560
</TABLE>
PAGE 1
/1/ The Lehman Brothers Aggregate Bond Index comprises all bonds that are
investment grade, are in excess of $25 million and have at least one year to
maturity.
/2/ The Lipper Intermediate Investment-Grade Debt Funds Average universe
consists of 212 funds.
56
<PAGE>
------------------------
The Montgomery Funds
------------------------
Total Return Bond Fund
------------------------
I n v e s t m e n t s
at year-end were mortgage pass-throughs (24% of assets), low-risk CMOs (20%) and
corporate debt (16%).
Q: What's your outlook for the bond market in 1998?
A: We think conditions are ripe for a bond-market rally. Many investors now
believe that Asia's slowdown is curbing global inflation. In fact, investors
have begun to speculate that deflation is in the cards. Several trends support
this scenario. The price of gold and other commodities declined in 1997.
Economists estimate that global inflation was very mild last year, and they are
now reducing their inflation outlook for 1998 to reflect the Asian crisis and
lower oil prices, among other things.
What could this mean for investors? In the past, deflation has been generally
positive for bonds. For equities, it can be a problem. Firms tend to have less
pricing flexibility in a deflationary environment, which can lead to lower
profits. It remains to be seen when the Federal Reserve will weigh in with its
all-important opinion on this debate. Fed Chairman Alan Greenspan recently
acknowledged the possibility of deflation, but the Fed has so far refrained from
reducing interest rates to head it off. If it does lower rates, we think bonds
may be better positioned to profit.
=========================================
T O P T E N H O L D I N G S
-----------------------------------------
(as a percentage of total net assets)
FNMA, 7.000% due TBA.......................................................9.6%
U.S. Treasury Bonds,
8.875% due 12/15/19....................................................6.9%
Citicorp Mortgage Securities, Inc.,
Series 1990-17B,
9.500% due 11/25/20....................................................5.3%
U.S. Treasury Bonds,
6.500% due 11/15/26....................................................5.2%
FHLB, MTN, 7.580% due 09/13/04.............................................5.0%
FHLMC, 5.500% Pass-through Pools
due 04/01/11-06/01/11..................................................4.4%
FHLMC 9.000% Pass-through Pools
due 07/01/07-10/01/71..................................................4.2%
FHLMC, 1604D (PAC) 5.250%
due 01/15/04...........................................................3.8%
FNMA, 9.250% due 10/01/15..................................................3.7%
Deere (John) Capital Corporation,
MTN, 5.300% due 04/15/98...............................................2.6%
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
ASSET-BACKED SECURITIES - 2.7%
Principal Amount Value (Note 1)
California Infrastructure:
$750,000 PG&E-1, 6.420% due 09/25/08..................$ 756,211
375,000 SCE-1, 6.380% due 09/25/08................... 377,739
650,000 SDG&E-1, 6.310% due 09/25/08................. 653,605
Union Acceptance Corporation:
13,461,870 Series 1995-CI, (PAC), 3.000% due 10/02/02... 159,860
6,400,921 Series 1995-DI, (PAC), 3.000% due 02/07/99... 101,265
-------
TOTAL ASSET-BACKED SECURITIES
(Cost $1,918,428)............................................... 2,048,680
---------
COLLATERALIZED MORTGAGE OBLIGATIONS - 6.2%
428,776 CIT Group Securitization Corporation,
Series 1995-1A1, 7.700% due 08/15/20......... 430,079
4,000,000 Citicorp Mortgage Securities, Inc.,
Series 1990-17B, 9.500% due 11/25/20......... 4,062,350
250,000 UCFC Home Equity Loan, Series 1996-B1A2,
7.075% due 04/15/10.......................... 251,089
-------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $4,749,421)............................................... 4,743,518
---------
CORPORATE BONDS - 15.9%
2,000,000 Deere (John) Capital Corporation, MTN,
5.300% due 04/15/98(**)...................... 1,998,560
805,000 Ford Motor Credit Company, Senior Notes,
6.500% due 02/28/02.......................... 812,044
200,000 Franchise Finance Corporation, MTN,
6.780% due 02/20/02.......................... 201,000
650,000 General Motors Acceptance Corporation,
Senior Notes, 6.750% due 02/07/02............ 662,187
1,205,000 Hunt (J.B.) Transport Services, Inc., Notes,
6.250% due 09/01/03.......................... 1,192,950
875,000 IRT Property Company, Notes,
7.450% due 04/01/01.......................... 901,250
950,000 Irvine Apartment Communities, Notes,
7.000% due 10/01/07.......................... 957,125
Kimco Realty Corporation:
900,000 Notes, 7.910% due 04/26/05................... 970,875
650,000 Senior Notes, 6.500% due 10/01/03............ 650,812
110,000 Occidental Petroleum Corporation,
MTN, 9.750% due 06/15/01..................... 121,688
550,000 Price Reit Inc.,
7.250% due 11/11/00.......................... 561,000
500,000 Salomon Smith Barney Holdings Inc.,
5.625% due 11/15/98.......................... 498,820
1,000,000 Security Capital Pacific Trust, Notes,
7.550% due 08/01/08.......................... 1,057,500
700,000 Tele-Communications Inc.,
7.250% due 08/01/05.......................... 721,000
122,000 U. S. West Communications Corporation,
MTN, 5.500% due 03/15/99**................... 120,821
645,000 Vastar Resources, MTN, 6.960% due 02/26/07... 665,962
-------
The accompanying notes are an integral part of these financial statements.
57
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
Total Return Bond Fund
- ----------------------
I n v e s t m e n t s
TOTAL CORPORATE BONDS
Value (Note 1)
(Cost $11,861,992)............................................. $ 12,093,594
----------
FEDERAL HOME LOAN BANK (FHLB) -- 12.8%
Principal Amount
Agencies:
$2,000,000 5.260% (FLTR) due 05/12/99(**)..................... 1,982,724
1,650,000 4.670% (FLTR) due 03/22/00(**)..................... 1,601,294
650,000 4.500% (FLTR) due 04/14/00(**)..................... 636,029
1,700,000 6.320% due 02/21/06................................ 1,730,073
3,500,000 MTN, 7.580% due 09/13/04........................... 3,820,985
=========
TOTAL FEDERAL HOME LOAN BANK
(Cost $ 9,668,752)............................................. 9,771,105
=========
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) -- 27.2%
1,520,000 5.000% (FLTR) due 3/18/00(**)...................... 1,486,256
CMOs:
234,942 1655C (PAC) 5.250% due 06/15/03.................... 234,236
2,933,533 1604D (PAC) 5.250% due 07/15/04.................... 2,921,519
1,480,000 1676KD (AD) 6.250% due 03/15/06.................... 1,482,948
1,000,000 1657C (PAC) 5.500% due 11/15/11.................... 996,337
887,309 1560PD (PAC) 5.500% due 01/15/13................... 884,553
1,155,356 1546C 5.500% due 10/15/13.......................... 1,151,134
2,000,000 1610PG (PAC) 6.000% due 03/15/19................... 1,986,953
600,000 1722PG (PAC) 6.500% due 12/15/19................... 604,523
900,000 1487F 6.000% due 11/15/20.......................... 887,913
1,537,377 1502PX 7.000% due 04/15/23......................... 1,499,146
Pass-throughs:
3,473,576 5.500% Pass-through Pools due
04/01/11-06/01/11.................................. 3,371,261
3,029,742 9.000% Pass-through Pools due
07/01/07-10/01/17.................................. 3,217,799
---------
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $20,439,107)............................................. 20,724,578
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) -- 20.8%
191,498 9.500% due 12/01/01................................ 197,991
213,591 9.500% due 12/01/03................................ 223,261
1,025,899 9.000% due 09/01/07................................ 1,080,280
2,623,540 9.250% due 10/01/15................................ 2,829,632
1,000,000 5.000% (FLTR) due 03/03/00(**)..................... 980,000
7,250,000 7.000% due TBA..................................... 7,295,313
CMOs:
930,052 1988-16B (PAC), 9.500% due 06/25/18................ 1,004,747
208,073 1991-94C (PAC), Zero Coupon due 07/25/21........... 202,464
157,358 1993-143D (PAC), 5.000% due 08/25/23............... 156,503
843,006 1993-159PA (PAC), Zero Coupon due 01/25/21......... 784,391
1,100,000 1993-234PB (PAC), 5.500% due 10/25/07............. 1,072,887
---------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $15,788,680)............................................. 15,827,469
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) -- 0.8%
(Cost $572,625)
Pass-throughs:
$547,908 8.500% Pass-through Pools
due 01/15/23-07/15/23.............................. $ 578,038
-------
MUNICIPAL BONDS -- 3.7%
1,300,000 Chicago, Illinois, Tax Increment Bonds,
Central Loop, Series B, 6.375% due 06/01/03 1,309,750
1,400,000 Oakland, California, Pension Obligations,
Revenue Bonds, Sub-Series A,
6.950% due 12/15/08 1,475,250
---------
TOTAL MUNICIPAL BONDS
(Cost $2,745,636).............................................. 2,785,000
---------
U.S. TREASURY BONDS -- 14.2%
3,900,000 U.S. Treasury Bonds, 8.875% due 02/15/19........... 5,217,459
3,725,000 U.S. Treasury Bonds, 6.500% due 11/15/26........... 3,976,438
1,600,000 U.S. Treasury Bonds, 6.125% due 11/15/27........... 1,644,256
---------
TOTAL U.S. TREASURY BONDS
(Cost $10,069,071)............................................. 10,838,153
----------
U.S. TREASURY NOTE -- 0.2%
(Cost $165,748)
160,000 U.S. Treasury Notes, 6.500% due 05/15/05........... 166,800
-------
TOTAL SECURITIES
(Cost $77,979,460)............................................. 79,576,935
----------
REPURCHASE AGREEMENT -- 0.7%
(Cost $525,000)
525,000 Agreement with BZW Securities, Tri-Party,
6.900% dated 12/31/97, to be repurchased at
$525,201 on 01/02/98, collateralized by
$535,500 market value of U.S. government
securities, having various maturities and
various interest rates............................. 525,000
-------
TOTAL INVESTMENTS -- 105.2%
(Cost $78,504,460*)............................................ 80,101,935
OTHER ASSETS AND LIABILITIES -- (5.2%)
(Net).......................................................... (3,980,805)
---------
NET ASSETS -- 100.0%........................................... $ 76,121,130
==========
* Aggregate cost for federal tax purposes.
** Floating-rate note reflects the rate in effect at December 31, 1997.
Abbreviations:
AD Accretion Directed: These bonds receive, as principal, the negative
amortization from the accrual tranche(s) in a deal. These securities
often have guaranteed final maturities.
CMO Collateralized Mortgage Obligation
FLTR Floating-Rate Securities: bonds with coupon rates that adjust in
proportion to an index.
MTN Medium-Term Note.
PAC Planned Amortization Class: bonds that are protected in part from
variations in prepayments, generally resulting in greater stability.
TBA To-Be-Announced Security.
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
--------------------------------------
The Montgomery Funds
--------------------------------------
Short Duration
Government Bond Fund
--------------------------------------
P o r t f o l i o H i g h l i g h t s
(Unaudited)
I N V E S T M E N T R E V I E W
Q: How did the Fund perform from July 1, 1997, through December 31, 1997?
A: The Fund outperformed its benchmark, the Lehman Brothers 1-3 Year Government
Bond Index, over the second half of 1997. It also beat the index over the full-
year period. On a related note, the Fund celebrated its fifth anniversary in
late 1997. We're very pleased that its returns over those five years (December
31, 1992, to December 31, 1997) earned it first place out of 32 short government
bond funds, according to Lipper Analytical Services.* The Fund also garnered a
four-star rating from Morningstar for its risk/return profile over the three-
and five-year periods ended December 31, 1997. (See the footnote on the
following page for details.)
Q: What factors helped the Fund outperform over the second half of 1997?
A: Medium- to long-term interest rates declined more than short rates during the
fourth quarter--in bond-market parlance, "the yield curve flattened." So even
though we kept the portfolio's duration (a measure of its interest rate
sensitivity) fairly close to its benchmark's during the quarter, the Fund did
gain a slight advantage from having more exposure to bonds with maturities of
three years or greater. We also managed to outperform the index by selectively
overweighting certain sectors and underweighting others. This is a key element
of our strategy. We try to identify inefficiencies in the bond market and then
attempt to exploit them. By "inefficiencies" we mean securities that, for a
variety of reasons, other investors appear to have oversold or overlooked.
During the fourth quarter, for example, the Fund profited from its exposure to
U.S. government agency debt that is backed by "super-seasoned" pools of
mortgages dating as far back as 1977. These bonds still offer the high interest
rates of that era but, we think, may be less vulnerable to prepayments, one of
the most significant risks facing investors in this sector. Prepayments tend to
pick up in a declining interest rate environment like the current one, as
homeowners are more likely to refinance the mortgages backing a bond to take
advantage of lower rates. If a bond is prepaid, investors receive their
principal back and typically end up having to reinvest it in lower-yielding
issues. Our philosophy is that if homeowners were going to refinance the
mortgages that make up the pools backing these super-seasoned bonds, they would
already have done so at some point over the past 20 years. Therefore, we doubt
that most of these issues are at risk of prepayment, making their high yields
very enticing to us. This is the kind of inefficiency we aim to identify.
Q: Have you made any major changes to the portfolio recently? How is the Fund
positioned now?
A: The most significant change we made during the second half was to scale back
the Fund's exposure to U.S. Treasuries from nearly 30% of assets last summer to
just 9% at year's end. The turmoil in Asia and other markets around the world
last year drove investors to U.S. Treasuries. That demand drove their yields
down sharply. As a result, we took profits on many of our Treasury positions and
redirected the proceeds to sectors offering more-attractive yields.
==============================================
PORTFOLIO MANAGEMENT
----------------------------------------------
William C. Stevens....Senior Portfolio Manager
Peter Wilson...........................Manager
==============================================
FUND PERFORMANCE
----------------------------------------------
Average annual total returns
for the period ended 12/31/97
----------------------------------------------
Montgomery Short Duration
Government Bond Fund
Since inception (12/18/92)...............6.56%
One year.................................6.97%
Five years...............................6.51%
----------------------------------------------
Lehman Brothers Government
Bond 1-3 Year Index
Since 12/31/92...........................5.65%
One year.................................6.65%
Five years...............................5.65%
----------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate, so shares, when redeemed, may be
worth more or less than their original cost.
[LINE CHART APPEARS HERE]
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY SHORT DURATION GOVT BD(R)
Initial Investment: $10,000 Period: 12/18/92 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/18/92 10.00 $10,000 $ 0 $10,000
12/92 10.02 $10,020 $ 23 $10,043
01/93 10.10 $10,100 $ 75 $10,175
02/93 10.14 $10,140 $ 128 $10,268
03/93 10.17 $10,170 $ 180 $10,350
04/93 10.19 $10,190 $ 235 $10,425
05/93 10.16 $10,160 $ 282 $10,442
06/93 10.23 $10,230 $ 335 $10,565
07/93 10.23 $10,230 $ 393 $10,623
08/93 10.25 $10,250 $ 449 $10,699
09/93 10.25 $10,250 $ 508 $10,758
10/93 10.23 $10,230 $ 566 $10,796
11/93 10.18 $10,180 $ 617 $10,797
12/93 10.10 $10,100 $ 756 $10,856
01/94 10.13 $10,130 $ 810 $10,940
02/94 10.03 $10,030 $ 850 $10,880
03/94 9.94 $ 9,940 $ 891 $10,831
04/94 9.86 $ 9,860 $ 931 $10,791
05/94 9.82 $ 9,820 $ 979 $10,799
06/94 9.80 $ 9,800 $1,029 $10,829
07/94 9.85 $ 9,850 $1,088 $10,938
08/94 9.83 $ 9,830 $1,141 $10,971
09/94 9.75 $ 9,750 $1,188 $10,938
10/94 9.72 $ 9,720 $1,241 $10,961
11/94 9.65 $ 9,650 $1,290 $10,940
12/94 9.63 $ 9,630 $1,349 $10,979
01/95 9.71 $ 9,710 $1,423 $11,133
02/95 9.79 $ 9,790 $1,497 $11,287
03/95 9.79 $ 9,790 $1,561 $11,351
04/95 9.82 $ 9,820 $1,628 $11,448
05/95 9.94 $ 9,940 $1,711 $11,651
06/95 9.95 $ 9,950 $1,775 $11,725
07/95 9.92 $ 9,920 $1,832 $11,752
08/95 9.94 $ 9,940 $1,895 $11,835
09/95 9.96 $ 9,960 $1,958 $11,918
10/95 9.98 $ 9,980 $2,024 $12,004
11/95 10.04 $10,040 $2,095 $12,135
12/95 10.08 $10,080 $2,162 $12,242
01/96 10.11 $10,110 $2,226 $12,336
02/96 10.02 $10,020 $2,261 $12,281
03/96 9.97 $ 9,970 $2,310 $12,280
04/96 9.92 $ 9,920 $2,357 $12,277
05/96 9.88 $ 9,880 $2,408 $12,288
06/96 9.92 $ 9,920 $2,478 $12,398
07/96 9.91 $ 9,910 $2,538 $12,448
08/96 9.89 $ 9,890 $2,595 $12,485
09/96 9.93 $ 9,930 $2,668 $12,598
10/96 10.01 $10,010 $2,270 $12,760
11/96 10.06 $10,060 $2,827 $12,887
12/96 10.00 $10,000 $2,872 $12,872
01/97 10.00 $10,000 $2,936 $12,936
02/97 9.97 $ 9,970 $2,987 $12,957
03/97 9.90 $ 9,900 $3,030 $12,930
04/97 9.94 $ 9,940 $3,105 $13,045
05/97 9.96 $ 9,960 $3,176 $13,136
06/97 9.99 $ 9,990 $3,250 $13,240
07/97 10.07 $10,070 $3,340 $13,410
08/97 10.02 $10,020 $3,388 $13,408
09/97 10.06 $10,060 $3,464 $13,524
10/97 10.10 $10,100 $3,542 $13,642
11/97 10.08 $10,080 $3,598 $13,678
12/97 10.10 $10,100 $3,669 $13,769
</TABLE>
Performance Analysis
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LehmanBros 1-3 Govilnx $T Montgomery Short Duration Fund Net
- --------------------------------------------------------------------------------
<S> <C> <C>
Jan 93 $10,105.00 $10,131.00
- --------------------------------------------------------------------------------
Feb 93 $10,185.84 $10,224.21
- --------------------------------------------------------------------------------
Mar 93 $10,217.42 $10,306.00
- --------------------------------------------------------------------------------
Apr 93 $10,279.74 $10,380.20
- --------------------------------------------------------------------------------
May 93 $10,255.07 $10,397.85
- --------------------------------------------------------------------------------
Jun 93 $10,331.98 $10,520.54
- --------------------------------------------------------------------------------
Jul 93 $10,354.71 $10,577.35
- --------------------------------------------------------------------------------
Aug 93 $10,440.66 $10,653.51
- --------------------------------------------------------------------------------
Sep 93 $10,474.07 $10,713,17
- --------------------------------------------------------------------------------
Oct 93 $10,497.11 $10,749.60
- --------------------------------------------------------------------------------
Nov 93 $10,499.21 $10,750.67
- --------------------------------------------------------------------------------
Dec 93 $10,541.21 $10,809.80
- --------------------------------------------------------------------------------
Jan 94 $10,606.56 $10,894.12
- --------------------------------------------------------------------------------
Feb 94 $10,541.86 $10,834.20
- --------------------------------------------------------------------------------
Mar 94 $10,488.10 $10,785.44
- --------------------------------------------------------------------------------
Apr 94 $10,448.24 $10,745.54
- --------------------------------------------------------------------------------
May 94 $10,462.87 $10,754.13
- --------------------------------------------------------------------------------
Jun 94 $10,469.03 $10,783.17
- --------------------------------------------------------------------------------
Jul 94 $10,583.43 $10,892.08
- --------------------------------------------------------------------------------
Aug 94 $10,618.36 $10,924.76
- --------------------------------------------------------------------------------
Sep 94 $10,593.93 $10,693.07
- --------------------------------------------------------------------------------
Oct 94 $10,618.30 $10,915.95
- --------------------------------------------------------------------------------
Nov 94 $10,573.70 $10,894.12
- --------------------------------------------------------------------------------
Dec 94 $10,593.79 $10,933.34
- --------------------------------------------------------------------------------
Jan 95 $10,737.87 $11,086.40
- --------------------------------------------------------------------------------
Feb 95 $10,883.90 $11,239.40
- --------------------------------------------------------------------------------
Mar 95 $10,944.85 $11,303.46
- --------------------------------------------------------------------------------
Apr 95 $11,042.26 $11,399.54
- --------------------------------------------------------------------------------
May 95 $11,231.09 $11,602.45
- --------------------------------------------------------------------------------
Jun 95 $11,291.73 $11,675.55
- --------------------------------------------------------------------------------
Jul 95 $11,336.90 $11,702.40
- --------------------------------------------------------------------------------
Aug 95 $11,404.92 $11,785.49
- --------------------------------------------------------------------------------
Sep 95 $11,460.81 $11,867.99
- --------------------------------------------------------------------------------
Oct 95 $11,555.93 $11,953.44
- --------------------------------------------------------------------------------
Nov 95 $11,654.16 $12,084.92
- --------------------------------------------------------------------------------
Dec 95 $11,741.56 $12,191.27
- --------------------------------------------------------------------------------
Jan 96 $11,841.37 $12,285.14
- --------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------
LehmanBros 1-3 Govilnx $T Short Duration Fund Net
- ---------------------------------------------------------------------
<S> <C> <C>
Feb 96 $11,795.18 $12,229.86
- ---------------------------------------------------------------------
Mar 96 $11,786.93 $12,228.64
- ---------------------------------------------------------------------
Apr 96 $11,798.71 $12,226.19
- ---------------------------------------------------------------------
May 96 $11,824.67 $12,237.20
- ---------------------------------------------------------------------
Jun 96 $11,910.99 $12,347.33
- ---------------------------------------------------------------------
Jul 96 $11,957.44 $12,396.72
- ---------------------------------------------------------------------
Aug 96 $12,001.69 $12,433.91
- ---------------------------------------------------------------------
Sep 96 $12,110.90 $12,545.82
- ---------------------------------------------------------------------
Oct 96 $12,247.76 $12,707.66
- ---------------------------------------------------------------------
Nov 96 $12,338.39 $12,833.46
- ---------------------------------------------------------------------
Dec 96 $12,340.86 $12,818.06
- ---------------------------------------------------------------------
Jan 97 $12,399.92 $12,880.87
- ---------------------------------------------------------------------
Feb 97 $12,429.97 $12,902.77
- ---------------------------------------------------------------------
Mar 97 $12,420.23 $12,875.67
- ---------------------------------------------------------------------
Apr 97 $12,521.57 $12,990.27
- ---------------------------------------------------------------------
May 97 $12,608.82 $13,081.48
- ---------------------------------------------------------------------
Jun 97 $12,695.66 $13,185.14
- ---------------------------------------------------------------------
Jul 97 $12,834.30 $13,355.22
- ---------------------------------------------------------------------
Aug 97 $12,847.56 $13,352.55
- ---------------------------------------------------------------------
Sep 97 $12,945.18 $13,468.72
- ---------------------------------------------------------------------
Oct 97 $13,041.54 $13,584.34
- ---------------------------------------------------------------------
Nov 97 $13,074.29 $13,620.52
- ---------------------------------------------------------------------
Dec 97 $13,161.95 $13,710.82
- ---------------------------------------------------------------------
</TABLE>
Unit Value Base: Dec 92=$10,000.00
Source: Micropal
INDEX HYPOTHETICAL GROWTH FOR 10,000
SHORT DURATION GOV'T
LIPPER
SHORT US GOVT
AVE
12/92-12/97
<TABLE>
<CAPTION>
DATE RETURN VALUE
--------------------------------
<S> <C> <C>
Dec-92 $10.000
Jan-93 $10.100
Mar-93 $10.180
Mar-93 $10.209
Apr-93 $10.265
May-93 $10.255
Jun-93 $10.331
Jul-93 $10.359
Aug-93 $10.434
Sep-93 $10.461
Oct-93 $10.478
Nov-93 $10.4?8
Dec-93 $10.506
Jan-94 $10.572
Feb-94 $10.510
Mar-94 $10.440
Apr-94 $10.401
May-94 $10.412
Jun-94 $10.426
Jul-94 $10.504
Aug-94 $10.531
Sep-94 $10.512
Oct-94 $10.531
Nov-94 $10.499
Dec-94 $10.524
Jan-95 $10.646
Feb-95 $10.777
Mar-95 $10.834
Apr-95 $10.919
May-95 $11.087
Jun-95 $11.141
Jul-95 $11.170
Aug-95 $11.238
Sep-95 $11.293
Oct-95 $11.377
Nov-95 $11.?68
Dec-95 $11.551
Jan-96 $11.630
Feb-96 $11.588
Mar-96 $11.579
Apr-96 $11.591
May-96 $11.606
Jun-96 $11.683
Jul-96 $11.726
Aug-96 $11.756
Sep-69 $11.855
Oct-96 $11.973
Nov-96 $12.061
Dec-96 $12.056
Jan-97 $12.113
Feb-97 $12.143
Mar-97 $12.132
Apr-97 $12.224
May-97 $12.298
Jun-97 $12.376
Jul-97 $12.504
Aug-97 $12.512
Sep-97 $12.602
Oct-97 $12.686
Nov-97 $12.711
Dec-97 $12.779
</TABLE>
/1/ The Lehman Brothers Government Bond 1-3 Year Index comprises all U.S.
government issues with maturities of one to three years.
/2/ The Lipper Short U.S. Government Funds Average universe consists of 32
funds.
59
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Short Duration
Government Bond Fund
- --------------------
Portfolio Highlights
=====================================
T O P T E N H O L D I N G S
-------------------------------------
(as a percentage of total net assets)
FNMA, X-109A 6.000% (PAC)
due 08/25/05...............................................9.3%
U.S. Treasury Note,
6.500% due 05/15/05........................................9.0%
FHLMC, Pool #555326
9.750% due 03/01/16........................................7.8%
FHLMC, 5.500% Pass-through Pools
due 04/01/11-06/01/11......................................6.9%
FHLB, 0.000% (FLTR) due 03/22/00...................................6.0%
FHLMC, 1620PD
5.500% (PAC) due 07/15/12..................................5.6%
FHLMC, 1643PE 5.500% (PAC)
due 10/15/19...............................................5.5%
FHLMC, 1673C 5.350% (PAC)
due 03/15/12...............................................4.9%
FNMA, 7.000% due TBA...............................................4.7%
FHLMC, Pool #E40290 8.500%
due 06/01/07...............................................4.4%
======================================
A S S E T M I X
--------------------------------------
(as a percentage of total investments)
Collateralized Mortgage Obligations.................................42%
Mortgage Pass-throughs..............................................28%
Agencies............................................................16%
Treasuries...........................................................9%
Others...............................................................5%
* Lipper Analytical Services is a nationally recognized, independent company
that compiles performance data on mutual funds. Morningstar proprietary ratings
reflect historical risk-adjusted performance as of 12/31/97. The ratings are
subject to change every month. Past performance is no guarantee of future
results. The ratings are calculated from the funds' three-, five- and 10-year
average annual returns (if available) in excess of 90-day Treasury bill returns
with appropriate fee adjustments, and a risk factor that reflects fund
performance below 90-day T-bill returns. Ten percent of funds in a rating
universe receive five stars, and the next 22.5% receive four stars. The
Montgomery Short Duration Government Bond Fund was ranked among a universe of
1,371 taxable bond funds over the three-year period and 771 taxable bond funds
over the five-year period.
For example, we increased the Fund's weighting in collateralized mortgage
obligations (CMOs), a type of mortgage-backed security. These bonds currently
account for 42% of the portfolio, up from 32% in mid-1997. We also added to the
Fund's position in mortgage pass-throughs, many of which, like CMOs, offer
better yields than Treasuries. As of December 31, 1997, the Fund had 28% of its
assets in mortgage pass-throughs, up from 13% in mid-1997.
Q: The buzzword in the bond market recently has been deflation. What's
your perspective?
A: We think that deflation, caused by excess global supply, is very plausible.
If U.S. domestic demand weakens in the near term, other countries may not be
able to pick up the slack. European economies are still a little feeble,
Southeast Asia is in the midst of a crisis, and Japan continues to grapple with
weak domestic demand and other problems. Further, the potential slack is bigger
than it used to be, as the freeing of world trade and recent productivity gains
have rapidly expanded worldwide capacity. Of course, we're not the only
investors who believe that deflation could be on the horizon. That scenario has
created very bullish market sentiment recently, driving the yield on the
bellwether 30-year Treasury bond below 6%. Interestingly, though, the Federal
Reserve doesn't appear to have bought into the deflation hypothesis yet. Fed
Chairman Alan Greenspan recently acknowledged that deflation is a possibility,
but so far has not acted to forestall it. Real short-term yields remain very
high, suggesting that the Fed is still concerned about possible inflationary
pressure from strong U.S. economic and employment growth.
The bond market's rally--along with declining gold and commodity prices and the
strengthening dollar--is sending a very different message: Investors seem to
think that the Fed has its head in the sand on deflation. Ever since Greenspan
took over as the Fed's chief policy-maker, betting against his view of the
economy has been a losing proposition. But, with the Fed's outlook now diverging
so conspicuously from those out in the trenches, we wonder: Could this time be
different?
Q: If deflation does occur, what effect might it have on the bond market?
A: We think that bonds would have a distinct advantage over equities in a
deflationary environment. Bonds are traditionally driven by their real yields.
In contrast, equities have become increasingly prized for their earnings over
the past several years. But this orientation toward earnings could leave some
investors liable to disappointment in a deflationary environment. Deflation
tends to reduce companies' pricing flexibility, among other things, potentially
curtailing their earnings and depressing their shares. If such disappointments
are widespread, we think that investors would begin to appreciate the real
yields that bonds offer much more than they have for many years. A lot of
uncertainty remains, though. In this unsettled environment, we will continue to
focus on our core strategy: seeking out areas of the market where we think we
have a competitive advantage, and then trying to exploit any inefficiencies that
may exist. At the same time, we will actively try to minimize the Fund's risk
through diversification and other means.
60
<PAGE>
----------------------
The Montgomery Funds
----------------------
Short Duration
Government Bond Fund
----------------------
I n v e s t m e n t s
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
FEDERAL HOME LOAN BANK (FHLB) -- 15.6%
Principal Amount Value (Note 1)
Agencies:
$500,000 2.625% (FLTR) due 08/27/98..................$ 487,919
698,509 Zero Coupon due 02/25/99.................... 655,145
1,850,000 5.260% (FLTR) due 05/12/99.................. 1,834,020
3,350,000 4.755% (FLTR) due 03/22/00.................. 3,246,715
2,200,000 5.000% (FLTR) due 05/10/00.................. 2,151,573
---------
TOTAL FEDERAL HOME LOAN BANK
(Cost $8,368,630)......................................... 8,375,372
---------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) -- 50.2%
CMOs:
232,142 1647PJ 5.250% (PAC) due 02/15/03............ 231,514
1,000,000 1471E 6.250% (PAC) due 04/15/05............. 1,000,313
1,094,735 1203G 5.000% (PAC) due 07/15/05............. 1,080,366
1,000,000 1544E 6.250% (PAC) due 06/15/08............. 1,001,055
2,652,000 1673C 5.350% (PAC) due 03/15/12............. 2,638,906
3,000,000 1620PD 5.500% (PAC) due 07/15/12............ 2,990,971
1,708,892 1603D 5.250% (PAC) due 11/15/15............. 1,700,350
176,191 1355E 7.050% (PAC) due 06/15/19............. 175,923
3,000,000 1643PE 5.500% (PAC) due 10/15/19............ 2,965,078
Pass-throughs:
1,648,372 Pool #380018 9.000% due 02/01/03............ 1,702,588
2,278,235 Pool #E40290 8.500% due 06/01/07............ 2,381,646
3,816,705 5.500% Pass-through Pools
due 04/01/11-06/01/11....................... 3,697,825
3,918,686 Pool #555326 9.750% due 03/01/16............ 4,212,129
1,127,125 9.000% Pass-throughs
due 10/01/16-05/01/20....................... 1,198,239
Tiered Payment:
18,586 Pool #730223 9.50% due 01/01/06............. 19,449
6,314 Pool #730288 8.50% due 07/01/06............. 6,524
-----
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $26,818,866)........................................ 27,002,876
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 24.5%
2,500,000 7.000% due TBA.............................. 2,515,625
CMOs:
650,000 1993-99D 6.700% (AD) due 03/25/04........... 663,863
5,000,000 X-109A 6.000% (PAC) due 08/25/05............ 4,981,641
750,000 1993-101PE 5.750% (PAC) due 01/25/08........ 744,609
227,284 1993-30PD 5.750% (PAC) due 11/25/12......... 226,332
553,172 1993-99PD 5.600% (PAC) due 10/25/13......... 550,742
958,306 X-225C 5.200% (PAC) due 09/25/15............ 951,584
911,612 1994-23 5.125% (PAC) due 07/25/17........... 894,662
Pass-throughs:
1,615,653 9.000% Pass-through Pools due
05/01/01-11/01/06........................... 1,681,613
---------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $13,176,897)........................................ 13,210,671
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) -- 0.0%#
Pass-throughs:
3,446 10.250% Pool #288579 due 04/15/98........... 3,506
GNMA II:
16,568 10.500% Pool #1123 due 01/20/19............. 18,163
------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(Cost $20,014)............................................ 21,669
------
UNION ACCEPTANCE CORPORATION (UAC) -- 0.1%
Asset-Backed Securities:
1,859,315 95-DI (ABS) 3.000% due 02/07/99............. 29,415
5,014,544 95-CI (PAC) (ABS) 3.000% due 10/10/02....... 59,547
------
TOTAL UNION ACCEPTANCE CORPORATION
(Cost $47,717)............................................ 88,962
------
U.S. TREASURY NOTES -- 9.0%
(Cost $4,799,768)
4,625,000 U.S. Treasury Note, 6.500% due 05/15/05..... 4,821,562
---------
TOTAL INVESTMENTS -- 99.4%
(Cost $53,231,892*)....................................... 53,521,112
OTHER ASSETS AND LIABILITIES -- 0.6%
(Net)..................................................... 300,828
-------
NET ASSETS -- 100.0%......................................$ 53,821,940
==========
* Aggregate cost for federal tax purposes.
# Amount represents less than 0.1%.
Abbreviations:
ABS Asset-Backed Securities.
AD Accretion Directed: These bonds receive, as principal, the negative
amortization from the accrual tranche(s) in a deal. These securities often
have guaranteed final maturities.
CMO Collateralized Mortgage Obligation.
FLTR Floating-Rate Securities: bonds with coupon rates that adjust in
proportion to an index.
PAC Planned Amortization Class: bonds that are protected in part from
variations in prepayments, generally resulting in greater stability.
TBA To-Be-Announced Security.
61
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ---------------------------------------
The Montgomery Funds
- ---------------------------------------
California Tax-Free
Intermediate Bond Fund
- ---------------------------------------
P o r t f o l i o H i g h l i g h t s
(Unaudited)
===============================================
P O R T F O L I O M A N A G E M E N T
- -----------------------------------------------
William C. Stevens.....Senior Portfolio Manager
Peter Wilson..................Portfolio Manager
===============================================
F U N D P E R F O R M A N C E
- -----------------------------------------------
Average annual total returns
for the period ended 12/31/97
- -----------------------------------------------
Montgomery California Tax-Free
Intermediate Bond Fund
Since inception (7/1/93)................ 5.67%
One year................................ 7.50%
Three years............................. 7.77%
- -----------------------------------------------
Merrill Lynch California
Municipal Intermediate Bond Index
Since 6/30/93........................... 4.73%
One year................................ 6.55%
Three years............................. 7.49%
- -----------------------------------------------
Past performance is no guarantee of future results.
Net asset value, investment return and principal
value will fluctuate, so shares, when redeemed, may
be worth more or less than their original cost.
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY CA TAX FREE INTERM BD(R)
Initial Investment: $10,000 Period: 07/01/93 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
12/96 12.47 $10,392 $1,529 $11,921
01/97 12.47 $10,392 $1,572 $11,964
02/97 12.51 $10,425 $1,617 $12,042
03/97 12.32 $10,267 $1,634 $11,901
04/97 12.34 $10,283 $1,679 $11,962
05/97 12.45 $10,375 $1,737 $12,112
06/97 12.53 $10,442 $1,791 $12,233
07/97 12.80 $10,667 $1,872 $12,539
08/97 12.65 $10,542 $1,893 $12,435
09/97 12.74 $10,617 $1,949 $12,566
10/97 12.75 $10,625 $1,994 $12,619
11/97 12.76 $10,633 $2,039 $12,672
12/97 12.86 $10,717 $2,098 $12,815
</TABLE>
Performance Analysis
<TABLE>
<CAPTION>
- -----------------------------------
ML Muni CA Int3-7(U2CO)$T
- -----------------------------------
<S> <C>
Jul 93 $ 9,981.50000
- ------
Aug 93 $10,023.42230
- ------
Sep 93 $10,015.90473
- ------
Oct 93 $10,138.90005
- ------
Nov 93 $10,091.14583
- ------
Dec 93 $10,263.40169
- ------
Jan 94 $10,332.88492
- ------
Feb 94 $10,186.05462
- ------
Mar 94 $10,034.79171
- ------
Apr 94 $10,018.03361
- ------
May 94 $10,127.43054
- ------
Jun 94 $ 9,782.08515
- ------
Jul 94 $ 9,994.35640
- ------
Aug 94 $10,009.14805
- ------
Sep 94 $ 9,936.58172
- ------
Oct 94 $ 9,919.94192
- ------
Nov 94 $ 9,825.30568
- ------
Dec 94 $ 9,915.01072
- ------
Jan 95 $ 9,995.12401
- ------
Feb 95 $10,195.02649
- ------
Mar 95 $10,262.10976
- ------
Apr 95 $10,311.36789
- ------
May 95 $10,587.19697
- ------
Jun 95 $10,602.86602
- ------
Jul 95 $10,726.38941
- ------
Aug 95 $10,799.32886
- ------
Sep 95 $10,823.95133
- ------
Oct 95 $10,884.89018
- ------
Nov 95 $11,062.42274
- ------
Dec 95 $11,045.38661
- ------
Jan 96 $11,179.36715
- ------
Feb 96 $11,169.64111
- ------
Mar 96 $11,092.34719
- ------
Apr 96 $11,103.21769
- ------
May 96 $11,099.22053
- ------
Jun 96 $11,162.59708
- ------
Jul 96 $11,271.76728
- ------
Aug 96 $11,275.59968
- ------
Sep 96 $11,349,45485
- ------
Oct 96 $11,452.39441
- ------
Nov 96 $11,578.59980
- ------
Dec 96 $11,555,78996
- ------
Jan 97 $11,580.98158
- ------
Feb 97 $11,659.38482
- ------
Mar 97 $11,575.08747
- ------
Apr 97 $11,607.49771
- ------
May 97 $11,747.13591
- ------
Jun 97 $11,877.99900
- ------
Jul 97 $12,068.87844
- ------
Aug 97 $12,007.56853
- -----------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------
ML Muni CA Int3-7(U2CO)$T
- -----------------------------------
<S> <C>
Sep 97 $12,118.75862
- ------
Oct 97 $12,157.90221
- ------
Nov 97 $12,198.14487
- ------
Dec 97 $12,313.05139
- -----------------------------------
</TABLE>
FIRST DATA INVESTOR SERVICES
MUTUAL FUND HYPOTHETICAL ANALYSIS
MONTGOMERY CA TAX FREE INTERM BD (R)
Initial Investment: $10,000 Period: 07/01/93 - 12/97
<TABLE>
<CAPTION>
Growth of Value of Growth of
Initial Reinvested Investment with
Date NAV Investment Distributions Distributions Reinvested
<S> <C> <C> <C> <C>
07/01/93 12.00 $10,000 $ 0 $10,000
07/93 11.95 $ 9,958 $ 33 $ 9,991
08/93 12.02 $10,017 $ 60 $10,077
09/93 12.04 $10,033 $ 88 $10,121
10/93 12.04 $10,033 $ 117 $10,150
11/93 12.00 $10,000 $ 144 $10,144
12/93 12.07 $10,058 $ 175 $10,233
01/94 12.11 $10,092 $ 203 $10,295
02/94 11.95 $ 9,958 $ 227 $10,185
03/94 11.80 $ 9,833 $ 253 $10,086
04/94 11.80 $ 9,833 $ 284 $10,117
05/94 11.83 $ 9,858 $ 317 $10,175
06/94 11.79 $ 9,825 $ 346 $10,171
07/94 11.86 $ 9,883 $ 381 $10,264
08/94 11.85 $ 9,875 $ 410 $10,285
09/94 11.80 $ 9,833 $ 438 $10,271
10/94 11.72 $ 9,767 $ 466 $10,233
11/94 11.63 $ 9,692 $ 495 $10,187
12/94 11.65 $ 9,708 $ 530 $10,238
01/95 11.74 $ 9,783 $ 569 $10,352
02/95 11.86 $ 9,883 $ 603 $10,486
03/95 11.93 $ 9,942 $ 641 $10,583
04/95 11.96 $ 9,967 $ 678 $10,645
05/95 12.07 $10,058 $ 719 $10,777
06/95 12.04 $10,033 $ 751 $10,784
07/95 12.07 $10,058 $ 791 $10,849
08/95 12.16 $10,133 $ 837 $10,970
09/95 12.21 $10,175 $ 879 $11,054
10/95 12.31 $10,258 $ 929 $11,187
11/95 12.42 $10,350 $ 977 $11,327
12/95 12.46 $10,383 $1,023 $11,406
01/96 12.51 $10,425 $1,070 $11,495
02/96 12.44 $10,367 $1,103 $11,470
03/96 12.29 $10,242 $1,131 $11,373
04/96 12.24 $10,200 $1,168 $11,386
05/96 12.18 $10,150 $1,205 $11,355
06/96 12.23 $10,192 $1,250 $11,442
07/96 12.28 $10,233 $1,298 $11,531
08/96 12.24 $10,200 $1,336 $11,536
09/96 12.30 $10,250 $1,384 $11,634
10/96 12.39 $10,325 $1,436 $11,761
11/96 12.56 $10,467 $1,497 $11,964
</TABLE>
INDEX HYPOTHETICAL GROWTH FOR 10,000
<TABLE>
<CAPTION>
CAL TAX-FREE INTERMEDIATE
LIPPER
CALI INT DEBT MUNI
AVE
6/93 - 12/97
DATE RETURN VALUE
- --------------------------------
<S> <C> <C>
Jun-93 $10,000
Jul-93 $10,009
Aug-93 $10,199
Sep-93 $10,323
Oct-93 $10,340
Nov-93 $10,268
Dec-93 $10,454
Jan-94 $10,562
Feb-94 $10,325
Mar-94 $10,031
Apr-94 $10,079
May-94 $10,146
Jun-94 $10,113
Jul-94 $10,261
Aug-94 $10,291
Sep-94 $10,186
Oct-94 $10,064
Nov-94 $ 9,915
Dec-94 $10,022
Jan-95 $10,217
Feb-95 $10,452
Mar-95 $10,555
Apr-95 $10,574
May-95 $10,834
Jun-95 $10,760
Jul-95 $10,877
Aug-95 $10,995
Sep-95 $11,060
Oct-95 $11,187
Nov-95 $11,311
Dec-95 $11,376
Jan-96 $11,488
Feb-96 $11,443
Mar-96 $11,311
Apr-96 $11,305
May-96 $11,305
Jun-96 $11,383
Jul-96 $11,491
Aug-96 $11,489
Sep-96 $11,586
Oct-96 $11,705
Nov-96 $11,894
Dec-96 $11,847
Jan-97 $11,868
Feb-97 $11,949
Mar-97 $11,834
Apr-97 $11,890
May-97 $12,050
Jun-97 $12,157
Jul-97 $12,436
Aug-97 $12,329
Sep-97 $12,459
Oct-97 $12,492
Nov-97 $12,547
Dec-97 $12,702
</TABLE>
1 The Merrill Lynch California Municipal Bond Index is composed of those issues
contained in the broader Merrill Lynch California Municipal Bond Index whose
maturities range from three to seven years.
2 The Lipper California Intermediate Municipal Debt Funds Average universe
consists of 14 funds.
I N V E S T M E N T R E V I E W
Q: How did the Fund perform over the second half of 1997?
A: The Fund outperformed both of its benchmarks, the Merrill Lynch California
Municipal Intermediate Bond Index and the Lipper California Intermediate
Municipal Debt Funds Average, over that period. It also beat the index over the
full-year period and since inception.
Q: What main factors accounted for the Fund's performance over that period?
A: Like other bond sectors, the municipal market rallied over the second half of
1997. Investors were encouraged by ebbing inflation and other positive economic
trends. In fact, the persistent decline of inflation over the past several
quarters led some investors to question whether deflation might be around the
corner. Municipal bonds did not, however, match the gains that U.S. Treasuries
racked up during the second half, due in part to heavy municipal issuance.
Treasuries were driven by a "flight to quality," as investors who were concerned
about Asia's impact on world equity markets and economies turned to them as a
potential haven. This drove the yield of the bellwether 30-year bond below 6%.
On the flip side, municipal bonds are generally cheaper than Treasuries right
now.
Q: Does California's municipal-bond market differ much from that of other
states?
A: Yes and no. As in other states, California's municipal-bond market tends to
rise and fall with the state's economic fortunes. During the 1990s, however,
California's economy has tended to magnify national trends. At the beginning of
the decade, the state had to grapple not only with the recession facing the rest
of the country, but also with the downsizing of the defense industry (then a
linchpin of its economy). More recently, California has enjoyed an even greater
economic boom than other parts of the country, thanks in large part to Silicon
Valley and Southern California's media industry.
These trends have had a concurrent impact on the state's municipal-bond market.
Just a few years ago, the recession caused bond-rating agencies to downgrade the
credit ratings of issuers in California and around the country. With the higher
economic activity of the past few years has come higher tax revenues,
strengthening the credit-worthiness of many municipalities. In fact, Standard &
Poor's upgraded the State of California from A to A+ in July 1996. We believe
that there is also heavy and growing demand for tax-exempt investments in
California as many people around the state benefit from the roaring economy.
Just think of all those instant millionaires--and occasionally billionaires--
that Silicon Valley has created. In fact, demand for California municipal bonds
tends to be relatively heavy at all times, due to the state's high income-tax
rates and concentration of wealth. Finally, California differs from other states
in its frequent voter initiatives, some of which have had an impact on its
municipal-bond market.
62
<PAGE>
----------------------
The Montgomery Funds
----------------------
California Tax-Free
Intermediate Bond Fund
----------------------
I n v e s t m e n t s
Q: The Fund now invests more of its assets in higher-rated bonds than it
once did. Why?
A: To some extent, that shift simply reflects the composition of recent new
issuance. Over the past few years, most municipal bonds have been issued with
insurance. In 1997 approximately 70% of California new issuance was insured, and
we anticipate seeing the same trend carry over into 1998. Insurance provides
bonds with the higher credit ratings-AAA by Standard & Poor's and Aaa by
Moody's. So the gradual upgrade in the Fund's credit quality doesn't necessarily
mean that we're concerned about creditworthiness; we've simply replaced
noninsured bonds that have matured with insured bonds. In addition, we believe
that insured bonds are generally a better "bargain" than uninsured bonds right
now. Interest rates are currently at their lowest level since 1993, and
uninsured bonds have become scarce. As a result, their yields have declined to a
point where we think they're less attractive on a relative basis than insured
bonds.
Q: What's your outlook for the California municipal-bond market?
A: We think that current economic conditions are favorable for bonds in general.
Inflation is declining while the economy is still healthy. Those conditions tend
to support bonds. We also have a positive outlook for the California municipal-
bond market. The state's economy is now more diversified than it was in the
1980s, with thriving technology, media, financial services and agricultural
industries, among others. Its expansion over much of the 1990s and the
concurrent increase in tax revenues has also left the state is much better
fiscal shape. California now regularly runs a budget surplus and has eliminated
the budget deficit it accumulated during the recession. We believe that this
greater equilibrium could make the state more resilient if the expansion slows
or comes to a halt.
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
MUNICIPAL BONDS AND NOTES - 84.4%
Principal Amount Value (Note 1)
California - 84.4%
$200,000 Bakersfield, California, Hospital,
Pre-refunded, 7.375% due 01/01/14............ $ 210,608
205,000 Benicia, California, GO (MBIA Insured),
7.000% due 08/01/04.......................... 237,800
250,000 California Educational Authority Revenue,
University of San Francisco (MBIA
Insured), 6.000% due 10/01/08................ 282,812
350,000 California Health Facilities Financing Authority,
Revenue Refunding, Kaiser Permanente,
Series A, 6.250% due 03/01/21................ 371,875
200,000 California Housing Finance Agency,
Housing Revenue, Series C (MBIA Insured),
6.150% due 08/01/14.......................... 213,250
California State:
40,000 6.800% due 03/01/99.......................... 41,250
=====================================
TOP TEN HOLDINGS
-------------------------------------
(as a percentage of total net assets)
San Diego County, California, Regional
Transportation Commission Sales
Tax Revenue, 6.000% due 04/01/05...................................4.1%
California State, Pollution Control
Finance Authority, San Diego
Gas & Electric, Series A,
5.900% due 06/01/14................................................3.9%
Sacramento, California, Municipal
Utilities, Electric Revenue
Refunding, Series A (MBIA Insured),
6.250% due 08/15/10................................................2.5%
Metropolitan Water District,
Southern California Waterworks
Revenue, Series C,
6.000% due 07/01/08................................................2.4%
San Francisco, California, City and
County, International Airport
Revenue, AMT, Second Series,
8.000% due 05/01/09................................................2.2%
Castaic Lake, California, Water Agency,
Certificates of Participation, Refunding,
Water System Improvement
Project, Series A (MBIA Insured),
7.250% due 08/01/08................................................2.1%
Chino Basin, California, Regional
Financing Authority Revenue,
Municipal Water and District Sewer
Systems Project (AMBAC Insured),
7.000% due 08/01/06................................................2.1%
California State (FGIC Insured),
6.500% due 02/01/08................................................2.0%
Riverside County, California,
Transportation Commission Sales
Tax Revenue, Series A (FGIC Insured),
6.000% due 06/01/09................................................2.0%
Contra Costa, California, Transportation
Authority Sales Tax Revenue,
Series A (FGIC Insured),
6.000% due 03/01/07................................................2.0%
=====================================
I N V E S T M E N T G R A D E
-------------------------------------
(as a percentage of total net assets)
Aaa...............................58%
Aa.................................7%
A.................................16%
BBB................................1%
63
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
California Tax-Free
Intermediate Bond Fund
- ----------------------
I n v e s t m e n t s
MUNICIPAL BONDS AND NOTES - continued
Principal Amount Value (Note 1)
California State - continued
$ 260,000 6.200% due 11/01/02............................$ 283,725
100,000 6.750% due 04/01/04............................ 113,500
115,000 7.000% due 04/01/06............................ 135,700
200,000 7.400% due 09/01/07............................ 246,250
250,000 6.000% due 10/01/08............................ 282,187
145,000 7.000% due 08/01/09............................ 176,175
(FGIC Insured):
250,000 7.000% due 04/01/06............................ 296,250
500,000 6.500% due 02/01/08............................ 582,500
1,000,000 Pollution Control Finance Authority,
San Diego Gas & Electric Company,
Series A, 5.900% due 06/01/14.................. 1,110,000
Public Works Board, Facilities Lease Revenue:
100,000 San Jose Facilities, Series A,
7.750% due 08/01/06............................ 121,000
495,000 Various Community College Projects,
Series A, 6.000% due 03/01/05.................. 546,356
Public Works Board, Lease Revenue:
265,000 Department of Corrections, Series A
(AMBAC Insured), 6.000% due 01/01/06........... 295,144
300,000 Secretary of State, Series A (AMBAC Insured),
6.200% due 12/01/05............................ 337,875
75,000 University Revenue (AMBAC Insured),
6.250% due 11/01/00............................ 79,781
365,000 University Trust Certificates,
6.450% due 06/01/02............................ 396,481
Veterans Bond:
25,000 Series AG, 8.100% due 10/01/98................. 25,761
70,000 Series AL, 9.600% due 04/01/01................. 81,375
100,000 Series AT (FGIC Insured),
9.500% due 02/01/10............................ 143,500
250,000 California Statewide Communities,
Development Authority Revenue, Certificates
of Participation (St. Joseph Health System
Group), 6.500% due 07/01/04.................... 280,937
100,000 Carpinteria, California (FGIC Insured),
7.500% due 07/01/00............................ 108,500
500,000 Castaic Lake, California, Water Agency,
Certificates of Participation, Refunding,
Water System Improvement Project, Series
A (MBIA Insured), 7.250% due 08/01/08.......... 614,375
Chino Basin, California, Regional
Financing Authority Revenue, Municipal
Water and District Sewer Systems Project
(AMBAC Insured):
500,000 7.000% due 08/01/06............................ 593,750
240,000 7.000% due 08/01/08............................ 291,000
Contra Costa, California, Transportation
Authority Sales Tax Revenue, Series A (FGIC Insured):
300,000 6.000% due 03/01/05............................ 331,125
500,000 6.000% due 03/01/07............................ 561,875
300,000 Desert Hospital District, California, Hospital
Revenue, Certificates of Participation
(CGIC Insured), 6.150% due 07/01/02............ 324,375
East Bay, California:
100,000 Regional Parks District, Series B,
8.750% due 09/01/99............................ 107,750
75,000 Utility District, Series M,
7.500% due 03/01/00............................ 80,719
375,000 Eastern Municipal Water District, California,
Water and Sewer Revenue, Certificates of
Participation, Refunding, Series A
(FGIC Insured), 6.250% due 07/01/05............ 403,594
250,000 Elsinore Valley, California, Municipal Water
District, Certificates of Participation,
Refunding, Series A (FGIC Insured),
6.000% due 07/01/12............................ 281,250
270,000 Emeryville, California, Public Financing Authority,
Housing Revenue, 5.600% due 09/01/06........... 292,950
50,000 Estero, California, Series S-1,
7.000% due 07/01/00............................ 53,562
150,000 Franklin-McKinley, California, School
District, Series A (MBIA Insured),
6.000% due 07/01/06............................ 168,562
290,000 Fresno, California, Sewer Revenue, Series A
(MBIA Insured), 6.000% due 09/01/07............ 327,338
450,000 Kern, California, High School District,
Refunding, Series A (MBIA Insured),
6.000% due 08/01/03............................ 493,313
175,000 Lafayette, California, Elementary School District,
6.900% due 05/15/06............................ 205,625
100,000 Los Angeles, California, Series A,
6.400% due 09/01/98............................ 101,706
Los Angeles County, California:
Certificates of Participation:
200,000 6.700% due 03/01/99............................ 206,000
200,000 6.708% due 06/01/15............................ 220,750
50,000 Public Works, Revenue Anticipation
Notes, 4.500% due 03/01/01..................... 50,750
200,000 Transportation Authority,
5.625% due 07/01/18............................ 207,250
Transportation Commission, Sales Revenue,
Proposition C, Second Series, Series A:
180,000 6.200% due 07/01/04............................ 199,350
400,000 6.400% due 07/01/06............................ 455,000
Metropolitan Water District, Southern
California Waterworks Revenue:
200,000 6.000% due 07/01/21............................ 212,250
500,000 Refunding, Series B (MBIA Insured),
4.750% due 07/01/09............................ 504,375
600,000 Series C, 6.000% due 07/01/08.................. 674,250
250,000 Ontario, California, Redevelopment
Financing Authority, Revenue Refunding
(Ontario Redevelopment Project No. 1)
(MBIA Insured), 6.550% due 08/01/06............ 290,000
64
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
California Tax-Free
Intermediate Bond Fund
- ----------------------
I n v e s t m e n t s
MUNICIPAL BONDS AND NOTES - continued
Principal Amount Value (Note 1)
California State - continued
$ 65,000 Paramount, California, Redevelopment
Agency, 5.100% due 08/01/98....................$ 65,525
Piedmont, California, School District:
75,000 Series A, 8.300% due 08/01/01.................. 85,594
45,000 7.100% due 08/01/02............................ 50,513
40,000 Series C, 7.200% due 08/01/01.................. 44,200
200,000 Pomona, California, Unified School
District, Series A (MBIA Insured),
5.950% due 08/01/10............................ 225,500
Rancho, California, Water District Financing
Authority, Revenue Refunding (FGIC Insured):
400,000 6.500% due 11/01/02............................ 442,500
400,000 6.500% due 11/01/05............................ 458,000
100,000 Redding, California, Joint Powers Financing
Authority, Electicity Systems Revenue, Series A
(MBIA Insured), 6.250% due 06/01/08............ 115,250
330,000 Redwood City, California, Multi-Family
Housing (Redwood Shores), Series B,
Mandatory Put 10/01/00, 5.200% due 10/01/08.... 333,300
500,000 Riverside County, California, Transportation
Commission Sales Tax Revenue, Series A
(FGIC Insured), 6.000% due 06/01/09............ 563,750
625,000 Sacramento, California, Municipal Utilities,
Electric Revenue Refunding, Series A (MBIA
Insured), 6.250% due 08/15/10.................. 722,656
450,000 Saddleback Valley, California, Unified
School District, Public Financing Authority,
Special Tax Revenue Bonds (FSA Insured),
5.250% due 09/01/07............................ 479,813
250,000 San Bernardino County, California,
Transportation Authority Sales Tax Revenue,
Series A (MBIA Insured),
6.000% due 03/01/06............................ 280,000
San Diego County, California:
1,075,000 Regional Transportation Commission
Sales Tax Revenue, 6.000% due 04/01/05......... 1,187,875
175,000 Water Authority Revenue, Certificates of
Participation, Series A, 6.000% due 05/01/01... 185,719
San Francisco, California, City and County:
375,000 City Hall Improvement Project, Series A
(FGIC Insured), 6.100% due 06/15/00............ 394,688
100,000 GO, Series A, 6.100% due 12/15/98.............. 102,086
International Airport Revenue, AMT, Second Series:
445,000 8.000% due 05/01/06............................ 551,800
500,000 8.000% due 05/01/09............................ 620,000
240,000 San Mateo-Foster City, California, School
District (MBIA Insured), 7.750% due 08/01/06... 298,800
500,000 Santa Rosa, California, High School District
(FGIC Insured), 7.000% due 05/01/01............ 546,875
Walnut Valley, California, Unified School
District, Series A (MBIA Insured):
100,000 6.850% due 08/01/07............................ 119,375
100,000 7.000% due 08/01/08............................ 121,750
65,000 Watsonville, California, Water Revenue
(MBIA Insured), 6.100% due 05/15/99............ 66,950
Wiseburn, California, School District,
Series A (FGIC Insured):
360,000 6.875% due 08/01/06............................ 427,050
395,000 6.875% due 08/01/07............................ 474,000
TOTAL MUNICIPAL BONDS AND NOTES
(Cost $23,168,626)........................................... 24,217,005
----------
SHORT-TERM MUNICIPAL BONDS AND NOTES - 12.7%
California - 12.7%
100,000 Chula Vista, California, Industrial Development
Revenue, San Diego Gas & Electric Company,
Series B, 4.300% due 12/01/21+................. 100,000
Pollution Control Finance Authority:
Pacific Gas & Electric Company:
500,000 Series A, 4.750% due 12/01/18+................. 500,000
400,000 Series C, 4.900% due 11/01/26+................. 400,000
700,000 Series C, AMT, 4.750% due 11/01/26+............ 700,000
700,000 Resources Recovery Revenue, Atlantic
Richfield Company Project, Series A,
5.000% due 12/01/24+........................... 700,000
1,044,000 Richmond, California, Joint Powers
Financing Authority, 4.950% due 09/01/04+...... 1,044,000
200,000 San Bernardino County, California, Industrial
Development Authority Revenue Series II-
Master Halco Inc., 3.650% due 12/01/06++....... 200,000
TOTAL SHORT-TERM MUNICIPAL BONDS AND NOTES
(Cost $3,644,000)............................................ 3,644,000
---------
TOTAL INVESTMENTS - 97.1%
(Cost $26,812,626*).......................................... 27,861,005
OTHER ASSETS AND LIABILITIES - 2.9%
(Net)........................................................ 827,715
-------
NET ASSETS - 100.0%.......................................... $28,688,720
===========
* Aggregate cost for federal tax purposes.
+ Floating-rate note, rate resets daily.
++ Floating-rate note, rate resets weekly.
Abbreviations:
AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
CGIC Capital Guaranty Insurance Corporation
FGIC Federal Guaranty Insurance Corporation
FSA Federal Security Assurance
MBIA Municipal Bond Investors Assurance
The Montgomery California Tax-Free Intermediate Bond Fund concentrates in
California municipal securities. Certain California constitutional amendments,
legislative measures, executive orders, administrative regulations, court
decisions and voter initiatives could result in certain adverse consequences,
including impairing the ability of certain issuers of California municipal
securities to pay principal and interest on their obligations.
65
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ---------------------------------------
The Montgomery Funds
- ---------------------------------------
Money Market Funds
- ---------------------------------------
P o r t f o l i o H i g h l i g h t s
(Unaudited)
=================================================
P O R T F O L I O M A N A G E M E N T
-------------------------------------------------
William C. Stevens ..... Senior Portfolio Manager
Peter Wilson....................Portfolio Manager
=================================================
F U N D P E R F O R M A N C E
-------------------------------------------------
Yields as of 12/31/97
-------------------------------------------------
Montgomery
Government Reserve Fund
One-day yield.............................5.70%
Seven-day yield...........................5.32%
-------------------------------------------------
Montgomery
California Tax-Free Money Fund
One-day yield.............................3.77%
Seven-day yield...........................3.39%
-------------------------------------------------
Montgomery
Federal Tax-Free Money Fund
One-day yield.............................3.88%
Seven-day yield...........................3.47%
-------------------------------------------------
Yield will fluctuate. An investment in one of our money market funds is neither
insured nor guaranteed by the government. There can be no assurance that the
money market funds will be able to maintain a stable net asset value of $1 per
share.
I N V E S T M E N T R E V I E W
Q: How did the Funds perform over the second half?
A: All three outperformed their benchmarks. The California Tax-Free Money Fund
beat its benchmark, the Lipper California Tax-Exempt Money Market Funds Average,
by a slight margin over the second half. So did the Federal Tax-Free Money Fund,
which outpaced its benchmark, the Lipper Tax-Exempt Money Market Funds Average.
Finally, the Montgomery Government Reserve Fund beat the Lipper Government
Money Market Funds Average by 14 basis points. (A basis point is one-hundredth
of a percentage point.)
Q: What were the major bond-market trends during this period?
A: The bond market rallied over much of the second half, driven by a number of
positive factors. Investors continued to see little evidence that inflation was
on the rise, despite the very low level of unemployment and potentially growing
wage pressures in the United States. In fact, many market participants began to
speculate that deflation was in the offing. In the past, episodes of deflation
have tended to support bonds. Investors in the United States and around the
world were also drawn to the U.S. bond market (and particularly to Treasuries)
as the uncertainty about Asia grew. U.S. Treasuries have traditionally been
considered defensive investments and were once again a magnet for jittery
investors. While demand for high-quality bonds grew sharply, the supply of
Treasuries has continued to decline as the United States has moved toward fiscal
equilibrium. There was also a dearth of new issuance in the national and Cali-
fornia short-term municipal markets, which helped them to achieve modest gains
in late 1997. This supply/demand situation provided a solid underpinning for
last year's bond rally and may prove to be a positive factor for most bonds over
the long term.
Although this environment helped to propel interest rates downward, they did not
fall at a uniform rate across the board. Medium- and long-term rates declined
more than shorter rates, apparently reflecting a difference of opinion between
investors and the Federal Reserve about where the economy was heading.
Investors, who control medium- and long-term rates, increasingly viewed
deflation as not just a possibility but a probability, and drove down longer-
term rates in response. Fed Chairman Alan Greenspan recently acknowledged that
the market may be on to something, but the Fed has so far not weighed in with
any decisive action to head off deflation.
Q: What do you expect in 1998?
A: With Asia's crisis still unfolding and the U.S. economic expansion entering
its eighth year, we have two powerful forces pushing the bond market in opposite
directions. The slowdown in Asia won't be fully reflected in U.S. corporate
earnings until companies begin to report their first-quarter results in March
and April. Only time will tell how widespread and severe Asia's impact will have
been. At the same time, investors are likely to remain concerned about the
economy's direction.
In the past, similar periods of uncertainty have often benefited money market
instruments. When investors are concerned about the outlook for corporate
profits or the economy, they tend to flock to the kind of high-quality, short-
term securities in which we invest. That tendency, coupled with the potential
for deflation or at least a restrictive Federal Reserve, may create a positive
climate for money market funds in 1998.
66
<PAGE>
---------------------
The Montgomery Funds
---------------------
California Tax-Free
Money fund
---------------------
I n v e s t m e n t s
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
FEDERAL FARM CREDIT BANK (FFCB) -- 9.1%
Principal Amount Value (Note 1)
$3,395,000 7.950% due 01/02/98....................$ 3,395,193
1,000,000 4.800% due 01/14/98.................... 999,579
2,000,000 4.720% due 02/06/98.................... 1,998,027
3,250,000 4.650% due 03/02/98+++................. 3,243,908
1,000,000 4.625% due 03/03/98+++................. 998,208
7,100,000 5.450% due 03/03/98.................... 7,097,489
1,000,000 5.100% due 03/10/98.................... 998,856
750,000 Medium-term Note, 6.280% due 03/30/98.. 750,333
1,000,000 5.900% due 04/01/98.................... 999,843
500,000 6.000% due 04/20/98.................... 500,218
18,750,000 6.050% due 05/01/98.................... 18,767,587
500,000 4.440% due 08/12/98++++................ 495,514
520,000 5.750% due 09/11/98.................... 520,000
10,000,000 5.633% due 10/01/98++.................. 9,987,124
10,000,000 5.533% due 04/01/99++.................. 9,965,787
---------
60,717,666
----------
FEDERAL HOME LOAN BANK (FHLB) -- 34.7%
5,620,000 Discount Note due 01/02/98............. 5,619,148
9,000,000 5.804% due 01/02/98+................... 8,999,995
2,500,000 9.500% due 01/15/98.................... 2,503,426
3,700,000 7.930% due 01/20/98.................... 3,704,118
1,000,000 5.810% due 01/23/98.................... 999,958
1,500,000 5.420% due 02/06/98.................... 1,499,448
1,000,000 5.717% due 02/06/98.................... 999,963
1,000,000 4.039% due 02/11/98+++................. 998,066
4,250,000 4.782% due 02/12/98++.................. 4,244,368
250,000 5.200% due 02/19/98++++................ 249,738
700,000 4.900% due 02/23/98.................... 699,178
310,000 5.110% due 02/23/98.................... 309,709
19,185,000 4.500% due 02/25/98+++................. 19,154,654
4,000,000 4.782% due 02/25/98++.................. 3,992,580
500,000 5.875% due 02/26/98.................... 499,817
2,000,000 5.100% due 02/27/98.................... 1,997,616
2,000,000 4.690% due 03/02/98++++................ 1,996,596
500,000 5.135% due 03/02/98++++................ 499,326
1,000,000 4.156% due 03/03/98++++................ 977,349
2,000,000 4.950% due 03/04/98++++................ 1,996,961
1,000,000 5.490% due 03/05/98.................... 999,370
710,000 5.670% due 03/10/98.................... 709,501
2,800,000 4.415% due 03/16/98++++................ 2,792,132
2,000,000 4.500% due 03/16/98++++................ 1,995,057
1,000,000 7.100% due 03/16/98.................... 1,002,592
400,000 5.790% due 03/18/98.................... 400,013
2,000,000 5.875% due 03/18/98.................... 2,000,105
5,000,000 5.696% due 03/19/98++.................. 5,000,000
5,000,000 5.560% due 03/19/98.................... 4,999,221
4,500,000 4.250% due 03/23/98+++................. 4,486,284
5,000,000 5.690% due 03/25/98.................... 4,998,249
2,000,000 4.350% due 03/26/98+++................. 1,993,658
5,000,000 5.885% due 03/30/98.................... 4,999,583
4,000,000 5.000% due 04/02/98+++................. 3,992,324
5,500,000 4.485% due 04/08/98+++................. 5,481,510
2,000,000 5.800% due 04/14/98++.................. 1,999,738
400,000 3.392% due 04/20/98+++................. 396,446
1,350,000 4.729% due 04/23/98+++................. 1,345,368
24,500,000 5.400% due 04/27/98++++................ 24,479,309
500,000 5.260% due 04/27/98.................... 500,000
500,000 3.328% due 05/05/98++++................ 496,004
1,200,000 1.833% due 05/07/98++++................ 1,184,104
3,500,000 4.525% due 05/11/98+++................. 3,484,140
900,000 6.250% due 05/11/98.................... 901,615
2,000,000 5.879% due 05/26/98+................... 1,998,917
500,000 3.780% due 06/02/98++++................ 495,010
3,000,000 3.000% due 06/17/98+++................. 2,962,812
2,350,000 3.000% due 06/22/98+++................. 2,320,053
500,000 3.131% due 06/25/98+++................. 493,275
2,250,000 3.332% due 06/30/98+++................. 2,220,150
20,000,000 5.770% due 07/07/98++.................. 19,990,909
500,000 3.476% due 07/15/98++++................ 492,943
4,000,000 3.010% due 07/15/98+++................. 3,935,141
500,000 3.256% due 07/16/98+++................. 492,806
500,000 5.240% due 07/20/98.................... 498,193
500,000 3.048% due 07/28/98+++................. 491,942
1,000,000 6.285% due 08/05/98.................... 1,002,519
5,000,000 6.020% due 08/13/98.................... 5,002,251
924,032 1557 FB, 6.2375% due 08/15/98.......... 926,248
1,000,000 3.295% due 08/17/98+++................. 981,969
2,000,000 4.260% due 08/24/98+++................. 1,980,624
2,400,000 7.800% due 08/28/98.................... 2,429,482
550,000 4.785% due 09/09/98.................... 545,986
15,000,000 5.900% due 09/10/98.................... 15,000,000
15,000,000 5.780% due 10/06/98++.................. 14,991,546
2,000,000 4.891% due 10/27/98+++................. 1,986,182
2,500,000 5.800% due 10/27/98.................... 2,500,316
500,000 5.004% due 11/24/98++++................ 496,603
5,000,000 5.440% due 12/22/98+++................. 4,996,676
---------
231,830,890
-----------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) - 2.6%
161,236 M90162, 6.500% due 01/01/98............ 161,024
100,932 M19081, 5.500% due 02/01/98............ 100,884
176,859 17211, 6.500% due 02/01/98............. 176,894
1,000,000 4.650% due 03/11/98+++................. 997,973
1,500,000 4.500% due 03/25/98+++................. 1,495,369
1,882,846 L90031, 6.000% due 05/01/98............ 1,880,395
9,529,443 M19127, 6.000% due 06/01/98............ 9,516,812
1,371,707 PLM19136, 6.500% due 06/01/98.......... 1,371,300
178,432 6.500% due 07/01/98.................... 178,432
1,351,400 G50016, 6.000% due 09/01/98............ 1,350,854
406,333 6.500% due 10/01/98.................... 406,027
-------
17,635,964
----------
67
The accompanying notes are an integral part of these financial statements.
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Government Reserve Fund
- -----------------------
I n v e s t m e n t s
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 5.8%
Principal Amount Value (Note 1)
$18,191 050395, 9.000% due 01/01/98.............. $ 18,190
66,598 112363, 9.000% due 01/01/98.............. 66,598
3,500,000 4.010% due 01/06/98++.................... 3,499,387
2,250,000 3.965% due 01/28/98++.................... 2,247,606
500,000 8.030% due 01/28/98...................... 500,810
1,000,000 6.000% due 02/17/98+++................... 1,000,057
10,910,000 4.500% due 02/25/98+++................... 10,890,785
4,500,000 4.600% due 02/25/98+++................... 4,491,656
5,050,000 4.970% due 03/10/98++++.................. 5,040,350
100,000 8.200% due 03/10/98...................... 100,389
1,500,000 5.710% due 03/18/98...................... 1,499,593
400,000 4.375% due 06/03/98+++................... 398,056
2,638,249 1993-118A, 6.500% due 07/25/98........... 2,635,272
500,000 5.770% due 08/25/98...................... 499,533
1,196,058 1991-127 FA, 0.000% due 09/25/98......... 1,199,798
4,630,000 6.900% due 03/10/04...................... 4,631,302
---------
38,719,382
----------
STUDENT LOAN MARKETING ASSOCIATION (SLMA) -- 15.0%
2,000,000 5.779% due 01/21/98+...................... 2,000,155
3,000,000 5.820% due 01/23/98....................... 2,999,837
5,000,000 5.634% due 02/05/98+...................... 4,999,790
2,550,000 4.310% due 02/11/98++++................... 2,546,235
1,825,000 5.729% due 02/17/98+...................... 1,824,660
648,000 5.535% due 02/25/98....................... 647,545
13,770,000 7.000% due 03/03/98....................... 13,796,640
1,500,000 5.250% due 03/17/98....................... 1,498,543
1,650,000 5.674% due 04/21/98+...................... 1,649,859
1,850,000 4.625% due 06/01/98+++.................... 1,841,566
1,465,000 5.850% due 06/10/98....................... 1,465,179
1,000,000 5.750% due 06/30/98....................... 1,000,000
14,975,000 5.775% due 09/09/98....................... 14,976,966
1,000,000 5.919% due 11/04/98+...................... 999,759
15,500,000 5.664% due 11/06/98+...................... 15,488,537
16,900,000 5.639% due 02/08/99+...................... 16,843,240
16,000,000 5.649% due 08/02/99+...................... 15,926,278
----------
100,504,789
-----------
TENNESSEE VALLEY AUTHORITY (TVA) -- 0.7%
1,700,000 5.125% due 03/04/98....................... 1,700,000
2,700,000 5.950% due 09/15/98....................... 2,702,637
---------
4,402,637
---------
U.S. SOVEREIGN BONDS -- 0.1%
692,187 AID-Israel, Series B, 5.906% due 01/01/99+ 692,187
-------
TOTAL SECURITIES......................................... 454,503,515
-----------
REPURCHASE AGREEMENTS -- 34.0%
$46,788,500 Agreement with Bear Stearns, Tri-Party,
6.850% dated 12/31/97, to be repurchased
at $46,806,306 on 01/02/98, collateralized
by $48,737,299 market value of U.S.
government securities, having various
maturities and various interest rates.......$ 46,788,500
76,734,500 Agreement with BZW Securities, Tri-Party,
6.900% dated 12/31/97, to be repurchased
at $76,763,915 on 01/02/98, collateralized
by $78,269,190 market value of U.S.
government securities, having various
maturities and various interest rates....... 76,734,500
30,663,500 Agreement with Nomura Securities,
Tri-Party, 6.900% dated 12/31/97, to be
repurchased at $30,675,254 on 01/02/98,
collateralized by $31,276,770 market value
of U.S. government securities, having
various maturities and various interest
rates....................................... 30,663,500
73,226,500 Agreement with United Bank of Switzerland,
Tri-Party, 6.900% dated 12/31/97, to be
repurchased at $73,254,570 on 01/02/98,
collateralized by $74,692,213 market value
of U.S. government securities, having
various maturities and various interest
rates....................................... 73,226,500
----------
TOTAL REPURCHASE AGREEMENTS.................................... 227,413,000
-----------
TOTAL INVESTMENTS -- 102.0%
(At amortized cost*)........................................... 681,916,515
OTHER ASSETS AND LIABILITIES -- (2.0%)
(Net).......................................................... (13,615,253)
NET ASSETS -- 100.0%........................................... $668,301,262
===========
* Aggregate cost for federal tax purposes.
** Rate represents annualized yield at date of purchase.
+ Floating-rate note, rate resets weekly.
++ Floating-rate note, rate resets monthly.
+++ Floating-rate note, rate resets quarterly.
++++ Floating-rate note, rate resets semiannually.
Abbreviations:
CMO Collateralized Mortgage Obligation
68
The accompanying notes are an integral part of these financial statements.
<PAGE>
---------------------
The Montgomery Funds
---------------------
California Tax-Free
Money fund
---------------------
I n v e s t m e n t s
P O R T F O L I O I N V E S T M E N T S
December 31, 1997 (unaudited)
MUNICIPAL BONDS AND NOTES -- 112.1%
Principal Amount Value (Note 1)
California - 112.1%
$400,000 Abag, California, Financing Authority
Revenue, Nonprofit Corporations
(University of California Project)
4.000% due 12/01/0++................................$ 400,000
Alameda County, California:
1,400,000 Schools Financing Authority, Certificates of
Participation (Capital Improvement
Financing Projects), Series C,
3.850% due 07/01/25++............................... 1,400,000
1,000,000 Transportation Authority Sales Tax Revenue
(FGIC Insured), 5.000% due 05/01/98................. 1,004,019
1,000,000 Anaheim, California, Certificates of
Participation (Police Facilities
Refinancing Project) (AMBAC Insured),
3.350% due 08/01/08++............................... 1,000,000
125,000 Benicia, California, GO (MBIA Insured),
7.000% due 08/01/98................................. 127,194
California State:
5,000,000 Commercial Paper, 3.600% due 02/09/98............... 5,000,000
1,000,000 Economic Development Financing
Authority Revenue (KQED Inc. Project),
3.450% due 04/01/20++............................... 1,000,000
4,000,000 Economic Financing Authority, Industrial
Development Revenue (Serra Microchassis
Project), 4.900% due 08/01/27+...................... 4,000,000
Educational Facilities Authority Refunding
Revenue, Stanford University:
500,000 Series L, 3.450% due 10/01/14++..................... 500,000
1,000,000 Series L-3, 3.450% due 10/01/15++................... 1,000,000
500,000 Series L-4, 3.450% due 10/01/16++................... 500,000
General Obligations:
855,000 4.700% due 10/01/98................................. 859,939
100,000 6.400% due 10/01/98................................. 101,795
100,000 9.000% due 11/01/98................................. 104,063
Health Facilities Financing Authority
Revenue (CASMED):
125,000 Adventist Health Systems (MBIA Insured),
6.050% due 03/01/98................................. 125,444
Catholic Healthcare:
3,400,000 Series A (MBIA Insured),
3.350% due 07/01/09++............................... 3,400,000
900,000 Series B, 3.350% due 07/01/06++..................... 900,000
4,100,000 Series C (MBIA Insured),
3.350% due 07/01/12++............................... 4,100,000
500,000 Series D (MBIA Insured),
3.350% due 07/01/21++............................... 500,000
1,000,000 Robert F. Kennedy Medical Center,
7.750% due 03/01/14................................. 1,026,105
Saint Joseph Health System, Series B:
3,300,000 4.800% due 07/01/09+ ............................... 3,300,000
1,065,000 4.800% due 07/01/13+................................ 1,065,000
300,000 Scripps Hospital (MBIA Insured),
3.400% due 10/01/21++............................... 300,000
Sutter Healthcare:
3,900,000 Series B (AMBAC Insured),
4.800% due 07/01/12+................................ 3,900,000
2,000,000 Series C (FSA Insured),
4.800% due 07/01/22+................................ 2,000,000
730,000 Housing Finance Agency Revenue, Series A,
Refunding, 3.350% due 07/15/13++.................... 730,000
Pollution Control Finance Authority
Refunding Revenue:
Pacific Gas & Electric Company:
2,500,000 Series A, 4.750% due 12/01/18+...................... 2,500,000
Series C:
9,200,000 4.750% due 11/01/26+................................ 9,200,000
3,500,000 4.900% due 11/01/26+................................ 3,500,000
2,500,000 Series F, 4.750% due 11/01/26+...................... 2,500,000
2,500,000 Series G, 4.950% due 02/01/16+...................... 2,500,000
2,000,000 Revenue Anticipation Notes,
4.500% due 06/30/98................................. 2,006,208
3,000,000 School Cash Reserve Program Authority,
Series A, 4.750% due 07/02/98....................... 3,013,095
300,000 Transportation Commission, San Francisco
Bay Toll Bridge Revenue, Southern Bridge
Unit, Series A, 4.250% due 09/01/98................. 300,701
California Statewide Community
Development Authority Revenue:
Certificates of Participation:
1,400,000 (House Ear Institution),
4.750% due 12/01/18+................................ 1,400,000
900,000 (Memorial Health Services),
3.350% due 10/01/26++............................... 900,000
4,600,000 Multi-Family Housing Revenue
(Pittsburg Plaza Apartments), Series K,
4.150% due 09/01/27++............................... 4,600,000
365,000 Industrial Development (Encore Video
Project), 3.850% due 08/01/07++..................... 365,000
8,400,000 Chula Vista, California, Industrial Development
Revenue (San Diego Gas & Electric Company),
Series A, 4.900% due 03/01/23+...................... 8,400,000
1,000,000 Concord, California, Redevlopment Agency,
Tax Allocation Revenue, Series 3,
Pre-refunded, 8.000% due 07/01/18................... 1,040,095
500,000 Corona, California, Multi-Family Housing
Revenue (Country Hills Project), Series B,
3.850% due 02/01/20++............................... 500,000
69
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
California Tax-Free
Money fund
- ---------------------
I n v e s t m e n t s
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
California -- continued
$2,500,000 Eastern Municipal Water District,
California, Water and Sewer Revenue,
Certificates of Participation, Series B,
3.850% due 07/01/20++...............................$ 2,500,000
1,500,000 Fairfield-Suisun, California, Unified School
District, TRANS, 4.250% due 06/30/98................ 1,502,582
3,470,000 (Mission Wells Project), Series E,
3.950% due 09/01/14++............................... 3,470,000
500,000 (TreeTops Apartments Project), Series A,
4.050% due 08/15/26++............................... 500,000
300,000 Hillsborough, California, School District,
TRANS, 4.500% due 07/09/98.......................... 300,957
1,000,000 Irvine, California, Improvement Board,
5.000% due 09/02/22+................................ 1,000,000
Irvine Ranch, California, Water District:
900,000 5.000% due 10/01/10+................................ 900,000
900,000 5.000% due 08/01/16+................................ 900,000
1,700,000 Series A, 4.850% due 11/15/13+...................... 1,700,000
Series B:
2,700,000 4.850% due 10/01/04+................................ 2,700,000
2,700,000 4.750% due 08/01/09+................................ 2,700,000
3,100,000 4.850% due 10/01/09+................................ 3,100,000
1,500,000 Kern, California, Community College
District, Certificates of Participation,
6.000% due 01/01/25++............................... 1,500,000
1,400,000 Kern County, California, Certificates of
Participation (Kern Public Facilities
Project), Series B, 3.350% due 08/01/06++........... 1,400,000
405,000 La Mesa-Spring Valley, California,
School District, Certificates of Participation
(Capital Projects) (AMBAC Insured),
3.800% due 09/01/98................................. 405,000
900,000 Lassen, California, Municipal Utilities
District Revenue, Series A (FSA Insured),
4.200% due 05/01/08++............................... 900,000
Los Angeles, California:
Commercial Paper:
1,500,000 3.800% due 01/07/98................................. 1,500,000
1,500,000 3.750% due 01/09/98................................. 1,500,000
1,050,000 Judgment Obligation Bonds, Series A,
4.700% due 08/01/98................................. 1,054,785
Multi-Family Housing Revenue:
2,000,000 (Mission Village Terrace), Series D,
4.050% due 07/01/27++............................... 2,000,000
8,000,000 Series K, 3.850% due 07/01/10++..................... 8,000,000
Unified School District:
610,000 Series A, 4.500% due 07/01/98....................... 611,902
1,600,000 TRANS, 4.500% due 07/01/98.......................... 1,605,107
250,000 Waste Water System Revenue (MBIA
Insured), 7.625% due 08/01/14....................... 260,214
Los Angeles County, California:
1,200,000 Certificates of Participation (Museum of Arts
Project), Series A, 3.500% due 11/01/05++........... 1,200,000
1,400,000 Multi-Family Housing Authority Revenue
(Diamond Park Apartments Project),
Series A, 3.650% due 02/01/09++..................... 1,400,000
3,900,000 TRANS, Series A, 4.500% due 06/30/98................ 3,911,160
1,230,000 Madera, California, Public Financing Authority,
Lease Revenue (Municipal Golf Course
Refinancing Project), 4.200% due 11/01/23++......... 1,230,000
500,000 Marin County, California, Certificate of
Participation (Capital Improvements
Project), 5.900% due 08/01/98....................... 505,682
Metropolitan Water District, Southern
California Waterworks Revenue,
Commercial Paper:
3,000,000 3.800% due 01/07/98................................. 3,000,000
2,000,000 3.650% due 01/08/98................................. 2,000,000
3,000,000 3.750% due 01/09/98................................. 3,000,000
500,000 Series A, 3.850% due 06/01/23++..................... 500,000
100,000 Modesto, California, Waste Water
Treatment Facilities Revenue (MBIA
Insured), 4.300% due 11/01/98....................... 100,297
1,000,000 Moreno Valley, California, Unified School
District, TRANS, 4.500% due 06/30/98................ 1,002,843
2,400,000 Ontario, California, Multi-Family Housing
Revenue (Residential Park Center), Series A,
3.650% due 08/01/07++............................... 2,400,000
Orange County, California:
Apartment Development Revenue:
1,300,000 (Harbor Pointe), Issue D,
3.950% due 12/01/06++............................... 1,300,000
1,000,000 (Larkspur Canyon Apartments), Series A,
3.350% due 06/15/37++............................... 1,000,000
1,600,000 (Niguel Summit 2), Series U,
3.650% due 11/01/09+................................ 1,600,000
680,000 Community Facilities Special Tax Revenue,
District No. 87-3, Series A,
8.050% due 08/15/08................................. 710,671
2,500,000 Fire Authority, TRANS, 4.250% due 09/17/98.......... 2,505,874
1,290,000 Housing Authority, Apartment Development
Revenue (Village Niguel Project), Issue AA,
3.500% due 12/01/08++............................... 1,290,000
4,900,000 Improvement Bonds, District No. 88-1,
4.800% due 09/02/18+................................ 4,900,000
100,000 Local Transportation Authority Sales Tax
Revenue, Series A, 3.800% due 02/15/98.............. 100,000
250,000 Resources Recovery, Certificates of
Participation, Series A (MBIA Insured),
4.200% due 07/01/98................................. 250,419
Sanitation District, Certificate of
Participation:
1,250,000 (AMBAC Insured),
5.000% due 08/01/16+................................ 1,250,000
4,500,000 Series C (FGIC Insured),
4.750% due 08/01/17+................................ 4,500,000
1,500,000 Oxnard, California, School District, TRANS,
4.500% due 08/13/98................................. 1,505,735
70
The accompanying notes are an integral part of these financial statements.
<PAGE>
---------------------
The Montgomery Funds
---------------------
California Tax-Free
Money fund
---------------------
I n v e s t m e n t s
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
California -- continued
$300,000 Palm Springs, California, Community
Redevelopment Agency, Certificates of
Participation, District No. 11,
3.850% due 12/01/14++..............................$ 300,000
1,000,000 Plumas County, California, TRANS,
4.500% due 12/03/98................................ 1,006,471
8,662,000 Richmond, California, Joint Powers Finance
Authority, Port Terminal Lease Revenue,
4.950% due 09/01/04+............................... 8,662,000
1,000,000 Riverside Teeter, Commercial Paper,
3.750% due 01/14/98................................ 1,000,000
Sacramento, California, Municipal Utilities,
Electricity District Revenue:
500,000 Series V, 7.875% due 08/15/16...................... 522,092
575,000 Series W, 7.500% due 08/15/18...................... 587,624
Sacramento County, California:
2,500,000 Multi-Family Housing Authority Revenue
(Stone Creek Apartments Project),
3.950% due 11/15/27++.............................. 2,500,000
220,000 TRANS, 4.500% due 09/30/98......................... 220,919
290,000 Saint Helena, California, Water Revenue
(MBIA Insured), 4.000% due 06/01/98................ 290,147
1,000,000 Salinas, California, Multi-Family Housing
Revenue (Brentwood Gardens), Series A,
3.950% due 05/15/27++.............................. 1,000,000
San Bernardino County, California:
Industrial Development Authority Revenue:
1,440,000 (Aqua-Serv Engineers Inc. Project),
3.850% due 05/01/09++.............................. 1,440,000
660,000 (McElroy Metal Mill Inc. Project),
3.850% due 05/01/04++.............................. 660,000
2,000,000 Multi-Family Housing Authority Revenue
(Brookside Meadows), Series A,
3.600% due 08/01/05++.............................. 2,000,000
San Diego, California:
Commercial Paper:
2,000,000 3.600% due 01/08/98................................ 2,000,000
2,000,000 3.700% due 01/09/98................................ 2,000,000
Multi-Family Housing Revenue:
500,000 (La Cima Apartments Project), Series K,
3.900% due 12/01/08++.............................. 500,000
500,000 (Lusk Mira Mesa Apartments Project),
Series E, 3.850% due 04/01/07++.................... 500,000
210,000 (Nobel Court Apartments Project),
3.900% due 12/01/08++.............................. 210,000
2,000,000 University Town Center Apartments,
3.900% due 10/01/15++.............................. 2,000,000
200,000 San Diego County, California, Commission
Sales Tax Revenue, Series A (FGIC Insured),
5.000% due 04/01/98................................ 200,477
100,000 San Jose, California, Certificates of Participation
(Accelerated Street Improvement Project),
3.800% due 06/15/98................................ 99,954
700,000 Santa Clara, California, Electricity Revenue
Series A, 3.400% due 07/01/10++.................... 700,000
Santa Clara County, California:
500,000 Hospital Facilities Authority (VY Medical Center
Project), Series A, 3.500% due 08/01/15++.......... 500,000
550,000 TRANS, 4.750% due 10/01/98......................... 553,329
140,000 Santa Monica, California, Community College
District, Series A, 5.625% due 08/01/98............ 141,400
650,000 Santa Rosa, California, Waste Water Revenue,
Series B (FGIC Insured), 5.100% due 09/01/98....... 655,244
1,000,000 Simi Valley, California, Community
Development Agency, Multi-Family Revenue,
Issue A, 3.600% due 05/01/10+...................... 1,000,000
135,000 South Coast Air Quality Management,
California, District Building Corporation
Revenue, Series A (MBIA Insured),
6.900% due 08/01/98................................ 137,367
100,000 Southern California Rapid Transportation
District, Certificate of Participation (Workers
Compensation Funding) (MBIA Insured),
5.800% due 07/01/98................................ 100,891
University of California:
3,500,000 Commercial Paper, 3.700% due 01/08/98.............. 3,500,000
545,000 (Multiple Purposes Project), Series D
(MBIA Insured), 10.000% due 09/01/98............... 566,497
125,000 Ventura, California, Unified School
District, Series A (FSA Insured),
8.000% due 08/01/98................................ 127,863
-------
TOTAL MUNICIPAL BONDS AND NOTES................................... 199,924,161
-----------
TOTAL INVESTMENTS -- 112.1%
(At amortized cost*).............................................. 199,924,161
OTHER ASSETS AND LIABILITIES -- (12.1%)
(Net)............................................................. (21,565,424)
----------
NET ASSETS -- 100.0%..............................................$ 178,358,737
-----------
* Aggregate cost for federal tax purposes.
+ Floating-rate note, rate resets daily.
++ Floating-rate note, rate resets weekly.
Abbreviations:
AMBAC American Municipal Bond Assurance Corporation
FGIC Federal Guaranty Insurance Corporation
FSA Federal Security Assurance
GO General Obligation
MBIA Municipal Bond Investors Assurance
TRANS Tax and Revenue Anticipation Notes
The Montgomery California Tax-Free Money Fund concentrates in California
municipal securities. Certain California constitutional amendments, legislative
measures, executive orders, administrative regulations, court decisions and
voter initiatives could result in certain adverse consequences, including
impairing the ability of certain issuers of California municipal securities to
pay principal and interest on their obligations.
71
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
Federal
Tax-Free Money Fund
- ----------------------
I n v e s t m e n t s
PORTFOLIO INVESTMENTS
December 31, 1997 (unaudited)
MUNICIPAL BONDS AND NOTES -- 116.5%
Principal Amount Value (Note 1)
Alabama -- 3.5%
$2,500,000 Montgomery, Alabama, Baptist Medical
Center Special Care Facilities, Revenue
Bonds, Series F (AMBAC Insured),
3.700% due 02/01/30++ .........................$ 2,500,000
1,500,000 Phenix County, Alabama, Industrial
Development Board Revenue
(Mead Coated Board Project), Series A,
5.100% due 06/01/28+ .......................... 1,500,000
---------
4,000,000
Arkansas -- 0.3%
310,000 Arkansas State Development Finance,
State Police Headquarters,
3.800% due 06/01/98 ........................... 309,870
Arizona -- 2.2%
2,000,000 Pima County, Arizona, Industrial Development
Authority, Industrial Revenue, Tucson Electric,
3.800% due 10/01/22++ ......................... 2,000,000
500,000 Salt River Project, Arizona,
Agriculture Revenue, Series A,
7.875% due 01/01/28 ........................... 510,000
-------
2,510,000
California -- 0.7%
809,000 Richmond, California, Joint Powers
Financing Authority, 4.950% due 09/01/04+ ..... 809,000
Colorado -- 7.8%
1,300,000 Colorado Health Facilities Authority
Revenue (Boulder Community Hospital
Project), Series C (MBIA Insured),
4.150% due 10/01/14++ .......................... 1,300,000
1,100,000 Colorado Student Obligation Bond Authority,
Student Loan Revenue, Series D (GSL Insured),
3.750% due 07/01/27++ .......................... 1,100,000
1,000,000 Lower Colorado River, Commercial Paper,
3.800% due 01/09/98 ............................ 1,000,000
4,300,000 Moffat County, Colorado, Pollution Control
Revenue (Pacificorp Projects),
5.100% due 05/01/13+ ........................... 4,300,000
1,075,000 Regional Transportation District, Colorado,
Passenger Fare Revenue, Series A,
3.650% due 06/01/99++ .......................... 1,075,000
---------
8,775,000
Delaware -- 0.1%
155,000 Sussex County, Delaware, Single-Family
Mortgage Revenue, 7.150% due 03/01/98 .......... 155,737
District of Columbia -- 2.4%
District of Columbia, General Obligations:
700,000 Series A-1, 5.150% due 10/01/07+ ............... 700,000
2,000,000 Series B-2, 5.000% due 06/01/03+ ............... 2,000,000
---------
2,700,000
Florida -- 5.2%
1,000,000 Dade County, Florida, School District,
General Obligation Bonds (MBIA Insured),
4.500% due 02/15/98 ............................ 1,000,829
1,085,000 Dade County, Florida, Housing Finance
Authority (Jamaica Hut Project), Revenue
Bonds, 3.850% due 08/01/05++ ................... 1,085,000
1,000,000 Florida Municipal Power, Commercial Paper,
3.850% due 01/14/98 ............................ 1,000,000
250,000 Florida State Board of Education Capital
Outlay, Series C, 6.250% due 06/01/98 .......... 252,258
2,500,000 Indian River, Florida, Commercial Paper,
3.900% due 02/05/98 ............................ 2,500,000
---------
5,838,087
Georgia -- 2.3%
2,300,000 DeKalb, Georgia, Private Hospital
Authority, Revenue Anticipation Certificates
(Egleston Children's Health Project), Series A,
3.700% due 12/01/17+++ ......................... 2,300,000
250,000 Metropolitan Atlanta Rapid Transit Authority,
Georgia Sales Tax Revenue, Series J (FGIC
Insured), 8.000% due 07/01/18 .................. 259,776
-------
2,559,776
Hawaii -- 2.0%
State of Hawaii:
1,500,000 City and County of Honolulu: Commercial
Paper, 3.850% due 01/14/98 ..................... 1,500,000
700,000 Housing Finance & Development Corporation
Revenue, 3.750% due 07/01/24++ ................. 700,000
-------
2,200,000
Illinois -- 7.2%
500,000 Chicago, Illinois, Public Building, Community
College District No. 508, Series A (MBIA
Insured), 7.500% due 01/01/98 .................. 510,000
Illinois Health Facilities Authority,
Commercial Paper:
1,600,000 3.750% due 01/09/98 ............................ 1,600,000
1,550,000 3.900% due 01/16/98 ............................ 1,550,000
Illinois Health Facilities Authority
Revenue, Revenue Bonds (MBIA Insured):
800,000 Series A (AncillaSystem), 4.250% due 07/01/98 .. 801,143
1,300,000 Series B (Loyola University Health System),
3.650% due 07/01/24++ .......................... 1,300,000
72
The accompanying notes are an integral part of these Financial statements.
<PAGE>
---------------------
The Montgomery Funds
---------------------
Federal
Tax-Free Money Fund
---------------------
I n v e s t m e n t s
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
Illinois -- continued
$1,920,000 Lombard, Illinois, Multi-Family Housing
(Clover Creek Apartments Project),
4.000% due 12/15/06 ............................$ 1,920,000
500,000 O'Hare International Airport Revenue,
Series B, 3.750% due 01/01/18++ ................ 500,000
-------
8,181,143
Indiana -- 2.5%
200,000 Indiana Transportation Finance Authority,
Highway Revenue (AMBAC Insured),
4.250% due 06/01/98 ............................ 200,397
2,600,000 Rockport, Indiana, Pollution Control
Revenue (AEP Generating Company Project),
Series B, 5.100% due 07/01/25+ ................. 2,600,000
---------
2,800,397
Kansas -- 0.7%
525,000 Sedgwick County, Kansas, General
Obligation Bonds, Series A,
6.100% due 08/01/02 ............................ 531,777
250,000 Witchita, Kansas, Water & Sewer Utilities,
Series B, 4.800% due 04/01/98 .................. 250,388
-------
782,165
Kentucky -- 2.8%
650,000 Madison County, Kentucky, Capital Project
Corporation, Revenue Bonds,
7.800% due 04/01/09 ............................ 687,391
500,000 Murray State University, Kentucky,
University Revenue, Series G,
8.000% due 05/01/03 ............................ 516,600
2,000,000 Trimble County, Kentucky, Commercial
Paper, 3.900% due 01/09/98 ..................... 2,000,000
---------
3,203,991
Louisiana -- 5.6%
250,000 Louisiana Stadium and Exposition District,
Hotel Occupancy Tax and Stadium
Revenue, Series B (FGIC Insured),
5.250% due 07/01/98 ............................ 251,634
2,000,000 Louisiana State Recovery District,
Sales Tax Revenue (MBIA Insured),
4.250% due 07/01/98 ............................ 2,003,549
3,500,000 West Baton Rouge Parish, Louisiana,
Industrial District No. 3 (Dow Chemical
Company Project), Series B,
5.050% due 12/01/16+ ........................... 3,500,000
600,000 West Feliciana Parish, Louisiana, Pollution
Control Revenue (Gulf State Utilities
Company Project) (LOC: Canadian Imperial
Bank), 5.000% due 4/01/16+ ..................... 600,000
-------
6,355,183
Maryland -- 4.4%
2,000,000 Anne Arundel County, Maryland, Commercial
Paper, 3.800% due 02/06/98 ..................... 2,000,000
200,000 Baltimore, Maryland, Water Utility Revenue
Bonds, Series A (MBIA Insured),
6.650% due 07/01/98............................. 202,619
1,000,000 Maryland State, General Obligation Bonds,
First Series, 6.600% due 05/15/00 .............. 1,015,081
250,000 Montgomery County, Maryland, Series A,
6.750% due 04/01/00+ ........................... 256,686
100,000 Northeast Maryland Waste Disposal
Authority, Resource Recovery Revenue,
Harford County Resources (AMBAC Insured),
3.600% due 01/01/08++ .......................... 100,000
400,000 Prince Georges County, Maryland,
Construction Public Improvement
(MBIA Insured), 6.200% due 03/15/98+ ........... 401,880
750,000 Prince Georges County, Maryland, Series A,
6.600% due 02/01/0+ ............................ 766,710
225,000 Washington County, Maryland,
5.950% due 01/01/98 ............................ 225,000
-------
4,967,976
Massachusetts -- 0.2%
200,000 Franklin, Massachusetts, General
Obligation Bonds (MBIA Insured),
5.000% due 11/15/98 ............................ 201,766
Michigan -- 1.4%
500,000 Detroit, Michigan, Water Supply System,
Revenue Bonds, 7.875% due 07/01/08 ............. 519,353
1,000,000 Michigan Higher Education Student Loan
Authority, Revenue Bonds, Series X11-B,
3.750% due 10/01/13++ .......................... 1,000,000
---------
1,519,353
Minnesota -- 4.8%
1,000,000 Duluth, Minnesota, Economic Development
Authority (Miller-Dwan Medical Center
Project), 4.000% due 06/01/19++ ................ 1,000,000
2,400,000 Duluth, Minnesota, Health Facilities
Revenue Bonds, 5.250% due 06/01/19+ ............ 2,400,000
2,000,000 Maplewood, Minnesota, Multi-Family
Housing Bonds (Silver Ridge Project),
4.250% due 07/01/23++ .......................... 2,000,000
---------
5,400,000
Mississippi -- 0.4%
500,000 Jackson, Mississippi, General Obligation
Bonds, 7.000% due 05/01/07 ..................... 505,163
73
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Federal
Tax-Free Money Fund
- ---------------------
I n v e s t m e n t s
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
Missouri -- 3.8%
$1,300,000 Kansas City, Missouri, Industrial
Development Authority, Resh Health
Services System, Revenue Bonds
(MBIA Insured), 5.000% due 04/15/15+..........$ 1,300,000
1,000,000 Missouri Higher Education Loan
Authority, Student Loan Revenue,
Series A, 3.750% due 06/01/17++............... 1,000,000
2,000,000 Missouri State, Health and Education
Facilities Authority, Health Facilities
Revenue (Bethesda Barclay House),
Series A (LOC: Mercantile Bank
St. Louis), 5.400% due 08/15/26+.............. 2,000,000
---------
4,300,000
Nebraska -- 1.6%
1,800,000 Nebraska Higher Education Loan Program,
3.750% due 12/01/16++......................... 1,800,000
New Mexico -- 4.3%
200,000 Los Lunas, New Mexico, School District
No. 001, General Obligation Bonds
(FGIC Insured), 6.250% due 07/15/98........... 202,276
New Mexico State Hospital, Equipment Loan
Council Revenue, Catholic Health Initiatives:
680,000 Series A, 4.250% due 12/01/98................. 682,106
4,000,000 Series B, 3.650% due 12/01/22++............... 4,000,000
---------
4,884,382
New York -- 3.8%
New York State, Dormitory Authority,
Revenue Bonds, City University, Series A:
890,000 Rerefunded, 8.125% due 07/01/07............... 925,782
2,545,000 Unrefunded, 8.125% due 07/01/07............... 2,648,220
410,000 New York State, Medical Care Facilities
Finance Agency, 7.700% due 02/15/18+.......... 420,080
340,000 Roslyn, New York, Free School District,
5.150% due 01/15/98........................... 340,197
-------
4,334,279
North Carolina -- 2.6%
1,000,000 Charlotte, North Carolina, Airport Revenue
Bonds, Series A (MBIA Insured),
3.750% due 07/01/17++......................... 1,000,000
1,000,000 Greensboro, North Carolina, General Obligation
Bonds, Series B, 3.700% due 04/01/11++........ 1,000,000
1,000,000 University of North Carolina,
University Revenue, Series C,
3.700% due 05/15/27++......................... 1,000,000
---------
3,000,000
Ohio -- 2.0%
295,000 Montgomery, Ohio, General Obligation
Bonds, 7.000% due 12/01/98.................... 303,123
2,000,000 Ohio State, Air Quality Development
Authority Revenue (Ohio Edison Project),
Series A, 3.950% due 02/01/15+++++............ 2,000,188
---------
2,303,311
Oregon -- 1.2%
1,400,000 Port of Portland Oregon, Pollution Control
Revenue, Reynold Metals Company,
5.000% due 12/01/09+.......................... 1,400,000
Pennsylvania -- 5.4%
1,600,000 Cambria County, Pennsylvania, Industrial
Development Authority, Resource Recovery
Revenue, 3.750% due 09/01/19++................ 1,600,000
2,000,000 Delaware County, Pennsylvania, Commercial
Paper, 3.800% due 02/06/98.................... 2,000,000
1,000,000 Delaware Valley, Pennsylvania, Regional
Finance Authority, Revenue Bonds, Series A,
3.650% due 12/01/20+++........................ 1,000,000
540,000 Littleston, Pennsylvania, Area School
District, General Obligation Bonds
(FSA Insured), 4.000% due 10/01/98............ 540,340
1,000,000 Pennsylvania State Higher Education
Assistance Agency Student Loan Revenue,
3.850% due 03/01/27++......................... 1,000,000
---------
6,140,340
South Carolina -- 2.7%
525,000 Hilton Head Island, South Carolina, Public
Facilities Corporation, Certificate of
Participation (AMBAC Insured),
4.300% due 03/01/98........................... 525,346
2,500,000 Piedmont, South Carolina, Municipal Power
Agency, Electric Revenue, Series C
(MBIA Insured), 3.650% due 01/01/19++......... 2,500,000
---------
3,025,346
Tennessee -- 0.9%
1,000,000 Memphis, Tennessee, General Obligation
Bonds, Series A, 3.700% due 08/01/07++........ 1,000,000
Texas -- 9.8%
220,000 Arlington, Texas, Independent School
District, 7.000% due 08/15/98................. 224,117
190,000 Bedford, Texas, General Obligation Bonds
(MBIA Insured), 7.000% due 02/01/98........... 190,491
1,500,000 Brazos River Authority, Texas, Pollution
Control Revenue, Series C (MBIA Insured),
5.100% due 02/01/32+.......................... 1,500,000
235,000 Collin County, Texas, Jail Facilities
Financing Corporation, Revenue Bonds
(FGIC Insured), 8.875% due 03/01/98........... 236,874
1,250,000 Dallas, Texas, General Obligations,
6.000% due 02/15/98........................... 1,253,354
2,000,000 Harris County, Texas, Health Facilities
Development Corporation, Hospital Revenue,
4.900% due 12/01/25+.......................... 2,000,000
1,000,000 Lower Neches Valley Authority, Texas,
Chevron U.S.A. Inc. Project,
3.650% due 02/15/17++......................... 1,000,000
74
The accompanying notes are an integral part of these financial statements.
<PAGE>
---------------------
The Montgomery Funds
---------------------
Federal
Tax-Free Money Fund
---------------------
I n v e s t m e n t s
MUNICIPAL BONDS AND NOTES -- continued
Principal Amount Value (Note 1)
Texas -- continued
$1,000,000 North Central Texas Health Facilities
Development Corporation Revenue,
Presbyterian Medical Center, Series D
(MBIA Insured), 5.000% due 12/01/15+...........$ 1,000,000
North Texas Higher Education Authority
Inc., Texas Student Loan Revenue Refunding:
1,400,000 3.750% due 03/01/99++.......................... 1,400,000
1,200,000 3.750% due 04/01/20++.......................... 1,200,000
1,100,000 Port of Port Arthur, Texas, Navigation
District (Texaco Inc. Project),
5.050% due 10/01/24+........................... 1,100,000
---------
11,104,836
Utah -- 2.6%
1,500,000 Intermountain, Utah, Commercial Paper,
3.800% due 01/09/98............................ 1,500,000
1,500,000 Salt Lake City, Utah, Airport Revenue,
Series A, 3.750% due 06/01/98++................ 1,500,000
---------
3,000,000
Virginia -- 2.4%
2,500,000 Bedford County, Virginia, Commercial
Paper, 3.850% due 01/14/98..................... 2,500,000
200,000 Norfolk, Virginia, General Obligation
Bonds, 6.600% due 10/01/99..................... 207,809
-------
2,707,809
Washington -- 11.2%
1,500,000 Grandview, Washington, Industrial
Development, Revenue Bonds (Shonan
U.S.A. Project), 4.150% due 10/01/04++++....... 1,500,000
1,000,000 King County, Washington, School District
No. 403, General Obligation Bonds,
5.000% due 06/01/98............................ 1,004,653
1,850,000 Panorama City Project (LOC: Key Bank of
Washington), 4.750% due 01/01/27+.............. 1,850,000
1,000,000 Seattle, Washington, Metropolitan
Municipality, 7.375% due 01/01/30 +............ 1,020,000
Washington State, Housing Finance Commission
Multi-Family Mortgage Revenue:
1,500,000 (Glenbrooke Apartments Project),
Series A, 4.300% due 07/01/19++................ 1,500,000
500,000 Nonprofit Housing Revenue, Emerald
Heights Project, 5.100% due 01/01/21+.......... 500,000
1,375,000 Series A (LOC: Pacific First Federal
Savings), 4.150% due 07/01/20++................ 1,375,000
1,500,000 (Wandering Creek Project),
5.250% due 01/01/26+........................... 1,500,000
2,225,000 (Winterhill Apartments Project),
Series A, 4.250% due 07/01/28++................ 2,225,000
200,000 Washington State, General Obligation
Bonds, Series R-92C,
5.100% due 09/01/98............................ 201,413
-------
12,676,066
West Virginia -- 0.5%
500,000 West Virginia School Building Authority,
Revenue Bonds (MBIA Insured),
6.000% due 07/01/98............................ 505,235
Wisconsin -- 4.5%
500,000 Marathon County, Wisconsin, General
Obligation Bonds, Series A,
4.150% due 11/01/98............................ 500,907
200,000 Slinger, Wisconsin, School District,
6.500% due 04/01/98............................ 201,295
1,000,000 Wisconsin State, Health and Educational
Facilities Authority, Revenue Bonds (Alverno
College Project), 5.300% due 11/01/17+......... 1,000,000
Wisconsin State:
2,000,000 Operating Notes, 4.500% due 06/15/98........... 2,005,664
1,000,000 Series A, 6.400% due 05/01/00+................. 1,018,026
410,000 Series C, 5.000% due 05/01/98.................. 411,507
-------
5,137,399
Wyoming -- 0.7%
800,000 Platte County, Wyoming, Pollution Control
Revenue, 4.500% due 07/01/14+.................. 800,000
TOTAL INVESTMENTS -- 116.5%
(At amortized cost*)........................................... 131,893,610
OTHER ASSETS AND LIABILITIES -- (16.5%)
(Net).......................................................... (18,671,152)
----------
NET ASSETS -- 100.0%...........................................$ 113,222,458
===========
* Aggregate cost for federal tax purposes.
+ Floating--rate note, rate resets daily.
++ Floating--rate note, rate resets weekly.
+++ Floating--rate note, rate resets monthly.
++++ Floating--rate note, rate resets quarterly.
+++++ Floating--rate note, rate resets annually.
Abbreviations:
AMBAC American Municipal Bond Assurance Corporation
FGIC Federal Guaranty Insurance Corporation
FSA Federal Security Assurance
GSL Guaranteed Student Loan
LOC Line of Credit
MBIA Municipal Bond Investors Assurance
75
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ---------------------------------
The Montgomery Funds
- ---------------------------------
Statement of
Assets and Liabilities
- ---------------------------------
D e c e m b e r 3 1 , 1 9 9 7
( U n a u d i t e d )
<TABLE>
<CAPTION>
Growth
Fund
Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (note 1)
Securities ........................................................................................... $ 1,088,889,397
Repurchase agreements .................................................................................... 287,584,000
---------------
Total Investments ........................................................................................ 1,376,473,397
Cash ..................................................................................................... 123,536
Foreign currency, at value (Cost $129,265) ............................................................... --
Forward foreign-currency exchange contracts:
Forward foreign-currency exchange contracts to buy, at value
(Contract cost $489,960 and $41,707, respectively) (note 5) .......................................... --
Forward foreign-currency exchange contracts to sell (note 5) ......................................... --
Receivables:
Dividends ............................................................................................ 1,123,679
Interest ............................................................................................. 54,990
Shares of beneficial interest sold ................................................................... 1,912,168
Investment securities sold ........................................................................... 7,786,279
Other assets:
Organization costs (note 1) .......................................................................... 3,769
---------------
Total Assets ............................................................................................. 1,387,477,818
---------------
<CAPTION>
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Forward foreign exchange contracts:
Forward foreign-currency exchange contracts to buy (note 5) .......................................... --
Forward foreign-currency exchange contracts to sell, at value
(Contract cost $1,120,221 and $314,013, respectively) (note 5) ....................................... --
Payables:
Due to California Tax-Free Money Fund ................................................................ --
Shares of beneficial interest redeemed ............................................................... 1,171,299
Investment securities purchased ...................................................................... 20,248,024
Management fees ...................................................................................... 101,481
Administration fees .................................................................................. 73,233
Share marketing plan fees (Class P shares only) ...................................................... 296
Custodian fees ....................................................................................... 15,161
Trustees' fees and expenses .......................................................................... 2,000
Cash overdrafts ...................................................................................... --
Transfer agency and servicing fees ................................................................... 377,910
Accrued liabilities and expenses ..................................................................... 332,883
---------------
Total Liabilities ........................................................................................ 22,322,287
---------------
Net Assets ............................................................................................... $ 1,365,155,531
---------------
Investments at identified cost ........................................................................... $ 1,141,196,759
<CAPTION>
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) .................................... $ 108,727
Accumulated net realized gain/(loss) on securities sold, forward foreign-currency exchange contracts,
futures contracts, foreign-currency transactions and securities sold short ........................... (2,737,356)
Net unrealized appreciation/(depreciation) of investments, forward foreign-currency
exchange contracts, foreign-currency transactions and other assets ................................... 235,276,201
Shares of beneficial interest ............................................................................ 623,716
Additional paid-in capital ............................................................................... 1,131,884,243
---------------
Net Assets ............................................................................................... $ 1,365,155,531
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Class R shares ....................................................................................... $ 1,364,984,678
Class P shares ....................................................................................... 170,853
---------------
Net Assets ............................................................................................... $ 1,365,155,531
Number of Fund shares outstanding:
Class R shares ....................................................................................... 62,363,834
Class P shares ....................................................................................... 7,772
---------------
Total Shares ............................................................................................. 62,371,606
Class R shares:
Net asset value, offering and redemption price per share outstanding ................................. $ 21.89
---------------
Class P shares:
Net asset value, offering and redemption price per share outstanding ................................. $ 21.98
---------------
</TABLE>
76
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Small Cap Small Cap Micro Cap
Assets: Opportunities Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments in securities, at value (note 1)
Securities ....................................................................$ 233,114,906 $ 223,407,547 $ 327,313,535
Repurchase agreements ............................................................. 10,436,000 6,428,000 43,162,000
------------- ------------- -------------
Total Investments ................................................................. 243,550,906 229,835,547 370,475,535
Cash .............................................................................. 23,586 -- 78,087
Foreign currency, at value (Cost $129,265) ........................................ -- -- --
Forward foreign-currency exchange contracts:
Forward foreign-currency exchange contracts to buy, at value
(Contract cost $489,960 and $41,707, respectively) (note 5) ................... -- -- --
Forward foreign-currency exchange contracts to sell (note 5) .................. -- -- --
Receivables:
Dividends ..................................................................... 54,151 19,690 61,305
Interest ...................................................................... 1,992 1,228 8,243
Shares of beneficial interest sold ............................................ 987,535 120,248 121,354
Investment securities sold .................................................... 1,081,319 867,532 556,625
Other assets:
Organization costs (note 1) ................................................... 8,088 -- 2,802
------------- ------------- -------------
Total Assets ...................................................................... 245,707,577 230,844,245 371,303,951
------------- ------------- -------------
<CAPTION>
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Forward foreign exchange contracts:
Forward foreign-currency exchange contracts to buy (note 5) ................... -- -- --
Forward foreign-currency exchange contracts to sell, at value
(Contract cost $1,120,221 and $314,013, respectively) (note 5) ................ -- -- --
Payables:
Due to California Tax-Free Money Fund ......................................... 3,000 -- --
Shares of beneficial interest redeemed ........................................ 589,286 60,423 127,246
Investment securities purchased ............................................... 813,162 1,000,039 2,660,513
Management fees ............................................................... 1,993 18,576 39,693
Administration fees ........................................................... 14,155 13,084 20,591
Share marketing plan fees (Class P shares only) ............................... 28 13,882 --
Custodian fees ................................................................ 3,352 3,280 7,118
Trustees' fees and expenses ................................................... 500 1,000 1,993
Cash overdrafts ............................................................... -- 354,350 --
Transfer agency and servicing fees ............................................ 51,366 12,783 198,363
Accrued liabilities and expenses .............................................. 62,307 37,518 164,566
------------- ------------- -------------
Total Liabilities ................................................................. 1,539,149 1,514,935 3,220,083
------------- ------------- -------------
Net Assets ........................................................................$ 244,168,428 $ 229,329,310 $ 368,083,868
------------- ------------- -------------
Investments at identified cost ....................................................$ 205,238,569 $ 164,567,803 $ 255,407,656
<CAPTION>
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Undistributed net investment income/(accumulated net investment loss) .............$ (1,274,531) $ (618,973) $ (1,605,309)
Accumulated net realized gain/(loss) on securities sold, forward
foreign-currency exchange contracts,
futures contracts, foreign-currency transactions and securities sold short .... 1,158,613 5,152,273 10,154,683
Net unrealized appreciation/(depreciation) of investments, forward foreign-currency
exchange contracts, foreign-currency transactions and other assets ............ 38,312,337 65,267,744 115,067,879
Shares of beneficial interest ..................................................... 130,313 116,855 181,226
Additional paid-in capital ........................................................ 205,841,696 159,411,411 244,285,389
------------- ------------- -------------
Net Assets ........................................................................$ 244,168,428 $ 229,329,310 $ 368,083,868
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class R shares ................................................................ 244,156,994 $ 207,627,597 $ 368,083,868
Class P shares ................................................................ 11,434 21,701,713 N/A
------------- ------------- -------------
Net Assets ........................................................................ 244,168,428 $ 229,329,310 $ 368,083,868
Number of Fund shares outstanding:
Class R shares ................................................................ 13,030,729 10,571,596 18,122,631
Class P shares ................................................................ 619 1,113,940 N/A
------------- ------------- -------------
Total Shares ...................................................................... 13,031,348 11,685,536 18,122,631
Class R shares:
Net asset value, offering and redemption price per share outstanding .......... 18.74 $ 19.64 $ 20.31
------------- ------------- -------------
Class P shares:
Net asset value, offering and redemption price per share outstanding .......... 18.47 $ 19.48 N/A
------------- ------------- -------------
<CAPTION>
Equity Income International International
Assets Fund Growth Fund Small Cap Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments in securities, at value (note 1)
Securities ....................................................................$ 41,892,187 $ 32,028,564 $ 37,956,695
Repurchase agreements ............................................................. 2,681,000 -- 6,452,000
------------- ------------- -------------
Total Investments ................................................................. 44,573,187 32,028,564 44,408,695
Cash .............................................................................. -- -- --
Foreign currency, at value (Cost $129,265) ........................................ -- 127,704 --
Forward foreign-currency exchange contracts:
Forward foreign-currency exchange contracts to buy, at value
(Contract cost $489,960 and $41,707, respectively) (note 5) ................... -- 486,646 40,723
Forward foreign-currency exchange contracts to sell (note 5) .................. -- 1,120,121 314,013
Receivables:
Dividends ..................................................................... 104,205 97,098 46,595
Interest ...................................................................... 510 1,441 1,847
Shares of beneficial interest sold ............................................ 271,137 130,153 57,499
Investment securities sold .................................................... -- 431,789 787,408
Other assets:
Organization costs (note 1) ................................................... 4,793 4,794 3,912
------------- ------------- -------------
Total Assets ...................................................................... 44,953,832 34,428,310 45,660,692
------------- ------------- -------------
<CAPTION>
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Forward foreign exchange contracts:
Forward foreign-currency exchange contracts to buy (note 5) ................... -- 489,960 41,707
Forward foreign-currency exchange contracts to sell, at value
(Contract cost $1,120,221 and $314,013, respectively) (note 5) ................ -- 1,097,222 311,848
Payables:
Due to California Tax-Free Money Fund ......................................... -- -- --
Shares of beneficial interest redeemed ........................................ 26,524 214,413 170,859
Investment securities purchased ............................................... 854,654 635,649 79,701
Management fees ............................................................... 10,428 25,605 42,947
Administration fees ........................................................... 2,505 1,942 2,471
Share marketing plan fees (Class P shares only) ............................... 1,521 11 7
Custodian fees ................................................................ 1,113 16,455 9,316
Trustees' fees and expenses ................................................... 1,500 1,500 1,000
Cash overdrafts ............................................................... 19,328 182,651 46,420
Transfer agency and servicing fees ............................................ 14,946 9,510 17,999
Accrued liabilities and expenses .............................................. 30,720 55,790 29,698
------------- ------------- -------------
Total Liabilities ................................................................. 963,239 2,730,708 753,973
------------- ------------- -------------
Net Assets ........................................................................$ 43,990,593 $ 31,697,602 $ 44,906,719
------------- ------------- -------------
Investments at identified cost ....................................................$ 38,485,550 $ 29,736,897 $ 45,888,212
<CAPTION>
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Undistributed net investment income/(accumulated net investment loss) .............$ (224) $ (83,086) $ (433,023)
Accumulated net realized gain/(loss) on securities sold, forward
foreign-currency exchange contracts,
futures contracts, foreign-currency transactions and securities sold short .... 388,615 (652,989) (1,593,667)
Net unrealized appreciation/(depreciation) of investments, forward foreign-currency
exchange contracts, foreign-currency transactions and other assets ............ 6,087,637 2,313,246 (1,482,491)
Shares of beneficial interest ..................................................... 24,738 21,480 35,418
Additional paid-in capital ........................................................ 37,489,827 30,098,951 48,380,482
------------- ------------- -------------
Net Assets ........................................................................$ 43,990,593 $ 31,697,602 $ 44,906,719
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class R shares ................................................................$ 42,377,527 $ 31,693,589 $ 44,902,288
Class P shares ................................................................ 1,613,066 4,013 4,431
------------- ------------- -------------
Net Assets ........................................................................ $ 43,990,593 $ 31,697,602 $ 44,906,719
Number of Fund shares outstanding:
Class R shares ................................................................ 2,383,227 2,147,729 3,541,428
Class P shares ................................................................ 90,610 272 349
------------- ------------- -------------
Total Shares ...................................................................... 2,473,837 2,148,001 3,541,777
Class R shares:
Net asset value, offering and redemption price per share outstanding .......... $ 17.78 $ 14.76 $ 12.68
------------- ------------- -------------
Class P shares:
Net asset value, offering and redemption price per share outstanding .......... $ 17.80 $ 14.75 $ 12.70
------------- ------------- -------------
</TABLE>
77
<PAGE>
- ---------------------------------
The Montgomery Funds
- ---------------------------------
Statements of
Assets and Liabilities
- ---------------------------------
D e c e m b e r 3 1 , 1 9 9 7
(Unaudited)
<TABLE>
<CAPTION>
Emerging
Markets Fund
Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (note 1)
Securities ................................................................................... $ 951,740,190
Repurchase agreements ........................................................................ 15,319,000
---------------
Total Investments ................................................................................ 967,059,190
Cash ............................................................................................. 3,175,849
Foreign currency, at value (Cost $10,912,297, $335, $15,329 and $6,144,018, respectively) ........ 10,247,279
Forward foreign-currency exchange contracts:
Forward foreign-currency exchange contracts to buy, at value
(Contract cost $1,714,077, $6,727, $168,173 and $6,265,061,
respectively) (note 5) ................................................................... 1,705,424
Forward foreign-currency exchange contracts to sell (note 5) ................................. 1,612,765
Receivables:
Dividends .................................................................................... 3,597,434
Interest ..................................................................................... 78,001
Expenses absorbed by Manager ................................................................. --
Shares of beneficial interest sold ........................................................... 7,001,117
Investment securities sold ................................................................... 11,363,781
Other assets:
Segregated cash for equity swap agreements ................................................... --
Organization costs (note 1) .................................................................. --
---------------
Total Assets ..................................................................................... 1,005,840,840
---------------
<CAPTION>
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Forward foreign exchange contracts:
Forward foreign-currency exchange contracts to buy (note 5) .................................. 1,714,077
Forward foreign-currency exchange contracts to sell, at value
(Contract cost $1,612,765 and $6,396,296, respectively) (note 5) ............................. 1,617,625
Payables:
Equity swaps ................................................................................. --
Shares of beneficial interest redeemed ....................................................... 7,712,667
Investment securities purchased .............................................................. 7,536,786
Reverse repurchase agreement ................................................................. --
Management fees .............................................................................. 85,737
Administration fees .......................................................................... 51,503
Share marketing plan fees (Class P shares only) .............................................. 818
Custodian fees ............................................................................... 330,849
Trustees' fees and expenses .................................................................. 1,500
Cash overdrafts .............................................................................. --
Transfer agency and servicing fees ........................................................... 286,725
Accrued liabilities and expenses ............................................................. 226,751
---------------
Total Liabilities ................................................................................ 19,565,038
---------------
Net Assets ....................................................................................... $ 986,275,802
---------------
Investments at identified cost ................................................................... $ 898,189,983
<CAPTION>
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) ............................ $ (9,038,997)
Accumulated net realized gain/(loss) on securities sold, forward foreign-currency
exchange contracts, futures contracts, foreign-currency transactions and securities sold short (116,367,065)
Net unrealized appreciation/(depreciation) of investments, forward foreign-currency
exchange contracts, foreign-currency transactions, equity swaps and net other assets ........ 67,398,541
Shares of beneficial interest .................................................................... 762,879
Additional paid-in capital ....................................................................... 1,043,520,444
---------------
Net Assets ....................................................................................... $ 986,275,802
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Class R shares ............................................................................... $ 985,691,522
Class P shares ............................................................................... 584,280
---------------
Net Assets ....................................................................................... $ 986,275,802
Number of Fund shares outstanding:
Class R shares ............................................................................... 76,242,387
Class P shares ............................................................................... 45,555
---------------
Total Shares ..................................................................................... 76,287,942
Class R shares:
Net asset value, offering and redemption price per share outstanding ......................... $ 12.93
---------------
Class P shares:
Net asset value, offering and redemption price per share outstanding ......................... $ 12.83
---------------
</TABLE>
78
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Emerging Latin America
Asia Fund Fund
Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments in securities, at value (note 1)
Securities ................................................................................... $ 27,147,332 $ 7,422,605
Repurchase agreements ........................................................................ 2,681,000 --
------------- -------------
Total Investments ................................................................................ 29,828,332 7,422,605
Cash ............................................................................................. -- --
Foreign currency, at value (Cost $10,912,297, $335, $15,329 and $6,144,018, respectively) ........ 320 --
Forward foreign-currency exchange contracts:
Forward foreign-currency exchange contracts to buy, at value
(Contract cost $1,714,077, $6,727, $168,173 and $6,265,061, .................................. -- --
respectively) (note 5) ................................................................... -- --
Forward foreign-currency exchange contracts to sell (note 5)
Receivables:
Dividends .................................................................................... 41,466 47,792
Interest ..................................................................................... 512 --
Expenses absorbed by Manager ................................................................. -- 19,996
Shares of beneficial interest sold ........................................................... 500,690 366,642
Investment securities sold ................................................................... 1,830,795 --
Other assets:
Segregated cash for equity swap agreements ................................................... 3,233,689 --
Organization costs (note 1) .................................................................. 12,531 6,250
------------- -------------
Total Assets ..................................................................................... 35,448,335 7,863,285
------------- -------------
<CAPTION>
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Forward foreign exchange contracts:
Forward foreign-currency exchange contracts to buy (note 5) .................................. -- --
Forward foreign-currency exchange contracts to sell, at value
(Contract cost $1,612,765 and $6,396,296, respectively) (note 5) ............................. -- --
Payables:
Equity swaps ................................................................................. 177,879 --
Shares of beneficial interest redeemed ....................................................... 2,031,841 183,530
Investment securities purchased .............................................................. 656,670 --
Reverse repurchase agreement ................................................................. -- --
Management fees .............................................................................. 24,927 --
Administration fees .......................................................................... 1,971 437
Share marketing plan fees (Class P shares only) .............................................. -- --
Custodian fees ............................................................................... 11,977 2,139
Trustees' fees and expenses .................................................................. 1,000 100
Cash overdrafts .............................................................................. 420,033 123,245
Transfer agency and servicing fees ........................................................... 15,751 2,073
Accrued liabilities and expenses ............................................................. 22,306 3,803
------------- -------------
Total Liabilities ................................................................................ 3,364,355 315,327
------------- -------------
Net Assets ....................................................................................... $ 32,083,980 $ 7,547,958
------------- -------------
Investments at identified cost ................................................................... $ 38,819,764 $ 8,385,235
<CAPTION>
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) ............................ $ (740,411) $ 48,810
Accumulated net realized gain/(loss) on securities sold, forward foreign-currency
exchange contracts, futures contracts, foreign-currency transactions and securities sold short (5,573,560) (244,515)
Net unrealized appreciation/(depreciation) of investments, forward foreign-currency
exchange contracts, foreign-currency transactions, equity swaps and net other assets ........ (8,932,632) (962,658)
Shares of beneficial interest .................................................................... 34,462 6,864
Additional paid-in capital ....................................................................... 47,296,121 8,699,457
------------- -------------
Net Assets ....................................................................................... $ 32,083,980 $ 7,547,958
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Class R shares ............................................................................... $ 32,083,980 $ 7,547,958
Class P shares ............................................................................... $ N/A N/A
------------- -------------
Net Assets ....................................................................................... 32,083,980 $ 7,547,958
Number of Fund shares outstanding:
Class R shares ............................................................................... 3,446,249 686,394
Class P shares ............................................................................... N/A N/A
------------- -------------
Total Shares ..................................................................................... 3,446,249 686,394
Class R shares:
Net asset value, offering and redemption price per share outstanding ......................... 9.31 $ 11.00
------------- -------------
Class P shares:
Net asset value, offering and redemption price per share outstanding ......................... N/A N/A
------------- -------------
<CAPTION>
Global Global
Opportunities Communications
Fund Fund
Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments in securities, at value (note 1)
Securities ................................................................................... $ 23,149,139 $ 132,963,050
Repurchase agreements ........................................................................ -- 597,000
------------- -------------
Total Investments ................................................................................ 23,149,139 133,560,050
Cash ............................................................................................. -- --
Foreign currency, at value (Cost $10,912,297, $335, $15,329 and $6,144,018, respectively) ........ 15,006 --
Forward foreign-currency exchange contracts:
Forward foreign-currency exchange contracts to buy, at value
(Contract cost $1,714,077, $6,727, $168,173 and $6,265,061, .................................. 6,568 164,206
respectively) (note 5) ................................................................... -- --
Forward foreign-currency exchange contracts to sell (note 5)
Receivables:
Dividends .................................................................................... 57,718 83,403
Interest ..................................................................................... -- 114
Expenses absorbed by Manager ................................................................. -- --
Shares of beneficial interest sold ........................................................... 16,299 31,044
Investment securities sold ................................................................... 690,200 2,800,807
Other assets:
Segregated cash for equity swap agreements ................................................... -- --
Organization costs (note 1) .................................................................. 3,831 5,141
------------- -------------
Total Assets ..................................................................................... 23,938,761 136,644,765
------------- -------------
<CAPTION>
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Forward foreign exchange contracts:
Forward foreign-currency exchange contracts to buy (note 5) .................................. 6,727 168,173
Forward foreign-currency exchange contracts to sell, at value
(Contract cost $1,612,765 and $6,396,296, respectively) (note 5) ............................. -- --
Payables:
Equity swaps ................................................................................. -- --
Shares of beneficial interest redeemed ....................................................... 96,450 260,742
Investment securities purchased .............................................................. 387,721 164,205
Reverse repurchase agreement ................................................................. -- --
Management fees .............................................................................. 8,662 7,952
Administration fees .......................................................................... 1,358 8,102
Share marketing plan fees (Class P shares only) .............................................. -- --
Custodian fees ............................................................................... 5,913 31,102
Trustees' fees and expenses .................................................................. 1,000 1,000
Cash overdrafts .............................................................................. 737,004 168,683
Transfer agency and servicing fees ........................................................... 6,291 36,426
Accrued liabilities and expenses ............................................................. 23,872 40,776
------------- -------------
Total Liabilities ................................................................................ 1,274,998 887,161
------------- -------------
Net Assets ....................................................................................... $ 22,663,763 $ 135,757,604
------------- -------------
Investments at identified cost ................................................................... $ 21,264,540 $ 105,984,671
<CAPTION>
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) ............................ $ (178,454) $ (1,213,276)
Accumulated net realized gain/(loss) on securities sold, forward foreign-currency
exchange contracts, futures contracts, foreign-currency transactions and securities sold short (156,342) (2,148,658)
Net unrealized appreciation/(depreciation) of investments, forward foreign-currency
exchange contracts, foreign-currency transactions, equity swaps and net other assets ........ 1,883,325 27,548,415
Shares of beneficial interest .................................................................... 15,477 87,175
Additional paid-in capital ....................................................................... 21,099,757 111,483,948
------------- -------------
Net Assets ....................................................................................... $ 22,663,763 $ 135,757,604
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Class R shares ............................................................................... $ 22,663,763 $ 135,757,604
Class P shares ............................................................................... N/A N/A
------------- -------------
Net Assets ....................................................................................... $ 22,663,763 $ 135,757,604
Number of Fund shares outstanding:
Class R shares ............................................................................... 1,547,717 8,717,510
Class P shares ............................................................................... N/A N/A
------------- -------------
Total Shares ..................................................................................... 1,547,717 8,717,510
Class R shares:
Net asset value, offering and redemption price per share outstanding ......................... $ 14.64 $ 15.57
------------- -------------
Class P shares:
Net asset value, offering and redemption price per share outstanding ......................... N/A N/A
------------- -------------
<CAPTION>
U.S. Asset
Select 50 Allocation
Fund Fund
Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments in securities, at value (note 1)
Securities ................................................................................... $ 214,094,208 $ 136,005,110
Repurchase agreements ........................................................................ 10,729,000 --
------------- -------------
Total Investments ................................................................................ 224,823,208 136,005,110
Cash ............................................................................................. 26,923 --
Foreign currency, at value (Cost $10,912,297, $335, $15,329 and $6,144,018, respectively) ........ 5,794,600 --
Forward foreign-currency exchange contracts:
Forward foreign-currency exchange contracts to buy, at value
(Contract cost $1,714,077, $6,727, $168,173 and $6,265,061, .................................. 5,241,299 --
respectively) (note 5) ................................................................... 6,396,296 --
Forward foreign-currency exchange contracts to sell (note 5)
Receivables:
Dividends .................................................................................... 235,965 353,940
Interest ..................................................................................... 2,049 --
Expenses absorbed by Manager ................................................................. 7,023 --
Shares of beneficial interest sold ........................................................... 1,578,176 870,656
Investment securities sold ................................................................... 2,879,387 --
Other assets:
Segregated cash for equity swap agreements ................................................... -- --
Organization costs (note 1) .................................................................. 4,807 8,146
------------- -------------
Total Assets ..................................................................................... 246,989,733 137,237,852
------------- -------------
<CAPTION>
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Forward foreign exchange contracts:
Forward foreign-currency exchange contracts to buy (note 5) .................................. 6,265,061 --
Forward foreign-currency exchange contracts to sell, at value
(Contract cost $1,612,765 and $6,396,296, respectively) (note 5) ............................. 4,827,608 --
Payables:
Equity swaps ................................................................................. -- --
Shares of beneficial interest redeemed ....................................................... 628,947 184,293
Investment securities purchased .............................................................. 3,752,778 202,548
Reverse repurchase agreement ................................................................. -- --
Management fees .............................................................................. 23,559 --
Administration fees .......................................................................... 13,624 --
Share marketing plan fees (Class P shares only) .............................................. 131 122
Custodian fees ............................................................................... 14,266 750
Trustees' fees and expenses .................................................................. 1,000 1,750
Cash overdrafts .............................................................................. -- 77
Transfer agency and servicing fees ........................................................... 58,387 34,822
Accrued liabilities and expenses ............................................................. 81,858 26,434
------------- -------------
Total Liabilities ................................................................................ 15,667,219 450,796
------------- -------------
Net Assets ....................................................................................... $ 231,322,514 $ 136,787,056
------------- -------------
Investments at identified cost ................................................................... $ 206,654,002 $ 143,569,814
<CAPTION>
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) ............................ $ 13,925 $ (3,737,822)
Accumulated net realized gain/(loss) on securities sold, forward foreign-currency
exchange contracts, futures contracts, foreign-currency transactions and securities sold short (1,206,516) 9,680,475
Net unrealized appreciation/(depreciation) of investments, forward foreign-currency
exchange contracts, foreign-currency transactions, equity swaps and net other assets ........ 18,390,286 (7,564,704)
Shares of beneficial interest .................................................................... 122,879 75,956
Additional paid-in capital ....................................................................... 214,001,940 138,333,151
------------- -------------
Net Assets ....................................................................................... $ 231,322,514 $ 136,787,056
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Class R shares ............................................................................... $ 231,244,543 $ 136,706,502
Class P shares ............................................................................... 77,971 80,554
------------- -------------
Net Assets ....................................................................................... $ 231,322,514 $ 136,787,056
Number of Fund shares outstanding:
Class R shares ............................................................................... 12,283,650 7,591,134
Class P shares ............................................................................... 4,204 4,466
------------- -------------
Total Shares ..................................................................................... 12,287,854 7,595,600
Class R shares:
Net asset value, offering and redemption price per share outstanding ......................... $ 18.83 $ 18.01
------------- -------------
Class P shares:
Net asset value, offering and redemption price per share outstanding ......................... $ 18.55 $ 18.04
------------- -------------
</TABLE>
79
<PAGE>
- ------------------------
The Montgomery Funds
- ------------------------
Statements of
Assets and Liabilities
- ------------------------
<TABLE>
<CAPTION>
Global
D e c e m b e r 3 1 , 1 9 9 7 Asset Allocation
( U n a u d i t e d ) Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
<S> <C>
Investments in securities, at value (note 1)
Securities ........................................................................................... $ 1,617,596
Repurchase agreements ................................................................................ --
-----------
Total Investments 1,617,596
Cash ..................................................................................................... 2,455
Receivables:
Receivable from Small Cap Opportunities Fund ......................................................... --
Dividends ............................................................................................ 2,930
Interest ............................................................................................. --
Expenses absorbed by Manager ......................................................................... 11,467
Shares of beneficial interest sold ................................................................... 2,049
Investment securities sold ........................................................................... 504
Other assets:
Organization costs (note 1) .......................................................................... 12,231
-----------
Total Assets 1,649,232
-----------
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Payable:
Deferred fee income on dollar roll transactions ...................................................... --
Deferred gain on dollar roll transactions ............................................................ --
Shares of beneficial interest redeemed ............................................................... 1,220
Investment securities purchased ...................................................................... --
Management fees ...................................................................................... --
Administration fees .................................................................................. --
Accounting fees ...................................................................................... 1,000
Share marketing plan fees (Class P shares only) ...................................................... --
Custodian fees ....................................................................................... --
Legal and audit fees ................................................................................. 2,728
Printing fees ........................................................................................ 600
Dividends ............................................................................................ --
Trustees' fees and expenses .......................................................................... 750
Cash overdrafts ...................................................................................... --
Transfer agency and servicing fees ................................................................... 1,559
Purchase of investments under roll agreements ........................................................ --
Accrued liabilities and expenses ..................................................................... 265
-----------
Total Liabilities 8,122
-----------
Net Assets $ 1,641,110
-----------
Investments at identified cost ........................................................................... $ 1,696,242
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) .................................... $ --
Accumulated net realized gain/(loss) on securities sold, forward foreign-currency exchange contracts,
futures contracts, foreign-currency transactions and securities sold short ........................... 59,406
Net unrealized appreciation/(depreciation) of investments, forward foreign-currency exchange
contracts, foreign-currency transactions and net other assets ........................................ (78,646)
Shares of beneficial interest ............................................................................ 1,344
Additional paid-in capital ............................................................................... 1,659,006
-----------
Net Assets $ 1,641,110
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Class R shares ....................................................................................... $ 1,641,110
Class P shares ....................................................................................... N/A
-----------
Net Assets $ 1,641,110
Number of Fund shares outstanding:
Class R shares ....................................................................................... 134,374
Class P shares ....................................................................................... N/A
-----------
Total Shares 134,374
Class R shares:
Net asset value, offering and redemption price per share outstanding ................................. $ 12.21
-----------
Class P shares:
Net asset value, offering and redemption price per share outstanding ................................. N/A
-----------
</TABLE>
80
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Short Duration California Tax-Free
Total Return Government Intermediate
Bond Fund Bond Fund Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C> <C>
Investments in securities, at value (note 1)
Securities ............................................................... $ 79,576,935 $ 53,521,112 $ 27,861,005
Repurchase agreements .................................................... 525,000 -- --
------------ ------------ ------------
Total Investments 80,101,935 53,521,112 27,861,005
Cash ......................................................................... -- -- --
Receivables:
Receivable from Small Cap Opportunities Fund ............................. -- -- --
Dividends ................................................................ -- -- --
Interest ................................................................. 1,126,986 401,682 446,937
Expenses absorbed by Manager ............................................. -- -- --
Shares of beneficial interest sold ....................................... 298,417 475,938 583,693
Investment securities sold ............................................... 13,530,002 2,342,340 --
Other assets:
Organization costs (note 1) .............................................. 25,895 -- 4,221
------------ ------------ ------------
Total Assets 95,083,235 56,741,072 28,895,856
------------ ------------ ------------
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Payables:
Deferred fee income on dollar roll transactions .......................... 5,556 -- --
Deferred gain on dollar roll transactions ................................ 37,031 -- --
Shares of beneficial interest redeemed ................................... 176 156,196 1,030
Investment securities purchased .......................................... 18,749,889 2,519,210 --
Management fees .......................................................... 42,114 14,114 5,341
Administration fees ...................................................... 3,344 2,430 1,140
Accounting fees .......................................................... 2,500 2,000 2,000
Share marketing plan fees (Class P shares only) .......................... -- 3 --
Custodian fees ........................................................... 2,197 1,728 1,018
Legal and audit fees ..................................................... 5,778 19,000 13,000
Printing fees ............................................................ 500 9,678 3,000
Dividends ................................................................ -- 44,579 --
Trustees' fees and expenses .............................................. 1,000 1,500 2,000
Cash overdrafts .......................................................... 66,088 130,885 160,985
Transfer agency and servicing fees ....................................... 1,412 8,373 9,373
Purchase of investments under roll agreements ............................ 22,266 -- --
Accrued liabilities and expenses ......................................... 22,254 9,436 8,249
------------ ------------ ------------
Total Liabilities 18,962,105 2,919,132 207,136
------------ ------------ ------------
Net Assets $ 76,121,130 $ 53,821,940 $ 28,688,720
------------ ------------ ------------
Investments at identified cost ............................................... $ 78,504,460 $ 53,231,892 $ 26,812,626
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) ........ $ (3,510) $ (46,506) $ 920
Accumulated net realized gain/(loss) on securities sold, forward
foreign-currency exchange contracts, futures contracts,
foreign-currency transactions and securities sold short .................. 783,222 115,601 (126,143)
Net unrealized appreciation/(depreciation) of investments, forward
foreign-currency exchange contracts, foreign-currency transactions
and net other assets ..................................................... 1,597,475 289,220 1,048,379
Shares of beneficial interest ................................................ 61,936 53,314 22,304
Additional paid-in capital ................................................... 73,682,007 53,410,311 27,743,260
------------ ------------ ------------
Net Assets $ 76,121,130 $ 53,821,940 $ 28,688,720
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Class R shares ........................................................... $ 76,121,130 $ 53,821,940 $ 28,688,720
Class P shares ........................................................... N/A N/A N/A
------------ ------------ ------------
Net Assets $ 76,121,130 $ 53,821,940 $ 28,688,720
Number of Fund shares outstanding:
Class R shares ........................................................... 6,193,551 5,331,400 2,230,440
Class P shares ........................................................... N/A N/A N/A
------------ ------------ ------------
Total Shares ................................................................. 6,193,551 5,331,400 2,230,440
Class R shares:
Net asset value, offering and redemption price per share outstanding ..... $ 12.29 $ 10.10 $ 12.86
------------ ------------ ------------
Class P shares:
Net asset value, offering and redemption price per share outstanding ..... N/A N/A N/A
------------ ------------ ------------
<CAPTION>
Government California Federal
Reserve Tax-Free Tax-Free
Fund Money Fund Money Fund
Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments in securities, at value (note 1)
Securities ............................................................... $454,503,515 $199,924,161 $131,893,610
Repurchase agreements .................................................... 227,413,000 -- --
------------ ------------ ------------
Total Investments 681,916,515 199,924,161 131,893,610
Cash ......................................................................... 238,156 -- --
Receivables:
Receivable from Small Cap Opportunities Fund ............................. -- 3,000 --
Dividends ................................................................ -- -- --
Interest ................................................................. 5,998,619 1,178,005 1,024,156
Expenses absorbed by Manager ............................................. -- -- --
Shares of beneficial interest sold ....................................... -- 95,431 36,000
Investment securities sold ............................................... 344,528 8,022,729 1,000,101
Other assets:
Organization costs (note 1) .............................................. -- 429 2,757
------------ ------------ ------------
Total Assets 688,497,818 209,223,755 133,956,624
------------ ------------ ------------
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Payables:
Deferred fee income on dollar roll transactions .......................... -- -- --
Deferred gain on dollar roll transactions ................................ -- -- --
Shares of beneficial interest redeemed ................................... 961,943 254,614 26,082
Investment securities purchased .......................................... 18,959,801 16,027,545 11,440,760
Management fees .......................................................... 17,319 59,685 36,037
Administration fees ...................................................... 25,133 7,744 4,928
Accounting fees .......................................................... 25,135 4,800 4,000
Share marketing plan fees (Class P shares only) .......................... 1 -- --
Custodian fees ........................................................... 8,472 3,761 3,288
Legal and audit fees ..................................................... 27,500 7,000 11,000
Printing fees ............................................................ 25,000 2,500 7,317
Dividends ................................................................ -- -- 276,499
Trustees' fees and expenses .............................................. 2,000 750 1,500
Cash overdrafts .......................................................... -- 14,474,697 8,902,973
Transfer agency and servicing fees ....................................... 34,568 3,821 4,082
Purchase of investments under roll agreements ............................ -- -- --
Accrued liabilities and expenses ......................................... 109,684 18,101 15,700
------------ ------------ ------------
Total Liabilities 20,196,556 30,865,018 20,734,166
------------ ------------ ------------
Net Assets $668,301,262 $178,358,737 $113,222,458
------------ ------------ ------------
Investments at identified cost ............................................... $681,916,515 $199,924,161 $131,893,610
Net Assets Consist of:
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss) ........ $ (44,895) $ (60) $ (880)
Accumulated net realized gain/(loss) on securities sold, forward
foreign-currency exchange contracts, futures contracts,
foreign-currency transactions and securities sold short .................. (38,166) (6,745) (873)
Net unrealized appreciation/(depreciation) of investments, forward
foreign-currency exchange contracts, foreign-currency transactions
and net other assets ..................................................... -- -- --
Shares of beneficial interest ................................................ 6,683,886 1,783,663 1,132,244
Additional paid-in capital ................................................... 661,700,437 176,581,879 112,091,967
------------ ------------ ------------
Net Assets $668,301,262 $178,358,737 $113,222,458
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Class R shares ........................................................... $668,301,260 $178,358,737 $113,222,458
Class P shares ........................................................... 2 N/A N/A
------------ ------------ ------------
Net Assets $668,301,262 $178,358,737 $113,222,458
Number of Fund shares outstanding:
Class R shares ........................................................... 668,388,626 178,366,318 113,224,380
Class P shares ........................................................... 2 N/A N/A
------------ ------------ ------------
Total Shares ................................................................. 668,388,628 178,366,318 113,224,380
Class R shares:
Net asset value, offering and redemption price per share outstanding ..... $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------
Class P shares:
Net asset value, offering and redemption price per share outstanding ..... $ 1.00 N/A N/A
------------ ------------ ------------
</TABLE>
81
<PAGE>
- ---------------------------------
The Montgomery Funds
- ---------------------------------
Statements of Operations
- ---------------------------------
Six Month Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Growth Opportunities Small Cap
Fund Fund Fund
Net Investment Income:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest ........................................................................ $ 7,275,230 $ 362,353 $ 173,135
Dividends ....................................................................... 5,607,441 241,233 592,126
------------ ------------ ------------
Total Income .................................................................... 12,882,671 603,586 765,261
------------ ------------ ------------
Expenses:
Management fee (note 2) ......................................................... 6,016,330 1,922,791 1,106,196
Custodian fee ................................................................... 39,173 13,257 11,590
Transfer agency and servicing fees .............................................. 1,011,236 233,616 58,842
Administration fee (note 2) ..................................................... 419,718 87,125 77,433
Share marketing plan fee (note 3) (Class P shares only) ......................... 236 14 14,124
Legal and audit fees ............................................................ 110,077 26,112 23,379
Trustees' fees .................................................................. 4,559 1,452 1,589
Registration fees ............................................................... 76,989 17,072 12,281
Accounting expenses ............................................................. 183,178 35,503 26,841
Printing fees ................................................................... 219,723 58,536 30,348
Amortization of organization expenses (note 1) .................................. 2,857 1,401 --
Other ........................................................................... 125,911 25,500 21,611
Interest expense ................................................................ -- -- --
------------ ------------ ------------
Total Expenses .................................................................. 8,209,987 2,422,379 1,384,234
Fees deferred and/or expenses absorbed by Manager (note 2) ...................... -- (544,262) --
------------ ------------ ------------
Net Expenses .................................................................... 8,209,987 1,878,117 1,384,234
------------ ------------ ------------
Net Investment Income/(Loss) .................................................... 4,672,684 (1,274,531) (618,973)
------------ ------------ ------------
<CAPTION>
Net Realized and Unrealized Gain/(Loss) on Investments:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net realized gain/(loss) from:
Security transactions and interest equity swaps ............................. 88,663,355 24,822,182 16,317,433
Forward foreign-currency exchange contracts ................................. 1,591 -- --
Foreign-currency transactions and net other assets .......................... (1,397) -- --
------------ ------------ ------------
Net Realized Gain/(Loss) on Investments During the Period ....................... 88,663,549 24,822,182 16,317,433
------------ ------------ ------------
Net change in unrealized appreciation/(depreciation) of:
Securities .................................................................. 10,459 (3,557,146) 17,631,260
Forward foreign-currency exchange contracts ................................. -- -- --
Foreign-currency transactions and net other assets .......................... (249) -- --
------------ ------------ ------------
Net Unrealized Appreciation/(Depreciation) of Investments During the Period ..... 10,210 (3,557,146) 17,631,260
------------ ------------ ------------
Net Realized and Unrealized Gain/(Loss) on Investments .......................... 88,673,759 21,265,036 33,948,693
------------ ------------ ------------
Net Increase/(Decrease) in Net Assets Resulting from Operations ................. $ 93,346,443 $ 19,990,505 $ 33,329,720
------------ ------------ ------------
Foreign dividend withholding taxes .............................................. $ 53,981 $ -- $ --
------------ ------------ ------------
</TABLE>
(*)Montgomery Latin America Fund commenced operations on June 30, 1997.
The accompanying notes are an integral part of the these financial statements.
82
<PAGE>
<TABLE>
<CAPTION>
Equity International
Micro Cap Income Growth
Fund Fund Fund
Net Investment Income:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest ........................................................................ $ 779,885 $ 40,010 $ 56,232
Dividends ....................................................................... 673,802 639,359 182,159
------------ ------------ ------------
Total Income .................................................................... 1,453,687 679,369 238,391
------------ ------------ ------------
Expenses:
Management fee (note 2) ......................................................... 2,402,466 199,976 379,187
Custodian fee ................................................................... 14,654 2,255 20,693
Transfer agency and servicing fees .............................................. 309,775 42,499 15,506
Administration fee (note 2) ..................................................... 120,672 14,564 13,040
Share marketing plan fee (note 3) (Class P shares only) ......................... -- 1,528 7
Legal and audit fees ............................................................ 44,188 8,894 22,157
Trustees' fees .................................................................. 2,773 1,923 1,904
Registration fees ............................................................... 38,957 17,486 18,446
Accounting expenses ............................................................. 56,298 3,612 12,167
Printing fees ................................................................... 23,781 4,562 3,038
Amortization of organization expenses (note 1) .................................. 738 1,451 1,178
Other ........................................................................... 44,694 6,330 14,324
Interest expense ................................................................ -- -- 582
------------ ------------ ------------
Total Expenses .................................................................. 3,058,996 305,080 502,229
Fees deferred and/or expenses absorbed by Manager (note 2) ...................... -- (124,837) (192,671)
------------ ------------ ------------
Net Expenses .................................................................... 3,058,996 180,243 309,558
------------ ------------ ------------
Net Investment Income/(Loss) .................................................... (1,605,309) 499,126 (71,167)
------------ ------------ ------------
<CAPTION>
Net Realized and Unrealized Gain/(Loss) on Investments:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net realized gain/(loss) from:
Security transactions ....................................................... 16,355,818 2,265,039 121,488
Forward foreign-currency exchange contracts ................................. -- -- (86,647)
Foreign-currency transactions and net other assets .......................... -- -- (48,880)
------------ ------------ ------------
Net Realized Gain/(Loss) on Investments During the Period ....................... 16,355,818 2,265,039 (14,039)
------------ ------------ ------------
Net change in unrealized appreciation/(depreciation) of:
Securities .................................................................. 26,122,977 1,652,883 (986,924)
Forward foreign-currency exchange contracts ................................. -- -- 21,770
Foreign-currency transactions and net other assets .......................... -- -- 3,234
------------ ------------ ------------
Net Unrealized Appreciation/(Depreciation) of Investments During the Period ..... 26,122,977 1,652,883 (961,920)
------------ ------------ ------------
Net Realized and Unrealized Gain/(Loss) on Investments .......................... 42,478,795 3,917,922 (975,959)
------------ ------------ ------------
Net Increase/(Decrease) in Net Assets Resulting from Operations ................. $ 40,873,486 $ 4,417,048 $ (1,047,126)
------------ ------------ ------------
Foreign dividend withholding taxes .............................................. $ -- $ -- $ 13,638
------------ ------------ ------------
<CAPTION>
International
Small Cap Emerging
Fund Markets Fund
Net Investment Income:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest ................................................................................. $ 79,148 $ 1,188,269
Dividends ................................................................................ 290,007 9,586,483
------------- -------------
Total Income ............................................................................. 369,155 10,774,752
------------- -------------
Expenses:
Management fee (note 2) .................................................................. 601,334 6,247,864
Custodian fee ............................................................................ 23,316 1,009,785
Transfer agency and servicing fees ....................................................... 45,411 1,036,714
Administration fee (note 2) .............................................................. 16,669 368,571
Share marketing plan fee (note 3) (Class P shares only) .................................. 8 809
Legal and audit fees ..................................................................... 16,332 80,727
Trustees' fees ........................................................................... 1,434 3,669
Registration fees ........................................................................ 10,539 64,574
Accounting expenses ...................................................................... 15,131 372,035
Printing fees ............................................................................ -- 157,129
Amortization of organization expenses (note 1) ........................................... 2,971 --
Other .................................................................................... 2,219 121,795
Interest expense ......................................................................... 5,869 --
------------- -------------
Total Expenses ........................................................................... 741,233 9,463,672
Fees deferred and/or expenses absorbed by Manager (note 2) ............................... (280,699) --
------------- -------------
Net Expenses ............................................................................. 460,534 9,463,672
------------- -------------
Net Investment Income/(Loss) ............................................................. (91,379) 1,311,080
------------- -------------
<CAPTION>
Net Realized and Unrealized Gain/(Loss) on Investments:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net realized gain/(loss) from:
Security transactions ................................................................ 2,016,717 (107,293,460)
Forward foreign-currency exchange contracts .......................................... 2,602 (2,360,096)
Foreign-currency transactions and net other assets ................................... (119,032) (4,560,161)
------------- -------------
Net Realized Gain/(Loss) on Investments During the Period ................................ 1,900,287 (114,213,717)
------------- -------------
Net change in unrealized appreciation/(depreciation) of:
Securities ........................................................................... (7,864,582) (157,002,265)
Forward foreign-currency exchange contracts .......................................... 6,992 28,491
Foreign-currency transactions and net other assets ................................... (1,877) (1,159,392)
------------- -------------
Net Unrealized Appreciation/(Depreciation) of Investments During the Period .............. (7,859,467) (158,133,166)
------------- -------------
Net Realized and Unrealized Gain/(Loss) on Investments ................................... (5,959,180) (272,346,883)
------------- -------------
Net Increase/(Decrease) in Net Assets Resulting from Operations .......................... $ (6,050,559) $(271,035,803)
------------- -------------
Foreign dividend withholding taxes ....................................................... $ 21,568 $ 640,102
------------- -------------
<CAPTION>
Emerging Latin America
Asia Fund Fund*
Net Investment Income:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest ................................................................................. $ 136,010 $ 88,098
Dividends ................................................................................ 320,045 5,106
------------ ------------
Total Income ............................................................................. 456,055 93,204
------------ ------------
Expenses:
Management fee (note 2) .................................................................. 429,320 56,271
Custodian fee ............................................................................ 50,096 8,860
Transfer agency and servicing fees ....................................................... 64,071 13,635
Administration fee (note 2) .............................................................. 18,374 3,152
Share marketing plan fee (note 3) (Class P shares only) .................................. -- --
Legal and audit fees ..................................................................... 14,366 8,127
Trustees' fees ........................................................................... 1,471 1,501
Registration fees ........................................................................ 12,313 16,668
Accounting expenses ...................................................................... 17,277 2,814
Printing fees ............................................................................ 7,735 6,706
Amortization of organization expenses (note 1) ........................................... 4,810 701
Other .................................................................................... 8,441 1,495
Interest expense ......................................................................... -- --
------------ ------------
Total Expenses ........................................................................... 628,274 119,930
Fees deferred and/or expenses absorbed by Manager (note 2) ............................... (128,054) (119,930)
------------ ------------
Net Expenses ............................................................................. 500,220 --
------------ ------------
Net Investment Income/(Loss) ............................................................. (44,165) 93,204
------------ ------------
<CAPTION>
Net Realized and Unrealized Gain/(Loss) on Investments:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net realized gain/(loss) from:
Security transactions ................................................................ (5,084,371) (137,068)
Forward foreign-currency exchange contracts .......................................... (223,222) (14,057)
Foreign-currency transactions and net other assets ................................... (265,830) 6,311
------------ ------------
Net Realized Gain/(Loss) on Investments During the Period ................................ (5,573,423) (144,814)
------------ ------------
Net change in unrealized appreciation/(depreciation) of:
Securities ........................................................................... (19,080,106) (962,630)
Forward foreign-currency exchange contracts .......................................... 264 --
Foreign-currency transactions and net other assets ................................... 236,965 (28)
------------ ------------
Net Unrealized Appreciation/(Depreciation) of Investments During the Period .............. (18,842,877) (962,658)
------------ ------------
Net Realized and Unrealized Gain/(Loss) on Investments ................................... (24,416,300) (1,107,472)
------------ ------------
Net Increase/(Decrease) in Net Assets Resulting from Operations .......................... $(24,460,465) $ (1,014,268)
------------ ------------
Foreign dividend withholding taxes ....................................................... $ 34,091 $ 6,635
------------ ------------
</TABLE>
83
<PAGE>
- ----------------------------------
The Montgomery Funds
- ----------------------------------
Statements of Operations
- ----------------------------------
Six Months Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Global Global U.S. Asset
Opportunities Communications Select 50 Allocation
Fund Fund Fund Fund
Net Investment Income:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Interest ........................................................... $ 5,229 $ 65,257 $ 467,942 $ --
Dividends .......................................................... 139,205 325,097 1,596,207 5,453,308
------------ ------------ ------------ ------------
Total Income ....................................................... 144,434 390,354 2,064,149 5,453,308
Expenses:
Management fee (note 2) ............................................ 373,834 1,093,757 1,522,531 --
Custodian fee ...................................................... 19,513 96,889 45,291 --
Transfer agency and servicing fees ................................. 26,906 149,046 193,344 122,248
Administration fee (note 2) ........................................ 10,737 52,866 79,552 --
Share marketing plan fee (note 3) (Class P shares only) ............ -- -- 84 101
Legal and audit fees ............................................... 17,760 23,436 24,138 7,264
Trustees' fees ..................................................... 1,409 1,751 1,758 3,425
Registration fees .................................................. 10,591 4,560 43,646 27,563
Accounting fees .................................................... 9,895 45,165 72,810 --
Printing fees ...................................................... 5,238 7,942 49,412 16,317
Amortization of organization expenses (note 1) ..................... 2,908 4,462 882 3,487
Other .............................................................. 5,754 14,599 21,177 7,541
Interest expense ................................................... 19,915 19,243 -- --
------------ ------------ ------------ ------------
Total Expenses ..................................................... 504,460 1,513,716 2,054,625 187,946
Fees deferred and/or expenses absorbed by Manager (note 2) ......... (191,717) (52,649) -- (16,319)
------------ ------------ ------------ ------------
Net Expenses ....................................................... 312,743 1,461,067 2,054,625 171,627
------------ ------------ ------------ ------------
Net Investment Income/(Loss) ....................................... (168,309) (1,070,713) 9,524 5,281,681
------------ ------------ ------------ ------------
<CAPTION>
Net Realized and Unrealized Gain/(Loss) on Investments:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net realized gain/(loss) from:
Security transactions .......................................... 1,585,328 5,609,571 11,330,740 (13,748,205)
Forward foreign-currency exchange contracts .................... (132,063) (416,449) (621,069) --
Futures contracts .............................................. -- -- -- --
Investments sold short ......................................... -- -- --
Foreign-currency transactions .................................. 33,887 (20,147) 384,740 --
Capital-gain distributions received ............................ -- 209,086 -- 26,312,615
------------ ------------ ------------ ------------
Net Realized Gain on Investments During the Period ................. 1,487,152 5,382,061 11,094,411 12,564,410
------------ ------------ ------------ ------------
Net change in unrealized appreciation/(depreciation) of:
Securities ..................................................... (2,604,779) (5,500,818) (8,708,035) (22,477,696)
Forward foreign-currency exchange contracts .................... 630 (1,112) 553,386 --
Foreign-currency transactions and net other assets ............. (537) (11,234) (283,715) 7
------------ ------------ ------------ ------------
Net Unrealized Appreciation/(Depreciation) of Investments
During the Period .............................................. (2,604,686) (5,513,164) (8,438,364) (22,477,689)
------------ ------------ ------------ ------------
Net Realized and Unrealized Gain/(Loss) on Investments ............. (1,117,534) (131,103) 2,656,047 (9,913,279)
------------ ------------ ------------ ------------
Net Increase/(Decrease) in Net Assets Resulting from Operations .... $ (1,285,843) $ (1,201,816) $ 2,665,571 $ (4,631,598)
------------ ------------ ------------ ------------
Foreign dividend withholding taxes ................................. $ 9,888 $ 20,996 $ 20,154 $ --
------------ ------------ ------------ ------------
</TABLE>
* Montgomery Total Bond Fund commenced operations on June 30, 1997.
84
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Global California
Asset Short Duration Tax-Free
Allocation Total Return Government Intermediate
Fund Bond Fund* Bond Fund Bond Fund
Net Investment Income:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Interest ........................................................... $ -- $ 2,639,925 $ 1,692,480 $ 596,345
Dividends .......................................................... 62,220 -- -- --
-------------- ----------- ----------- -----------
Total Income ....................................................... 62,220 2,639,925 1,692,480 596,345
Expenses:
Management fee (note 2) ............................................ 1,733 196,755 157,506 95,178
Custodian fee ...................................................... -- 5,284 3,484 2,058
Transfer agency and servicing fees ................................. 7,294 4,653 21,522 14,499
Administration fee (note 2) ........................................ -- 19,675 11,800 6,256
Share marketing plan fee (note 3) (Class P shares only) ............ -- -- -- --
Legal and audit fees ............................................... 2,734 11,875 13,541 6,641
Trustees' fees ..................................................... 1,124 2,367 1,896 2,370
Registration fees .................................................. 9,748 32,103 19,474 3,265
Accounting fees .................................................... 6,007 13,069 6,468 4,061
Printing fees ...................................................... 990 702 12,802 3,279
Amortization of organization expenses (note 1) ..................... 8,885 11,355 4,278 4,276
Other .............................................................. 365 4,230 10,876 6,863
Interest expense ................................................... -- 94,829 223,157 --
-------------- ----------- ----------- -----------
Total Expenses ..................................................... 38,880 396,897 486,804 148,746
Fees deferred and/or expenses absorbed by Manager (note 2) ......... (34,907) (26,612) (118,856) (62,564)
-------------- ----------- ----------- -----------
Net Expenses ....................................................... 3,973 370,285 367,948 86,182
-------------- ----------- ----------- -----------
Investment Income/(Loss) ........................................... 58,247 2,269,640 1,324,532 510,163
-------------- ----------- ----------- -----------
<CAPTION>
Net Realized and Unrealized Gain/(Loss) on Investments:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net realized gain/(loss) from:
Security transactions .......................................... 72,512 1,474,179 355,886 5,855
Forward foreign-currency exchange contracts .................... -- -- -- --
Futures contracts .............................................. -- 54,056 16,504 --
Investments sold short ......................................... -- -- -- --
Foreign-currency transactions .................................. -- -- -- --
Capital-gain distributions received ............................ 48,489 -- -- --
-------------- ----------- ----------- -----------
Net Realized Gain on Investments During the Period ................. 121,001 1,528,235 372,390 5,855
-------------- ----------- ----------- -----------
Net change in unrealized appreciation/(depreciation) of:
Securities ..................................................... (184,923) 1,597,475 157,285 617,807
Forward foreign-currency exchange contracts .................... -- -- -- --
Foreign-currency transactions and net other assets ............. -- -- -- --
-------------- ----------- ----------- -----------
Net Unrealized Appreciation/(Depreciation) of Investments
During the Period .............................................. (184,923) 1,597,475 157,285 617,807
-------------- ----------- ----------- -----------
Net Realized and Unrealized Gain/(Loss) on Investments ............. (63,922) 3,125,710 529,675 623,662
-------------- ----------- ----------- -----------
Net Increase/(Decrease) in Net Assets Resulting from Operations .... (5,675) $ 5,395,350 $ 1,854,207 $ 1,133,827
-------------- ----------- ----------- -----------
Foreign dividend withholding taxes ................................. $ -- $ -- $ -- $ --
-------------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Government California Federal
Reserve Tax-Free Money Tax-Free
Fund Fund Money Fund
Net Investment Income:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest ................................................................... $16,901,529 $ 3,055,414 $ 2,181,409
Dividends .................................................................. -- -- --
----------- ----------- -----------
Total Income ............................................................... 16,901,529 3,055,414 2,181,409
Expenses:
Management fee (note 2) .................................................... 1,074,998 521,016 451,173
Custodian fee .............................................................. 21,518 12,331 9,407
Transfer agency and servicing fees ......................................... 89,254 14,572 11,115
Administration fee (note 2) ................................................ 131,080 42,628 29,454
Share marketing plan fee (note 3) (Class P shares only) .................... -- -- --
Legal and audit fees ....................................................... 50,900 15,298 14,288
Trustees' fees ............................................................. 2,740 1,170 1,899
Registration fees .......................................................... 114,779 12,188 36,359
Accounting fees ............................................................ 81,025 23,858 16,079
Printing fees .............................................................. 60,444 11,211 12,503
Amortization of organization expenses (note 1) ............................. 1,771 477 330
Other ...................................................................... 36,054 12,355 6,501
Interest expense ........................................................... -- -- --
----------- ----------- -----------
Total Expenses ............................................................. 1,664,563 667,104 589,108
Fees deferred and/or expenses absorbed by Manager (note 2) ................. -- (172,638) (235,642)
----------- ----------- -----------
Net Expenses ............................................................... 1,664,563 494,466 353,466
----------- ----------- -----------
Net Investment Income/(Loss) ............................................... 15,236,966 2,560,948 1,827,943
----------- ----------- -----------
<CAPTION>
Net Realized and Unrealized Gain/(Loss) on Investments:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net realized gain/(loss) from:
Security transactions .................................................. 16,733 -- 715
Forward foreign-currency exchange contracts ............................ -- -- --
Futures contracts ...................................................... -- -- --
Investments sold short ................................................. -- -- --
Foreign-currency transactions .......................................... -- -- --
Capital-gain distributions received .................................... -- -- --
----------- ----------- -----------
Net Realized Gain on Investments During the Period ......................... 16,733 -- 715
----------- ----------- -----------
Net change in unrealized appreciation/(depreciation) of:
Securities ............................................................. -- -- --
Forward foreign-currency exchange contracts ............................ -- -- --
Foreign-currency transactions and net other assets ..................... -- -- --
----------- ----------- -----------
Net Unrealized Appreciation/(Depreciation) of Investments
During the Period ...................................................... -- -- --
----------- ----------- -----------
Net Realized and Unrealized Gain/(Loss) on Investments ..................... 16,733 -- 715
----------- ----------- -----------
Net Increase/(Decrease) in Net Assets Resulting from Operations ............ $15,253,699 $ 2,560,948 $ 1,828,658
----------- ----------- -----------
Foreign dividend withholding taxes ......................................... $ -- $ -- $ --
----------- ----------- -----------
</TABLE>
<PAGE>
- --------------------------------
The Montgomery Funds
- --------------------------------
Statements of
Changes in Net Assets
- --------------------------------
Six Months Ended December31,1997
( U n a u d i t e d )
<TABLE>
<CAPTION>
Small Cap
Growth Opportunities Small Cap
Fund Fund Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss) ..................................................... $ 4,672,684 $ (1,274,531) $ (618,973)
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, securities sold short, equity swaps and
foreign-currency transactions during the period .............................. 88,663,549 24,822,182 16,317,433
Net unrealized appreciation/(depreciation) of securities, forward foreign-
currency exchange contracts, securities sold short, equity swaps, foreign-
currency transactions and net other assets during the period ................. 10,210 (3,557,146) 17,631,260
Net Increase/(Decrease) in Net Assets Resulting from Operations 93,346,443 19,990,505 33,329,720
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares ............................................................... (8,104,225) -- --
Class P shares ............................................................... (591) -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ............................................................... (160,157,694) (5,324,622) (27,244,989)
Class P shares ............................................................... (20,125) (256) (2,828,409)
--------------- ------------- -------------
Total distributions .............................................................. (168,282,635) (5,324,878) (30,073,398)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ............................................................... 302,575,477 3,174,014 4,733,715
Class P shares ............................................................... (39,219) 1,057 16,384,503
Net Increase/(Decrease) in Net Assets 227,600,066 17,840,698 24,374,540
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of period .............................................................. 1,137,555,465 226,327,730 204,954,770
End of Period $ 1,365,155,531 $ 244,168,428 $ 229,329,310
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) ............................................ $ 108,727 $ (1,274,531) $ (618,973)
</TABLE>
* Montgomery Latin America Fund commenced operations on June 30, 1997.
<TABLE>
<CAPTION>
Global Global U.S. Asset
Opportunities Communications Select 50 Allocation
Fund Fund Fund Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income/(loss) ........................................ $ (168,309) $ (1,070,713) $ 9,524 $ 5,281,681
Net realized gain on securities, futures contracts, securities sold
short and foreign-currency transactions during the period ....... 1,487,152 5,382,061 11,094,411 12,564,410
Net unrealized appreciation/(depreciation) of securities, foreign-
currency transactions and net other assets during the period .... (2,604,686) (5,513,164) (8,438,364) (22,477,689)
Net Increase/(Decrease) in Net Assets Resulting from Operations (1,285,843) (1,201,816) 2,665,571 (4,631,598)
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares .................................................. -- -- -- (10,518,904)
Class P shares .................................................. -- -- -- (5,926)
Distributions to shareholders from net realized gains on investments:
Class R shares .................................................. (4,796,805) (29,195,663) (20,659,018) (11,764,750)
Class P shares .................................................. -- -- (7,288) (6,851)
------------ ------------- ------------- -------------
Total distributions ................................................. (4,796,805) (29,195,663) (20,666,306) (22,296,431)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares .................................................. (3,624,512) 12,199,982 76,724,994 36,414,032
Class P shares .................................................. -- -- 80,279 13,058
Net Increase/(Decrease) in Net Assets (9,707,160) (18,197,497) 58,804,538 9,499,061
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of period ................................................. 32,370,923 153,955,101 172,517,976 127,287,995
End of Period $ 22,663,763 $ 135,757,604 $ 231,322,514 $ 136,787,056
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) $ (178,454) $ (1,213,276) $ 13,925 $ (3,737,822)
</TABLE>
* Montgomery Total Return Bond Fund commenced operations on June 30, 1997.
86
The accompanying notes are an intergral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Equity International
Micro Cap Income Growth
Fund Fund Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss) ...................................................$ (1,605,309) $ 499,126 $ (71,167)
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, securities sold short, equity swaps and
foreign-currency transactions during the period ............................. 16,355,818 2,265,039 (14,039)
Net unrealized appreciation/(depreciation) of securities, forward foreign-
currency exchange contracts, securities sold short, equity swaps, foreign-
currency transactions and net other assets during the period ................ 26,122,977 1,652,883 (961,920)
Net Increase/(Decrease) in Net Assets Resulting from Operations 40,873,486 4,417,048 (1,047,126)
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares .............................................................. -- (484,581) (49,516)
Class P shares .............................................................. -- (14,769) --
Distributions to shareholders from net realized gains on investments:
Class R shares .............................................................. (19,495,466) (4,032,969) (2,206,214)
Class P shares .............................................................. -- (153,718) (291)
----------- ---------- ---------
Total distributions ............................................................ (19,495,466) (4,686,037) (2,256,021)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares .............................................................. 28,894,164 4,036,213 1,084,077
Class P shares .............................................................. -- 760,861 (1,026)
Net Increase/(Decrease) in Net Assets 50,272,184 4,528,085 (2,220,096)
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of period ............................................................ 317,811,684 39,462,508 33,917,698
End of Period .................................................................. $ 368,083,868 $ 43,990,593 $ 31,697,602
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) $ (1,605,309) $ (224) $ (83,086)
<CAPTION>
International
Small Cap Emerging
Fund Markets Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss) .............................................................. $ (91,379) $ 1,311,080
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, securities sold short, equity swaps and
foreign-currency transactions during the period ........................................ 1,900,287 (114,213,717)
Net unrealized appreciation/(depreciation) of securities, forward foreign-
currency exchange contracts, securities sold short, equity swaps, foreign-
currency transactions and net other assets during the period ........................... (7,859,467) (158,133,166)
Net Increase/(Decrease) in Net Assets Resulting from Operations (6,050,559) (271,035,803)
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares ......................................................................... (339,171) (11,335,189)
Class P shares ......................................................................... (26) (5,292)
Distributions to shareholders from net realized gains on investments:
Class R shares ......................................................................... (5,934,957) (24,405,292)
Class P shares ......................................................................... (647) (14,461)
--------------- -----------
Total distributions ....................................................................... (6,274,801) (35,760,234)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ......................................................................... 3,624,543 32,862,077
Class P shares ......................................................................... (9,603) 145,832
Net Increase/(Decrease) in Net Assets (8,710,420) (273,788,128)
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of period ....................................................................... 53,617,139 1,260,063,930
End of Period ............................................................................. $ 44,906,719 $ 986,275,802
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) $ (433,023) $ (9,038,997)
<CAPTION>
Emerging Latin America
Asia Fund Fund *
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss) .............................................................. $ (44,165) $ 93,204
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, securities sold short, equity swaps and
foreign-currency transactions during the period ........................................ (5,573,423) (144,814)
Net unrealized appreciation/(depreciation) of securities, forward foreign-
currency exchange contracts, securities sold short, equity swaps, foreign-
currency transactions and net other assets during the period ........................... (18,842,877) (962,658)
Net Increase/(Decrease) in Net Assets Resulting from Operations (24,460,465) (1,014,268)
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares ......................................................................... (553,598) (44,394)
Class P shares ......................................................................... -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ......................................................................... (3,025,530) (99,701)
Class P shares ......................................................................... -- --
------------ -----------
Total distributions ....................................................................... (3,579,128) (144,095)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ......................................................................... (7,971,683) 7,706,321
Class P shares ......................................................................... -- --
Net Increase/(Decrease) in Net Assets (36,011,276) 6,547,958
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of period ....................................................................... 68,095,256 1,000,000
End of Period ............................................................................. $ 32,083,980 $ 7,547,958
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) $ (740,411) $ 48,810
<CAPTION>
Global California
Asset Short Duration Tax-Free
Allocation Total Return Government Intermediate
Fund Bond Fund * Bond Fund Bond Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income/(loss) ........................................ $ 58,247 $ 2,269,640 $ 1,324,532 $ 510,165
Net realized gain on securities, futures contracts, securities sold
short and foreign-currency transactions during the period ....... 121,001 1,528,235 372,390 5,855
Net unrealized appreciation/(depreciation) of securities, foreign-
currency transactions and net other assets during the period .... (184,923) 1,597,475 157,285 617,807
Net Increase/(Decrease) in Net Assets Resulting from Operations (5,675) 5,395,350 1,854,207 1,133,827
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares .................................................. (66,312) (2,273,150) (1,325,264) (510,637)
Class P shares .................................................. -- -- -- --
Distributions to shareholders from net realized gains on investments:
Class R shares .................................................. (80,757) (745,013) -- --
Class P shares .................................................. -- -- -- --
--------- --------- --------- --------
Total distributions ................................................. (147,069) (3,018,163) (1,325,264) (510,637)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions
(note 4):
Class R shares .................................................. 140,402 73,743,943 6,028,480 6,384,195
Class P shares .................................................. -- -- (204) --
Net Increase/(Decrease) in Net Assets $ (12,342) 76,121,130 6,557,219 7,007,385
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of period ................................................. $ 1,653,452 -- 47,264,721 21,681,335
End of Period ....................................................... 1,641,110 $ 76,121,130 $ 53,821,940 $ 28,688,720
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) -- $ (3,510) $ (46,506) $ 920
<CAPTION>
Government California Federal
Reserve Tax-Free Tax-Free
Fund Money Fund Money Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss) .............................................. $ 15,236,966 $ 2,560,948 $ 1,827,943
Net realized gain on securities, futures contracts, securities sold
short and foreign-currency transactions during the period ............. 16,733 -- 715
Net unrealized appreciation/(depreciation) of securities, foreign-
currency transactions and net other assets during the period .......... -- -- --
Net Increase/(Decrease) in Net Assets Resulting from Operations 15,253,699 2,560,948 1,828,658
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R shares ........................................................ (15,238,977) (2,560,937) (1,828,468)
Class P shares ........................................................ (1) -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ........................................................ -- -- --
Class P shares ........................................................ -- -- --
---------- ---------- ---------
Total distributions ....................................................... (15,238,978) (2,560,937) (1,828,468)
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions
(note 4):
Class R shares ........................................................ 195,132,753 59,635,664 (974,827)
Class P shares ........................................................ (205) -- --
Net Increase/(Decrease) in Net Assets 195,147,269 59,635,675 (974,637)
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of period ....................................................... 473,153,993 118,723,062 114,197,095
End of Period ............................................................. $ 668,301,262 $ 178,358,737 $ 113,222,458
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) $ (44,895) $ (60) $ (880)
</TABLE>
86
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Statement of
Changes in Net
Assets
- --------------------
Year Ended
June 30, 1997
<TABLE>
<CAPTION>
Small Cap
Growth Opportunities Small Cap
Fund Fund Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss) .................................................. $ 6,885,258 $ (1,600,643) $ (1,812,573)
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, securities sold short, equity swaps and
foreign-currency transactions during the year ............................. 100,294,973 (17,279,013) 29,292,354
Net unrealized appreciation/(depreciation) of securities, forward foreign-
currency exchange contracts, securities sold short, equity swaps,
foreign-currency transactions and net other assets during the year ........ 84,224,834 43,491,855 (31,258,680)
Net Increase/(Decrease) in Net Assets Resulting from Operations ............... 191,405,065 24,612,199 (3,778,899)
<CAPTION>
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions to shareholders from net investment income:
Class R shares ............................................................ (6,881,794) (40,517) --
Class P shares ............................................................ (542) (1) --
Distributions to shareholders in excess of net investment income:
Class R shares ............................................................ -- -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ............................................................ (120,827,947) -- (40,471,488)
Class P shares ............................................................ (12,739) -- (417,004)
--------------- ------------- -------------
Total distributions ........................................................... (127,723,022) (40,518) (40,888,492)
<CAPTION>
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ............................................................ 147,296,738 65,607,686 (32,078,430)
Class P shares ............................................................ 112,711 8,150 6,639,063
Net Increase/(Decrease) in Net Assets ......................................... 211,091,492 90,187,517 (70,106,758)
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year ............................................................. 926,463,973 136,140,213 275,061,528
End of Period ................................................................. $ 1,137,555,465 $ 226,327,730 $ 204,954,770
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) ......................................... $ 3,540,859 $ -- $ --
</TABLE>
* Montgomery Emerging Asia Fund commenced operations on September 30, 1996.
<TABLE>
<CAPTION>
Global
Communications Select 50
Fund Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss) ............................................................... $ (1,763,666) $ 44,662
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, securities sold short and foreign-currency
transactions during the year ........................................................... 26,012,894 8,490,151
Net unrealized appreciation/(depreciation) of securities, forward foreign-currency
exchange contracts, securities sold short, foreign-currency
transactions and net other assets during the year ...................................... (5,241,046) 20,210,696
Net Increase in Net Assets Resulting from Operations ....................................... 19,008,182 28,745,509
<CAPTION>
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions to shareholders from net investment income:
Class R shares ......................................................................... -- (559,887)
Class P shares ......................................................................... -- --
Distributions to shareholders in excess of net investment income:
Class R shares ......................................................................... -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ......................................................................... (9,155,989) (2,599,004)
Class P shares ......................................................................... -- --
Total distributions ........................................................................ (9,155,989) (3,158,891)
<CAPTION>
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ......................................................................... (62,567,827) 68,970,865
Class P shares ......................................................................... -- 5,816
Net Increase/(Decrease) in Net Assets ...................................................... (52,715,634) 94,563,299
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning of year .......................................................................... 206,670,735 77,954,677
End of Period .............................................................................. $ 153,955,101 $ 172,517,976
Accumulated Undistributed Net Investment Income/(Accumulated Net Investment Loss) .......... $ (142,563) $ 4,401
</TABLE>
* Montgomery Global Asset Allocation Fund commenced operations on January 2,
1997.
The accompanying notes are an integral part of these financial statements.
88
<PAGE>
<TABLE>
<CAPTION>
International
Micro Cap Equity Growth
Fund Income Fund Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss) ................................................... $ (2,180,171) $ 886,880 $ 138,283
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, securities sold short, equity swaps and
foreign-currency transactions during the year .............................. 17,465,531 2,720,229 1,488,363
Net unrealized appreciation/(depreciation) of securities, forward foreign-
currency exchange contracts, securities sold short, equity swaps,
foreign-currency transactions and net other assets during the year ......... 25,628,245 3,479,398 3,198,060
Net Increase/(Decrease) in Net Assets Resulting from Operations ................ 40,913,605 7,086,507 4,824,706
<CAPTION>
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions to shareholders from net investment income:
Class R shares ............................................................. -- (881,077) --
Class P shares ............................................................. -- (9,168) --
Distributions to shareholders in excess of net investment income:
Class R shares ............................................................. -- -- --
Distributions to shareholders from net realized gains on investments:
Class R shares ............................................................. (20,853,034) (2,229,868) (2,164,570)
Class P shares ............................................................. -- (8,635) (116)
------------- ----------- -----------
Total distributions ............................................................ (20,853,034) (3,128,748) (2,164,686)
<CAPTION>
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ............................................................. (8,466,053) 15,381,763 12,949,863
Class P shares ............................................................ $ -- 809,138 3,963
Net Increase/(Decrease) in Net Assets .......................................... 11,594,518 20,148,660 15,613,846
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year .............................................................. 306,217,166 19,313,848 18,303,852
End of Period .................................................................. 317,811,684 $ 39,462,508 $ 33,917,698
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) .......................................... -- $ -- $ 37,597
</TABLE>
*Montgomery Emerging Asia Fund commenced operations on September 30, 1996.
<TABLE>
<CAPTION>
U.S. Asset Global Short Duration
Allocation Asset Allocation Government
Fund Fund* Bond Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income/(loss) ........................................................... $ 3,414,645 $ 8,065 $ 2,282,588
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, securities sold short and foreign-currency
transactions during the year ....................................................... 12,083,639 19,162 99,958
Net unrealized appreciation/(depreciation) of securities, forward foreign-currency
exchange contracts, securities sold short, foreign-currency
transactions and net other assets during the year .................................. 2,261,570 106,277 198,145
Net Increase in Net Assets Resulting from Operations ................................... 17,759,854 133,504 2,580,691
<CAPTION>
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions to shareholders from net investment income:
Class R shares ..................................................................... (2,906,566) -- (2,277,499)
Class P shares ..................................................................... (2,425) -- (38)
Distributions to shareholders in excess of net investment income:
Class R shares ..................................................................... -- -- (8,172)
Distributions to shareholders from net realized gains on investments:
Class R shares ..................................................................... (11,975,120) -- --
Class P shares ..................................................................... (3,810) -- --
------------- ----------- -----------
Total distributions .................................................................... (14,887,921) -- (2,285,709)
<CAPTION>
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ..................................................................... (8,166,667) 1,519,948 24,288,468
Class P shares ..................................................................... 29,395 -- (710)
Net Increase/(Decrease) in Net Assets .................................................. (5,265,339) 1,653,452 24,582,740
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year ...................................................................... 132,553,334 -- 22,681,981
End of Period .......................................................................... $ 127,287,995 $ 1,653,452 $ 47,264,721
Accumulated Undistributed Net Investment Income/(Accumulated Net Investment Loss) ...... $ 1,505,327 $ 8,065 $ (45,774)
</TABLE>
*Montgomery Global Asset Allocation Fund commenced operations on
January 2, 1997.
<TABLE>
<CAPTION>
International Global
Small Cap Emerging Emerging Opportunities
Fund Markets Fund Asia Fund* Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income/(loss) ............................................. $ (147,919) $ 4,761,171 $ (87,239) $ (181,500)
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, securities sold short, equity swaps and
foreign-currency transactions during the year ........................ 4,581,552 46,619,998 3,000,678 3,828,438
Net unrealized appreciation/(depreciation) of securities, forward foreign-
currency exchange contracts, securities sold short, equity swaps,
foreign-currency transactions and net other assets during the year ... 2,178,127 136,556,591 9,910,245 1,137,759
Net Increase/(Decrease) in Net Assets Resulting from Operations .......... 6,611,760 187,937,760 12,823,684 4,784,697
<CAPTION>
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distributions to shareholders from net investment income:
Class R shares ....................................................... -- (4,538,958) -- --
Class P shares ....................................................... -- (18) -- --
Distributions to shareholders in excess of net investment income:
Class R shares ....................................................... -- -- (30,694) --
Distributions to shareholders from net realized gains on investments:
Class R shares ....................................................... -- -- -- (1,395,395)
Class P shares ....................................................... -- -- -- --
---------- ----------- ---------- -----------
Total distributions ...................................................... -- (4,538,976) (30,694) (1,395,395)
<CAPTION>
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ....................................................... 5,350,787 81,733,907 55,302,266 486,120
Class P shares ....................................................... 15,000 551,178 -- --
Net Increase/(Decrease) in Net Assets .................................... 11,977,547 265,683,869 68,095,256 3,875,422
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of year ........................................................ 41,639,592 994,380,061 -- 28,495,501
End of Period ............................................................ $53,617,139 $1,260,063,930 $ 68,095,256 $32,370,923
Accumulated Undistributed Net Investment Income/
(Accumulated Net Investment Loss) .................................... $ (2,447) $ 990,404 $ (142,648) $ (10,145)
</TABLE>
*Montgomery Emerging Asia Fund commenced operations on September 30, 1996.
<TABLE>
<CAPTION>
California
Tax-Free Government California Federal
Intermediate Reserve Tax-Free Tax-Free
Bond Fund Fund Money Fund Money Fund
Increase/(Decrease) in Net Assets from Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income/(loss) ............................................. $ 770,950 $ 24,123,314 $ 3,393,054 $ 2,586,817
Net realized gain/(loss) on securities, forward foreign-currency exchange
contracts, futures contracts, securities sold short and foreign-
currency transactions during the year ................................ 27,183 (28,731) -- (1,588)
Net unrealized appreciation/(depreciation) of securities, forward
foreign-currency exchange contracts, securities sold short,
foreign-currency transactions and net other assets during the year ... 359,956 -- -- --
Net Increase in Net Assets Resulting from Operations ..................... 1,158,089 24,094,583 3,393,054 2,585,229
<CAPTION>
Distributions to Shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distributions to shareholders from net investment income:
Class R shares ....................................................... (771,185) (24,122,890) (3,393,007) (2,586,817)
Class P shares ....................................................... -- (30) -- --
Distributions to shareholders in excess of net investment income:
Class R shares ....................................................... -- -- -- (524)
Distributions to shareholders from net realized gains on investments:
Class R shares ....................................................... -- -- -- --
Class P shares ....................................................... -- -- -- --
---------- ------------ ----------- -----------
Total distributions ...................................................... (771,185) (24,122,920) (3,393,007) (2,587,341)
<CAPTION>
Beneficial Interest Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net increase/(decrease) from beneficial interest transactions (note 4):
Class R shares ....................................................... 7,346,498 33,759,486 20,588,996 114,199,207
Class P shares ....................................................... -- (700) -- --
Net Increase/(Decrease) in Net Assets .................................... 7,733,402 33,730,449 20,589,043 114,197,095
<CAPTION>
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of year ........................................................ 13,947,933 439,423,544 98,134,019 --
End of Period ............................................................ $ 21,681,335 $ 473,153,993 $ 118,723,062 $114,197,095
Accumulated Undistributed Net Investment Income/(Accumulated Net
Investment Loss) .................................................... $ 1,392 $ (42,883) $ (71) $ (355)
</TABLE>
*Montgomery Global Asset Allocation Fund commenced operations on
January 2, 1997.
89
<PAGE>
- --------------------------
The Montgomery Funds
- --------------------------
Transactions in Shares
with a Beneficial Interest
- --------------------------
<TABLE>
<CAPTION>
GROWTH FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars
R Shares:
===================================================================================================================================
<S> <C> <C> <C> <C>
Sold 10,101,066 $ 255,010,170 14,533,171 $ 306,808,623
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 7,601,605 163,434,484 6,074,664 124,941,420
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (4,649,177) (115,869,177) (13,524,409) (284,453,305)
===================================================================================================================================
Net increase/(decrease) 13,053,494 $ 302,575,477 7,083,426 $ 147,296,738
- -----------------------------------------------------------------------------------------------------------------------------------
P Shares:*
===================================================================================================================================
Sold 1,153 $ 29,474 5,296 $ 109,131
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 949 20,488 589 12,069
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (3,519) (89,181) (419) (8,489)
===================================================================================================================================
Net increase/(decrease) (1,417) $ (39,219) 5,466 $ 112,711
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EQUITY INCOME FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars
R Shares:
===================================================================================================================================
<S> <C> <C> <C> <C>
Sold 530,710 $ 10,016,405 1,908,279 $ 31,459,740
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 238,376 4,196,380 182,143 2,889,405
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (541,298) (10,176,572) (1,135,568) (18,967,382)
===================================================================================================================================
Net increase 227,788 $ 4,036,213 954,854 $ 15,381,763
- -----------------------------------------------------------------------------------------------------------------------------------
P Shares:(*)
===================================================================================================================================
Sold 36,786 $ 668,622 49,516 $ 829,352
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 9,397 168,453 1,088 17,834
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (4,041) (76,214) (2,243) (38,048)
===================================================================================================================================
Net increase/(decrease) 42,142 $ 760,861 48,361 $ 809,138
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EMERGING MARKETS FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars
R Shares:
===================================================================================================================================
<S> <C> <C> <C> <C>
Sold 31,444,796 $ 481,721,208 34,686,183 $ 519,924,852
- -----------------------------------------------------------------------------------------------------------------------------------
Issued in exchange for shares of the
Montgomery Advisors Emerging Markets Fund -- -- 486,078 6,576,635
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 2,665,930 33,244,145 313,619 4,247,945
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (32,613,662) (482,103,276) (30,814,815) (499,015,525)
===================================================================================================================================
Net increase/(decrease) 1,497,064 $ 32,862,077 4,671,065 $ 81,733,907
- -----------------------------------------------------------------------------------------------------------------------------------
P Shares:*
===================================================================================================================================
Sold 18,787 $ 300,184 38,561 $ 588,778
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 1,597 19,750 2 18
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (11,044) (174,102) (2,504) (37,618)
===================================================================================================================================
Net increase 9,340 $ 145,832 36,059 $ 551,178
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MICRO CAP FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars
R Shares:**
===================================================================================================================================
<S> <C> <C> <C> <C>
Sold 1,224,211 $ 26,401,471 2,139,966 $ 35,696,484
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 966,840 19,008,068 1,256,280 20,414,858
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (799,211) (16,515,375) (3,847,189) (64,577,395)
===================================================================================================================================
Net increase/(decrease) 1,391,840 $ 28,894,164 (450,943) $ (8,466,053)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Small Cap Opportunities, Small Cap, International Small Cap and Select
50 Funds' Class P shares commenced operations on July 29, 1996; July 1,
1996; June 9, 1997; and December 12, 1996, respectively.
** The Emerging Asia and Latin America Funds' Class R shares commenced
operations on September 30, 1996, and June 30, 1997, respectively.
90
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP OPPORTUNITIES FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars
R Shares:
===================================================================================================================================
<S> <C> <C> <C> <C>
Sold 3,390,451 $ 65,539,463 10,983,697 $ 171,594,561
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 293,574 5,193,288 2,521 39,628
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (3,564,315) (67,558,737) (6,691,938) (106,026,503)
===================================================================================================================================
Net increase/(decrease) 119,710 $ 3,174,014 4,294,280 $ 65,607,686
- -----------------------------------------------------------------------------------------------------------------------------------
P Shares: *
===================================================================================================================================
Sold 169 $ 2,638 558 $ 8,550
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 14 254 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (97) (1,835) (25) (400)
===================================================================================================================================
Net increase/(decrease) 86 $ 1,057 533 $ 8,150
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SMALL CAP FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars
R Shares:
===================================================================================================================================
<S> <C> <C> <C> <C>
Sold 360,578 $ 7,406,362 1,765,254 $ 33,679,540
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 1,320,955 24,450,884 1,995,154 37,911,061
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (1,268,790) (27,123,531) (6,366,339) (103,669,031)
===================================================================================================================================
Net increase/(decrease) 412,743 $ 4,733,715 (2,605,931) $ (32,078,430)
- -----------------------------------------------------------------------------------------------------------------------------------
P Shares:(*)
===================================================================================================================================
Sold 688,542 $ 15,078,817 359,494 $ 6,929,517
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 154,148 2,828,622 22,222 418,949
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (70,528) (1,522,936) (39,938) (709,403)
===================================================================================================================================
Net increase/(decrease) 772,162 $ 16,384,503 341,778 $ 6,639,063
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INTERNATIONAL GROWTH FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars
R Shares:
===================================================================================================================================
<S> <C> <C> <C> <C>
Sold 1,516,866 $ 24,452,252 2,118,300 $ 31,194,055
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 95,712 1,401,222 69,551 948,742
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (1,552,501) (24,769,397) (1,295,308) (19,192,934)
===================================================================================================================================
Net increase 60,077 $ 1,084,077 892,543 $ 12,949,863
- -----------------------------------------------------------------------------------------------------------------------------------
P Shares:(*)
===================================================================================================================================
Sold 121 $ 2,000 335 $ 5,001
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends -- -- 9 116
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (184) (3,026) (78) (1,154)
===================================================================================================================================
Net increase/(decrease) (63) $ (1,026) 266 $ 3,963
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INTERNATIONAL SMALL CAP FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars
R Shares:
===================================================================================================================================
<S> <C> <C> <C> <C>
Sold 1,317,263 $ 19,196,476 2,921,746 $ 44,958,978
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 478,710 6,026,955 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (1,378,052) (21,898,888) (2,601,160) (39,608,191)
===================================================================================================================================
Net increase 417,921 $ 3,624,543 320,586 $ 5,350,787
- -----------------------------------------------------------------------------------------------------------------------------------
P Shares:(*)
===================================================================================================================================
Sold 115 $ 2,000 855 $ 15,000
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 53 673 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (704) (12,276) -- --
===================================================================================================================================
Net increase/(decrease) (536) $ (9,603) 855 $ 15,000
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SELECT 50 FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars
R Shares:
===================================================================================================================================
<S> <C> <C> <C> <C>
Sold 6,007,019 $ 129,080,796 7,588,001 $ 130,776,571
- -----------------------------------------------------------------------------------------------------------------------------------
Issued in exchange for shares of the
Montgomery Advisors Emerging Markets Fund -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 1,052,243 19,382,412 194,339 3,061,479
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (3,395,735) (71,738,214) (3,899,388) (64,867,185)
===================================================================================================================================
Net increase/(decrease) 3,663,527 $ 76,724,994 3,882,952 $ 68,970,865
- -----------------------------------------------------------------------------------------------------------------------------------
P Shares:(*)
===================================================================================================================================
Sold 3,801 $ 81,836 3,579 $ 58,050
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 223 4,054 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (252) (5,161) (3,147) (52,234)
===================================================================================================================================
Net increase 3,772 $ 80,279 432 $ 5,816
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
U.S. ASSET ALLOCATION FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars
R Shares:
===================================================================================================================================
<S> <C> <C> <C> <C>
Sold 1,323,586 $ 42,969,791 2,671,291 $ 50,247,753
- -----------------------------------------------------------------------------------------------------------------------------------
Issued in exchange for shares of the
Montgomery Advisors Emerging Markets Fund -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 1,217,971 21,582,443 789,255 14,511,412
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (1,347,516) (28,138,202) (3,918,381) (72,925,832)
===================================================================================================================================
Net increase/(decrease) 1,194,041 $ 36,414,032 (457,835) $ (8,166,667)
- -----------------------------------------------------------------------------------------------------------------------------------
P Shares:(*)
===================================================================================================================================
Sold 13 $ 300 1,378 $ 26,534
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 720 12,778 253 4,643
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (1) (20) (97) (1,782)
===================================================================================================================================
Net increase 732 $ 13,058 1,534 $ 29,395
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EMERGING ASIA FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars
R Shares:**
===================================================================================================================================
<S> <C> <C> <C> <C>
Sold 6,418,559 $ 95,001,531 6,926,941 $ 108,517,381
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 289,776 2,755,772 2,124 29,137
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (6,864,045) (105,728,986) (3,327,106) (53,244,252)
===================================================================================================================================
Net increase/(decrease) (155,710) $ (7,971,683) 3,601,959 $ 55,302,266
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
LATIN AMERICA FUND
Six Months Ended 12/31/97 (unaudited)
Shares Dollars
R Shares:**
===================================================================================================================================
<S> <C> <C>
Sold 1,576,181 $ 18,805,167
- -----------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of dividends 12,584 132,260
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemed (985,704) (11,231,106)
===================================================================================================================================
Net increase/(decrease) 603,061 $ 7,706,321
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Small Cap Opportunities, Small Cap, International Small Cap and Select
50 Funds' Class P shares commenced operations on July 29, 1996; July 1,
1996; June 9, 1997; and December 12, 1996, respectively.
** The Emerging Asia and Latin America Funds' Class R shares commenced
operations on September 30, 1996, and June 30, 1997, respectively.
91
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Transactions in
Shares with a
Beneficial Interest
- --------------------
<TABLE>
<CAPTION>
GLOBAL OPPORTUNITIES FUND CALIFORNIA TAX-FREE MONEY FUND
Six Months Ended 12/31/97 Six Months Ended 12/31/97
(unaudited) Year Ended 6/30/97 (unaudited) Year Ended 6/30/97
Shares Dollars Shares Dollars Shares and Dollars Shares and Dollars
R Shares:
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Sold 799,800 $ 15,464,177 1,552,210 $ 26,712,712 $ 736,301,519 $ 800,562,011
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment
of dividends 328,938 4,693,941 78,091 1,291,178 2,458,193 3,271,172
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (1,269,632) (23,782,630) (1,621,968) (27,517,770) (679,124,048) (783,244,187)
====================================================================================================================================
Net increase/(decrease) (140,894) $ (3,624,512) 8,333 $ 486,120 $ 59,635,664 $ 20,588,996
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GLOBAL ASSET ALLOCATION FUND TOTAL RETURN BOND FUND
Six Months Ended 12/31/97 Period Ended 12/31/97
(unaudited) Year Ended 6/30/97 (unaudited)
R Shares:* Shares Dollars Shares Dollars Shares Dollars
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Sold 64,315 $ 867,803 182,005 $ 2,243,696 8,055,309 $ 96,688,156
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment
of dividends 12,221 146,043 -- -- 240,295 2,948,595
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (66,162) (873,444) (58,005) (723,748) (2,102,053) (25,892,808)
====================================================================================================================================
Net increase 10,374 $ 140,402 124,000 $ 1,519,948 6,193,551 $ 73,743,943
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GLOBAL COMMUNICATIONS FUND FEDERAL TAX-FREE MONEY FUND
Six Months Ended 12/31/97 Six Months Ended 12/31/97
(unaudited) Year Ended 6/30/97 (unaudited) Year Ended 6/30/97
R Shares:* Shares Dollars Shares Dollars Shares and Dollars Shares and Dollars
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Sold 1,718,452 $ 33,554,570 1,553,395 $ 27,424,685 $ 608,588,746 $ 697,918,747
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment
of dividends 1,826,683 27,929,966 527,423 8,880,420 1,411,577 2,441,561
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (2,677,783) (49,284,554) (5,680,057) (98,872,932) (610,975,150) (586,161,101)
====================================================================================================================================
Net increase/(decrease) 867,352 $ 12,199,982 (3,599,239) $ (62,567,827) $ (974,827) $ 114,199,207
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHORT DURATION GOVERNMENT BOND FUND GOVERNMENT RESERVE FUND
Six Months Ended 12/31/97 Six Months Ended 12/31/97
(unaudited) Year Ended 6/30/97 (unaudited) Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars Shares and Dollars Shares and Dollars
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Sold 7,081,111 $ 71,256,269 5,462,262 $ 54,326,915 $ 2,715,017,369 $ 3,645,527,042
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment
of dividends 101,314 1,020,514 195,195 1,945,143 14,475,747 22,892,029
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (6,581,854) (66,248,303) (3,214,013) (31,983,590) (2,534,360,363) (3,634,659,585)
====================================================================================================================================
Net increase/(decrease) 600,571 $ 6,028,480 2,443,444 $ 24,288,468 $ 195,132,753 $ 33,759,486
- ------------------------------------------------------------------------------------------------------------------------------------
P Shares:
====================================================================================================================================
Sold -- -- -- -- $ 282 $ --
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment
of dividends -- -- 3 30 4 29
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (21) (204) (74) (740) (491) (729)
====================================================================================================================================
Net increase/(decrease) (21) $ (204) (71) $ (710) $ (205) $ (700)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
Six Months Ended 12/31/97 (unaudited) Year Ended 6/30/97
R Shares: Shares Dollars Shares Dollars
====================================================================================================================================
<S> <C> <C> <C> <C>
Sold 803,809 $ 10,252,415 1,175,026 $ 14,606,989
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment
of dividends 28,971 369,738 36,878 457,824
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (333,044) (4,237,958) (621,747) (7,718,315)
====================================================================================================================================
Net increase/(decrease) 499,736 $ 6,384,195 590,157 $ 7,346,498
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Global Asset Allocation, Total Return Bond and Federal Tax-Free Money
Funds' Class R shares commenced operations on January 2, 1997; June 30, 1997;
and July 15, 1996, respectively.
The accompanying notes are an integral part of these financial statements.
92
<PAGE>
-----------------------------------
The Montgomery Funds
-----------------------------------
Statements of Cash Flows
-----------------------------------
Six Months Ended December 31, 1997
<TABLE>
<CAPTION>
Short Duration Total Return
Government Bond Fund Bond Fund
Cash Flows from Operating Activities:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income received ........................................ $ 1,832,492 $ 1,756,302
Fee income received .................................... 625 69,055
Operating expenses paid ................................ (135,047) (220,262)
Proceeds from sales of long-term securities
and purchased options ............................... 105,823,235 95,930,737
Net proceeds from futures and short sales transactions . 16,504 54,056
Purchases of long-term securities and purchased options (119,228,632) (172,632,653)
Net proceeds from short-term investments ............... 5,856,240 4,606,926
--------- ---------
Cash Used by Operating Activities .......................... $ (5,834,583) $ (70,435,839)
Cash Flows from Financing Activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from subscriptions ............................ $ 71,442,571 $ 96,389,739
Payments on shares redeemed ............................ (66,133,487) (25,892,632)
Net dollar roll deferral ............................... (1,875) 37,031
Cash dividends paid(*) ................................. (305,986) (69,568)
Reverse repurchase agreements .......................... (6,548,750) --
Reverse repurchase agreement interest expense .......... (223,157) (94,819)
------- ------
Cash Provided/(Used) by Financing Activities ............... $ (1,770,684) $ 70,369,751
Decrease in cash ........................................... $ (7,605,267) $ (66,088)
Cash at beginning of period ................................ 7,474,382 --
--------- ------
Cash at end of period ...................................... $ (130,885) $ (66,088)
Reconciliation of Net Increase in Net Assets from
Operations to Cash Provided by Operating Activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ... $ 1,854,207 $ 5,395,350
Increase in investments ................................ (6,255,646) (80,101,935)
Decrease/(Increase) in interest and dividends receivable 116,233 (1,126,986)
Decrease/(Increase) in deferred fee income from
dollar roll transactions ............................ (719) 5,556
Decrease in other assets ............................... 4,278 11,355
Increase in receivables for investments sold and
dollar roll transactions ............................ (2,321,394) (13,507,736)
Increase in payable for investments purchased .......... 539,835 18,749,889
Increase in accrued expenses ........................... 5,466 43,849
Interest expense ....................................... 223,157 94,819
------- ------
Total adjustments .......................................... $ (7,688,790) $ (75,831,189)
Cash Used by Operating Activities .......................... $ (5,834,583) $ (70,435,839)
</TABLE>
*Non-cash activities include reinvestment of dividends of $1,020,517 and
$2,948,595 for the Short Duration Government Bond Fund and the Total Return Bond
Fund, respectively.
93
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Financial Highlights
- --------------------
GROWTH FUND
<TABLE>
<CAPTION>
Class R Class P
Selected Per-Share Data for the Year Shares Shares
or Period Ended: 12/31/97 12/31/97
(unaudited) 1997## 1996 1995 1994(a) (unaudited) 1997## 1996(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 23.07 $ 21.94 $ 19.16 $ 15.27 $ 12.00 $ 23.12 $ 21.94 $ 19.22
====================================================================================================================================
Net investment income/(loss) 0.08 0.15 0.17 0.12 0.04 0.08 0.09 0.03
Net realized and unrealized gain on investments 1.81 3.90 4.32 3.91 3.31++ 1.79 3.96 2.69
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 1.89 4.05 4.49 4.03 3.35 1.87 4.05 2.72
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.15) (0.15) (0.17) (0.07) (0.01) (0.09) (0.10) --
Distributions from net realized capital gains (2.92) (2.77) (1.54) (0.07) -- (2.92) (2.77) --
Distributions in excess of net realized
capital gains -- -- -- -- (0.07) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (3.07) (2.92) (1.71) (0.14) (0.08) (3.01) (2.87) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 21.89 $ 23.07 $ 21.94 $ 19.16 $ 15.27 $ 21.98 $ 23.12 $ 21.94
====================================================================================================================================
Total Return** 8.45% 20.44% 24.85% 26.53% 27.98% 7.73% 20.41% 14.15%
====================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
====================================================================================================================================
Net assets, end of year (in 000s) $1,364,985 $1,137,343 $ 6,382 $878,776 $149,103 $ 171 $ 212 $ 82
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets 0.71%+ 0.69% 0.78% 0.98% 1.09%+ 0.46%+ 0.44% 0.53%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral
of fees by Manager -- -- -- -- $ 0.03 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 26.52% 61.10% 118.14% 128.36% 110.65% 26.52% 61.10% 118.14%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0611 $ 0.0595 $0.0596 N/A N/A $0.0611 $0.0595 $0.0596
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 1.25%+ 1.27% 1.35% 1.50% 1.49%+ 1.50%+ 1.52% 1.60%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager -- -- -- -- 1.79%+ -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Growth Fund's Class R shares and Class P shares commenced operations on
September 30, 1993, and January 12, 1996, respectively.
(b) The Small Cap Opportunities Fund's Class R shares and Class P shares
commenced operations on December 29, 1995, and July 29, 1996, respectively.
(c) The Micro Cap Fund's Class R shares commenced operations on December 30,
1994.
EQUITY INCOME FUND
<TABLE>
<CAPTION>
Class R Class P
Shares Shares
Selected Per-Share Data for the Year or Period Ended: 12/31/97 12/31/97
(unaudited) 1997## 1996 1995(d) (unaudited) 1997## 1996(d)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 17.91 $ 16.09 $ 13.38 $ 12.00 $ 17.90 $ 16.09 $ 15.66
====================================================================================================================================
Net investment income/(loss) 0.23 0.49 0.43 0.31 0.21 0.44 0.08
Net realized and unrealized gain/(loss) on investments 1.79 3.35 2.82 1.38 1.82 3.35 0.35
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 2.02 3.84 3.25 1.69 2.03 3.79 0.43
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.23) (0.46) (0.42) (0.31) (0.20) (0.42) --
Distributions from net realized capital gains (1.92) (1.56) (0.12) -- (1.92) (1.56) --
Distributions from capital -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.15) (2.02) (0.54) (0.31) (2.13) (1.98) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 17.78 $ 17.91 $ 16.09 $ 13.38 $ 17.80 $ 17.90 $ 16.09
====================================================================================================================================
Total Return** 11.43% 26.02% 24.56% 14.26% 11.48% 25.64% 2.75%
====================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
====================================================================================================================================
Net assets, end of year (in 000s) $ 42,378 $ 38,595 $ 19,312 $ 6,383 $ 1,613 $ 868 $ 2
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets 2.41%+ 2.93% 3.03% 4.06%+ 2.16%+ 2.68% 2.78%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager $ 0.17 $ 0.39 $ 0.34 $ 0.13 $ 0.14 $ 0.34 $ 0.06
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 28.80% 62.31% 89.77% 29.46% 28.8% 62.31% 89.77%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0596 $ 0.0598 $ 0.0423 N/A $ 0.0596 $0.0598 $0.0423
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.46%+ 1.46% 1.45% 3.16%+ 1.71%+ 1.71% 1.70%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.85%+ 0.86% 0.85% 0.84%+ 1.10%+ 1.11% 1.10%+
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(d) The Equity Income Fund's Class R shares and Class P shares commenced
operations on September 30, 1994, and March 11, 1996, respectively.
(e) The Small Cap Fund's Class R shares became available for investment by the
public on July 13, 1990. The Fund's Class P shares commenced operations on
July 1, 1996.
94
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP OPPORTUNITIES FUND
Class R Shares Class P Shares
Selected Per-Share Data for the Year 12/31/97 12/31/97
or Period Ended: (unaudited) 1997 1996(b)## (unaudited) 1997(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 17.53 $ 15.80 $ 12.00 $ 17.53 $ 14.37
=======================================================================================================================
Net investment income/(loss) (0.10) (0.13) 0.02 (0.11) (0.11)
Net realized and unrealized gain on investments 1.73 1.86 3.78++ 1.47 3.27
- -----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 1.63 1.73 3.80 1.36 3.16
- -----------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- (0.00)# -- -- (0.00)#
Distributions from net realized capital gains (0.42) -- -- (0.42) --
Distributions in excess of net realized
capital gains -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (0.42) (0.00)# -- (0.42) (0.00)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 18.74 $ 17.53 $ 15.80 $ 18.47 $ 17.53
=======================================================================================================================
Total Return** 9.41% 10.97% 31.67% 7.87% 22.09%
=======================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
=======================================================================================================================
Net assets, end of year (in 000s) $ 244,157 $ 226,318 $ 136,140 $ 11 $ 9
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets (1.02)%+ (0.86)% 0.23%+ (1.27)%+ (1.11)%+
- -----------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral
of fees by Manager $ (0.14) $ (0.16) $ (0.04) $ (0.15) $ (0.14)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 54.90% 154.50% 81.29% 54.90% 154.50%
- -----------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0577 $ 0.0562 $ 0.0578 $ 0.0577 $ 0.0562
- -----------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 1.50%+ 1.50% 1.50%+ 1.75%+ 1.75%+
- -----------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager 1.95%+ 1.75%+ 2.16%+ 2.20%+ 2.00%+
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
MICRO CAP FUND
Class R Shares
Selected Per-Share Data for the Year 12/31/97
or Period Ended: (unaudited) 1997 1996 1995(c)##
<S> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 19.00 $ 17.82 $ 13.75 $ 12.00
===============================================================================================================
Net investment income/(loss) (0.09) (0.13) (0.04) 0.09
Net realized and unrealized gain on investments 2.54 2.54 4.26 1.66
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 2.45 2.41 4.22 1.75
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- (0.04) --
Distributions from net realized capital gains (1.14) (1.23) (0.11) --
Distributions in excess of net realized
capital gains -- -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total distributions (1.14) (1.23) (0.15) --
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 20.31 $ 19.00 $ 17.82 $ 13.75
===============================================================================================================
Total Return** 13.08% 14.77% 30.95% 14.58%
===============================================================================================================
Ratios to Average Net Assets/Supplemental Data:
===============================================================================================================
Net assets, end of year (in 000s) $ 368,084 $ 317,812 $ 306,217 $ 162,949
- ---------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets (0.89)%+ (0.75)% (0.11)% 1.40%+
- ---------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral
of fees by Manager -- -- $ (0.05) $ 0.07
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 24.03% 79.00% 88.98% 36.81%
- ---------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0569 $ 0.0569 $ 0.0573 N/A
- ---------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 1.70%+ 1.71% 1.75% 1.75%+
- ---------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager -- -- 1.79%+ 2.07%+
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP FUND
Class R Shares
Selected Per-Share Data for the Year 12/31/97
or Period Ended: (unaudited) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 19.52 $ 21.55 $ 17.11 $ 15.15 $ 16.83 $ 12.90
==============================================================================================================================
Net investment income/(loss) (0.05) (0.18) (0.09) (0.10) (0.12) (0.11)
Net realized and unrealized gain/(loss) on investments 3.14 1.43 6.31 3.04 (0.47) 4.04
- ------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 3.09 1.25 6.22 2.94 (0.59) 3.93
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- -- -- --
Distributions from net realized capital gains (2.97) (3.28) (1.78) (0.98) (1.09) --
Distributions from capital -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.97) (3.28) (1.78) (0.98) (1.09) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 19.64 $ 19.52 $ 21.55 $ 17.11 $ 15.15 $ 16.83
==============================================================================================================================
Total Return** 16.75% 6.81% 39.28% 20.12% (1.59)% 30.47%
==============================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
==============================================================================================================================
Net assets, end of year (in 000s) $207,628 $198,298 $275,062 $202,399 $209,063 $219,968
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets (0.55)%+ (0.78)% (0.47)% (0.57)% (0.68)% (0.69)%
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 33.97% 58.71% 80.00% 85.07% 95.22% 130.37%
- ------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0539 $ 0.0522 $ 0.0529 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 1.24%+ 1.20% 1.24% 1.37% 1.35% 1.40%
- ------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
Selected Per-Share Data for the Year 12/31/97
or Period Ended: 1992 1991 1991(e) (unaudited) 1997(e)
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 13.24 $ 10.05 $ 10.62 $ 19.48 $ 21.73
==================================================================================================================
Net investment income/(loss) (0.06) (0.06) (0.07) (0.02) (0.10)
Net realized and unrealized gain/(loss) on investments 3.25 3.27 2.71 2.99 1.13
- ------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 3.19 3.21 2.64 2.97 1.03
- ------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- -- --
Distributions from net realized capital gains (2.75) (0.02) (0.02) (2.97) (3.28)
Distributions from capital (0.78) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total distributions (3.53) (0.02) (0.02) (2.97) (3.28)
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 12.90 $ 13.24 $ 13.24 $ 19.48 $ 19.48
==================================================================================================================
Total Return** 27.69% 31.97% 24.89% 16.18% 5.74%
==================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
==================================================================================================================
Net assets, end of year (in 000s) $176,588 $ 27,181 $ 27,181 $ 21,702 $ 6,656
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets (0.44)% (0.47)% (0.45)%+ (0.80)% + (1.03)%+
- ------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 80.67% 194.63% 188.16% 33.97% 58.71%
- ------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ N/A N/A N/A $ 0.0539 $ 0.0522
- ------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 1.50% 1.50% 1.45%+ 1.49%+ 1.45%+
- ------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period, since
the use of the undistributed income method did not accord with results of
operations.
95
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Financial Highlights
- --------------------
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH FUND
Class R Shares Class P Shares
Selected Per-Share Data for the Year or Period Ended: 12/31/97 12/31/97
(unaudited) 1997## 1996(a) (unaudited) 1997## 1996(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 16.24 $ 15.31 $ 12.00 $ 16.22 $ 15.31 $ 13.66
====================================================================================================================================
Net investment income/(loss) (0.03) 0.08 0.02 (0.07) 0.05 0.00#
Net realized and unrealized gain/(loss) on investments (0.36) 2.53 3.29 (0.33) 2.54 1.65
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations (0.39) 2.61 3.31 (0.40) 2.59 1.65
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.02) -- -- -- --
Distributions from net realized capital gains (1.07) (1.68) -- (1.07) (1.68) --
Distributions in excess of net realized capital gains -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.09) (1.68) -- (1.07) (1.68) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 14.76 $ 16.24 $ 15.31 $ 14.75 $ 16.22 $ 15.31
====================================================================================================================================
Total Return ** (2.39)% 19.20% 27.58% (2.54)% 19.13% 12.08%
====================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
====================================================================================================================================
Net assets, end of year (in 000s) $31,694 $33,912 $18,303 $ 4 $ 5 $ 1
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (0.38)%+ 0.57% 0.26%+ (0.63)%+ 0.32% 0.01%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ (0.12) $ (0.02) $ (0.07) $ (0.16) $ (0.06) $ (0.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 70.63% 95.02% 238.91% 70.63% 95.02% 238.91%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0128 $0.0217 $0.0176 $0.0128 $0.0217 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 2.70%+ 2.37% 2.91%+ 2.95%+ 2.62% 3.16%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.65%+ 1.66% 1.65%+ 1.90%+ 1.91% 1.90%+
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The International Growth Fund's Class R shares and Class P shares commenced
operations on July 3, 1995, and March 11, 1996, respectively.
(b) The Emerging Markets Fund's Class R shares and Class P shares commenced
operations on March 1, 1992, and March 11, 1996, respectively.
<TABLE>
<CAPTION>
INTERNATIONAL SMALL CAP FUND
Class R Shares Class P Shares
Selected Per-Share Data for the Year or Period Ended: 12/31/97 12/31/97
(unaudited) 1997 1996 1995 1994(c) (unaudited) 1997(c)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 17.16 $ 14.86 $ 11.75 $ 12.02 $ 12.00 $ 17.16 $ 16.96
====================================================================================================================================
Net investment income/(loss) 0.00# (0.05) 0.03 0.12 0.00# (0.04) 0.00#
Net realized and unrealized gain/(loss) on investments (2.16) 2.35 3.10 (0.39) 0.02 (2.14) 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations (2.16) 2.30 3.13 (0.27) 0.02 (2.18) 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.13) -- (0.02) (0.00)# -- (0.09) --
Distributions in excess of net investment income -- -- -- -- -- -- --
Distributions from net realized capital gains (2.19) -- -- -- -- (2.19) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.32) -- (0.02) (0.00)# -- (2.28) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 12.68 $ 17.16 $ 14.86 $ 11.75 $ 12.02 $ 12.70 $ 17.16
====================================================================================================================================
Total Return ** (12.51)% 15.48% 26.68% (2.23)% 0.17% (12.73)% 1.18%
====================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
====================================================================================================================================
Net assets, end of year (in 000s) $44,902 $53,602 $41,640 $28,516 $34,555 $ 4 $ 15
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (0.38)%+ (0.34)% 0.20% 0.95% 0.04%+ (0.63)%+ (0.59)%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by
Manager $ (0.05) $ (0.14) $ (0.08) $ 0.05 $ (0.02) $ (0.13) $ (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 50.54% 84.91% 177.36% 156.13% 123.50% 50.54% 84.91%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $0.0254 $0.0157 $0.0123 N/A N/A $0.0254 $0.0157
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 1.92%+ -- 1.96% 1.91% 1.99%+ 2.17%+ --
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 3.11%+ 2.60% 2.76% 2.50% 2.32%+ 3.36%+ 2.85%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.90%+ 1.90% 1.90% 1.90% 1.90%+ 2.15%+ 2.15%+
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) The International Small Cap Fund's Class R shares and Class P shares
commenced operations on September 30, 1993, and June 9, 1997, respectively.
(d) The Emerging Asia Fund's Class R shares commenced operations on September
30, 1996.
(e) The Latin America Fund's Class R shares commenced operations on June 30,
1997.
(f) The Global Opportunities Fund's Class R shares commenced operations on
September 30, 1993.
96
<PAGE>
<TABLE>
<CAPTION>
EMERGING MARKETS FUND
Class R Shares
12/31/97
(unaudited) 1997 1996 1995## 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 16.85 $ 14.19 $ 13.17 $ 13.68 $ 11.07
===============================================================================================================================
Net investment income/(loss) 0.02 0.07 0.08 0.03 (0.03)
Net realized and unrealized gain/(loss) on investments (3.46) 2.66 0.94 0.25++ 2.92
- -------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations (3.44) 2.73 1.02 0.28 2.89
- -------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.15) (0.07) -- -- --
Distributions from net realized capital gains (0.33) -- -- (0.42) (0.28)
Distributions in excess of net realized capital gains -- -- -- (0.37) --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.48) (0.07) -- (0.79) (0.28)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 12.93 $ 16.85 $ 14.19 $ 13.17 $ 13.68
===============================================================================================================================
Total Return ** (20.27)% 19.34% 7.74% 1.40% 26.10%
===============================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
===============================================================================================================================
Net assets, end of year (in 000s) $ 985,692 $ 1,259,457 $ 9 $ 998,083 $ 654,960
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.22%+ 0.48% 0.58% 0.23% (0.14)%
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 41.66% 83.08% 109.92% 92.09% 63.79%
- -------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0011 $ 0.001 N/A .0007 N/A
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.59%+ 1.67% 1.72% 1.80% 1.85%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
12/31/97
1993 1992(b) (unaudited) 1997 1996(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 9.96 $ 10.00 $ 16.77 $ 14.19 $ 12.62
========================================================================================================================
Net investment income/(loss) 0.07 0.03 0.00# 0.06 0.01
Net realized and unrealized gain/(loss) on investments 1.05 (0.07) (3.49) 2.58 1.56
- ------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 1.12 (0.04) (3.49) 2.64 1.57
- ------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.01) -- (0.12) (0.06) --
Distributions from net realized capital gains (0.00)# -- (0.33) -- --
Distributions in excess of net realized capital gains -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions (0.01) -- (0.45) (0.06) --
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 11.07 $ 9.96 $ 12.83 $ 16.77 $ 14.19
========================================================================================================================
Total Return ** 11.27% (0.40)% (20.64)% 18.62% 12.44%
========================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
========================================================================================================================
Net assets, end of year (in 000s) $ 206,617 $ 54,625 $ 584 $ 607 $ 2
- ------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.66% 1.70%+ (0.03)%+ 0.23% 0.33%+
- ------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager$ 0.06 $ 0.01 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 21.40% 0.19% 41.66% 83.08% 109.92%
- ------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ N/A N/A $ 0.0011 $ 0.0011 $ 0.0007
- ------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 1.93% 2.80%+ -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.90% 1.90%+ 1.84%+ 1.92% 1.97%+
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EMERGING ASIA FUND LATIN AMERICA FUND
Class R Shares Class R Shares
12/31/97 12/31/97(e)
(unaudited) 1997(d) unaudited
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 18.91 $ 12.00 $ 12.00
============================================================================================================
Net investment income/(loss) 0.00# 0.02 0.11
Net realized and unrealized gain/(loss) on investments (8.48) 6.92 (0.89)
- ------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations (8.48) 6.94 (0.78)
- ------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.17) -- (0.07)
Distributions in excess of net investment income -- (0.03) --
Distributions from net realized capital gains (0.95) -- (0.15)
- ------------------------------------------------------------------------------------------------------------
Total distributions (1.12) (0.03) (0.22)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 9.31 $ 18.91 $ 11.00
============================================================================================================
Total Return ** (45.00)% 57.80% (6.46)%
============================================================================================================
Ratios to Average Net Assets/Supplemental Data:
============================================================================================================
Net assets, end of year (in 000s) $ 32,084 $ 68,095 $ 7,548
- ------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (0.17)%+ (0.02)%+ 2.07%+
- ------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by
Manager $ (0.01) $ 0.37 $ (0.06)
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 84.44% 72.18% 70.24%
- ------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0044 $ 0.0077 $ 0.0005
- ------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- -- --
- ------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 2.39%+ 2.29%+ 2.66%+
- ------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.90%+ 1.80%+ --
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
GLOBAL OPPORTUNITIES FUND
Class R Shares
12/31/97
(unaudited) 1997 1996 1995 1994(f)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 19.17 $ 16.96 $ 13.25 $ 12.92 $ 12.00
================================================================================================================================
Net investment income/(loss) (0.11) (0.11) (0.06) 0.13 0.01
Net realized and unrealized gain/(loss) on investments (0.57) 3.14 3.84 0.70 0.91
- --------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations (0.68) 3.03 3.78 0.83 0.92
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- (0.07) -- --
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains (3.85) (0.82) -- (0.50) --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (3.85) (0.82) (0.07) (0.50) --
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 14.64 $ 19.17 $ 16.96 $ 13.25 $ 12.92
================================================================================================================================
Total Return ** (3.08)% 18.71% 28.64% 6.43% 7.67%
================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
================================================================================================================================
Net assets, end of year (in 000s) $ 22,664 $ 32,371 $ 28,496 $ 13,677 $ 12,504
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (1.10)%+ (0.62)% (0.56)% 1.03% 0.02%+
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by
Manager $ (0.23) $ (0.23) $ (0.16) $ (0.01) $ (0.05)
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 68.04% 117.10% 163.80% 118.75% 67.22%
- --------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0129 $ 0.0240 $ 0.0235 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 2.03%+ -- 2.05% 1.91% 1.99%+
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 3.29%+ 2.62% 3.10% 2.99% 2.75%+
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.90%+ 1.90% 1.90% 1.90% 1.90%+
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for theperiod, since
the use of the undistributed income method did not accord with results of
operations.
97
<PAGE>
- --------------------
The Montgomery Fund
- --------------------
Financial Highlights
- --------------------
<TABLE>
<CAPTION>
GLOBAL COMMUNICATIONS FUND
Class R Shares
Selected Per-Share Data for the Year or Period Ended 12/31/97
(unaudited) 1997 1996 1995 1994 1993(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 19.61 $ 18.05 $ 15.42 $ 14.20 $ 12.45 $ 12.00
====================================================================================================================================
Net investment income/(loss) (0.12) (0.25) (0.20) (0.03) (0.05) 0.00#
Net realized and unrealized gain/(loss) on investments (0.17) 2.72 2.83 1.28 1.80++ 0.45
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from investment
operations (0.29) 2.47 2.63 1.25 1.75 0.45
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- -- -- -- -- --
Distributions from net realized capital gains (3.75) (0.91) -- -- -- --
Distributions in excess of net realized capital gains -- -- -- (0.03) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (3.75) (0.91) -- (0.03) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 15.57 $ 19.61 $ 18.05 $ 15.42 $ 14.20 $ 12.45
====================================================================================================================================
Total Return** (1.02)% 14.43% 17.06% 8.83% 14.06% 3.75%
====================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
====================================================================================================================================
Net assets, end of year (in 000s) $135,758 $153,955 $206,671 $209,644 $234,886 $ 4,670
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets (1.42)%+ (1.05)% (1.01)% (0.10)% (0.46)% (0.05)%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ (0.13) $ (0.27) $ (0.22) $ (0.07) $ (0.06) $ (0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 41.57% 75.79% 103.73% 50.17% 29.20% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0073 $0.0104 $ 0.0129 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 1.93%+ -- 2.01% 1.91% 1.94% --
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 2.00%+ 2.00% 2.11% 2.09% 2.04% 8.96%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.90%+ 1.91% 1.90% 1.90% 1.90% 1.90%+
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Global Communications Fund's Class R shares commenced operations on
June 1, 1993
(b) The U.S. Asset Allocation Fund's Class R shares and Class P shares
commenced operations on March 31, 1994, and January 2, 1996, respectively.
<TABLE>
<CAPTION>
SELECT 50 FUND
Class R Shares Class P Shares
Selected Per-Share Data for the Year or Period Ended 12/31/97## 12/31/97
(unaudited) 1997## 1996(c) (unaudited)## 1997(c)##
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 20.01 $ 16.46 $ 12.00 $ 19.98 $ 15.89
====================================================================================================================================
Net investment income/(loss) 0.00# 0.01 0.06 (0.03) (0.02)
Net realized and unrealized gain/(loss) on investments 0.67 4.16 4.45 0.45 4.11
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.67 4.17 4.51 0.42 4.09
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- (0.10) (0.04) -- --
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains (1.85) (0.52) -- (1.85) --
Distributions in excess of net realized capital gains -- -- (0.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.85) (0.62) (0.05) (1.85) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 18.83 $ 20.01 $ 16.46 $ 18.55 $ 19.98
====================================================================================================================================
Total Return** 3.56% 26.35% 37.75% 2.31% 25.74%
====================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
====================================================================================================================================
Net assets, end of year (in 000s) $ 231,245 $ 172,509 $ 77,955 $ 78 $ 9
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 0.00%#+ 0.04% 0.42%+ (0.25)%+ (0.21)%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager -- $ (0.01) $ 0.02 $ (0.03) $ (0.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 77.84% 157.93% 105.98% 77.84% 157.93%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0107 $ 0.0011 $ 0.0097 $ 0.0107 $ 0.0011
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense -- 1.92% 2.11%+ -- 2.17%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 1.80%+ 1.82% 1.80%+ 2.05%+ 2.07%+
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) The Select 50 Fund's Class R shares and Class P shares commenced operations
on October 2, 1995, and December 12, 1996, respectively
(d) The Short Duration Government Bond Fund's Class R shares and Class P shares
commenced operations on December 18, 1992, and March 11, 1996,
respectively.
98
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
U.S. ASSET ALLOCATION FUND
Class R Shares
12/31/97
(unaudited) 1997## 1996 1995 1994(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 19.89 $ 19.33 $ 16.33 $ 12.24 $ 12.00
==========================================================================================================================
Net investment income/(loss) 0.91 0.48 0.26 0.25 0.06
Net realized and unrealized gain/(loss) on investments 0.67 2.13 3.54 4.11 0.18
- --------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from investment
operations 1.58 2.61 3.80 4.36 0.24
- --------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (1.63) (0.39) (0.25) (0.17) --
Distributions from net realized capital gains (1.83) (1.66) (0.55) (0.10) --
Distributions in excess of net realized capital gains -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (3.46) (2.05) (0.80) (0.27) --
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 18.01 $ 19.89 $ 19.33 $ 16.33 $ 12.24
==========================================================================================================================
Total Return** 8.24% 14.65% 23.92% 35.99% 2.00%
==========================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
==========================================================================================================================
Net assets, end of year (in 000s) $ 136,707 $ 127,214 $ 132,511 $ 60,234 $ 1,548
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 7.70%+ 2.55% 1.85% 3.43% 2.54%+
- --------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.91 $ 0.47 $ 0.24 $ 0.19 $ (0.11)
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 66.83% 168.51% 225.91% 95.75% 190.94%
- --------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ N/A $ 0.0448 $ 0.0595 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- 1.43% 1.42% 1.31% 1.43%+
- --------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 0.27%+ 1.49% 1.55% 2.07% 9.00%+
- --------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.25%+ 1.31% 1.30% 1.30% 1.30%+
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
12/31/97
(unaudited) 1997## 1996(b)
<S> <C> <C> <C>
Net Asset Value - Beginning of Year $ 19.89 $ 19.33 $ 17.86
===================================================================================================
Net investment income/(loss) 0.97 0.43 0.09
Net realized and unrealized gain/(loss) on investments 0.59 2.13 1.38
- ---------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from investment
operations 1.56 2.56 1.47
- ---------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (1.58) (0.34) --
Distributions from net realized capital gains (1.83) (1.66) --
Distributions in excess of net realized capital gains -- -- --
- ---------------------------------------------------------------------------------------------------
Total distributions (3.41) (2.00) --
Net Asset Value - End of Period $ 18.04 $ 19.89 $ 19.33
===================================================================================================
Total Return** 8.12% 14.35% 8.23%
===================================================================================================
Ratios to Average Net Assets/Supplemental Data:
===================================================================================================
Net assets, end of year (in 000s) $ 81 $ 74 $ 43
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 7.45%+ 2.30% 1.60%+
- ---------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.97 $ 0.42 $ 0.08
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate 66.83% 168.51% 225.91%
- ---------------------------------------------------------------------------------------------------
Average commission rate paid+++ N/A $ 0.0448 $ 0.0595
- ---------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- 1.68% 1.67%+
- ---------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 0.52%+ 1.74% 1.80%+
- ---------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.50%+ 1.56% 1.55%+
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT DURATION GOVERNMENT BOND FUND
Class R Shares
12/31/97
(unaudited) 1997## 1996 1995
<S> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 9.99 $ 9.92 $ 9.95 $ 9.80
==========================================================================================================================
Net investment income/(loss) 0.28 0.59 0.60 0.62
Net realized and unrealized gain/(loss) on investments 0.11 0.07 (0.04) 0.16
- --------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.39 0.66 0.56 0.78
- --------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.28) (0.59) (0.59) (0.62)
Distributions in excess of net investment income -- (0.00)# (0.00)# --
Distributions from net realized capital gains -- -- -- --
Distributions in excess of net realized capital gains -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Distributions from capital -- -- -- (0.01)
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (0.28) (0.59) (0.59) (0.63)
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 10.10 $ 9.99 $ 9.92 $ 9.95
==========================================================================================================================
Total Return** 3.99% 6.79% 5.74% 8.28%
==========================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
==========================================================================================================================
Net assets, end of year (in 000s) $ 53,822 $ 47,265 $ 22,681 $ 17,093
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 5.57%+ 5.87% 5.88% 6.41%
- --------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.26 $ 0.54 $ 0.52 $ 0.54
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 226.30% 450.98% 349.62% 284.23%
- --------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 1.54%+ 1.55% 1.55% 1.38%
- --------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 2.05%+ 2.05% 2.31% 2.23%
- --------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.60%+ 0.60% 0.60% 0.47%
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class P Shares
1994 1993(d) 1997## 1996(d)
<S> <C> <C> <C> <C>
Net Asset Value - Beginning of Year $ 10.23 $ 10.00 $ 9.92 $ 9.98
=============================================================================================================================
Net investment income/(loss) 0.61 0.33 0.59 0.16
Net realized and unrealized gain/(loss) on investments (0.34) 0.23 0.06 (0.05)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.27 0.56 0.65 0.11
- -----------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.56) (0.33) (0.58) (0.17)
Distributions in excess of net investment income (0.07) -- (0.00)# --
Distributions from net realized capital gains -- -- -- --
Distributions in excess of net realized capital gains (0.07) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Distributions from capital -- (0.00)# -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.70) (0.33) (0.58) (0.17)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value - End of Period $ 9.80 $ 10.23 $ 9.99 $ 9.92
=============================================================================================================================
Total Return** 2.49% 5.66% 6.69% 1.12%
=============================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
=============================================================================================================================
Net assets, end of year (in 000s) $ 21,937 $ 22,254 $ 0 $ 1
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 5.93% 6.02%+ 5.62% 5.63%+
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.51 $ 0.27 $ 0.54 $ 0.14
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 603.07% 213.22% 450.98% 349.62%
- -----------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 0.71% -- 1.80% 1.80%+
- -----------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 1.75% 2.07%+ 2.30% 2.56%+
- -----------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.25% 0.22%+ 0.85% 0.85%+
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period, since
the use of the undistributed income method did not accord with results of
operations.
99
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Financial Highlights
- --------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE MONEY FUND
Class R Shares
Selected Per-Share Data for the Year or Period Ended 12/31/97
(unaudited) 1997 1996 1995(a)
<S> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00
====================================================================================================================================
Net investment income 0.015 0.029 0.030 0.027
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 0.015 0.029 0.030 0.027
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.015) (0.029) (0.030) (0.027)
Distributions in excess of net investment income -- -- -- (0.000)###
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.015) (0.029) (0.030) (0.027)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
====================================================================================================================================
Total Return** 1.53% 2.95% 3.03% 2.68%
====================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
====================================================================================================================================
Net assets, end of year (in 000s) $ 178,359 $ 118,723 $ 98,134 $ 64,780
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 3.00%+ 2.91% 2.99% 3.55%+
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $ 0.014 $ 0.028 $ 0.028 $ 0.023
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 0.58%+ 0.58%+ 0.59% 0.33%+
- ------------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager 0.78%+ 0.73% 0.80% 0.86%+
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The California Tax-Free Money Fund's Class R shares commenced operations on
September 30, 1994.
(b) The California Tax-Free Intermediate Bond Fund's Class R shares commenced
operations on July 1, 1993.
(c) The Federal Tax-Free Money Fund's Class R shares commenced operations on
July 15, 1996.
<TABLE>
<CAPTION>
TOTAL RETURN BOND FUND GLOBAL ASSET ALLOCATION FUND
Class R Shares Class R Shares
Selected Per-Share Data for the Year or Period Ended 12/31/97(d) 12/31/97
(unaudited) (unaudited) 1997(e)##
<S> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 12.00 $ 13.33 $ 12.00
==========================================================================================================================
Net investment income/(loss) 0.36 0.43 0.09
Net realized and unrealized gain/(loss) on investments 0.41 (0.44) 1.24
- --------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.77 (0.01) 1.33
- --------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.36) (0.50) --
Distributions from net realized capital gains (0.12) (0.61) --
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (0.48) (1.11) --
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 12.29 $ 12.21 $ 13.33
==========================================================================================================================
Total Return** 6.46% 0.01% 11.17%
==========================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
==========================================================================================================================
Net assets, end of year (in 000s) $ 76,121 $ 1,641 $ 1,653
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 5.77%+ 6.72%+ 1.31%+
- --------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.35 $ 0.17 $ (0.21)
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 167.97% 84.45% 89.52%+
- --------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 0.94%+ -- --
- --------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 1.01%+ 4.49%+ 4.84%+
- --------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.70%+ 0.46%+ 0.47%+
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(d) The Total Return Bond Fund's Class R shares commenced operations on June
30, 1997.
(e) The Global Asset Allocation Fund's Class R shares commenced operations on
December 31, 1996.
(f) The Government Reserve Fund's Class R shares and Class P shares commenced
operations on September 14, 1992, and March 11, 1996, respectively.
100
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
Class R Shares
12/31/97
(unaudited) 1997 1996 1995 1994(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 12.53 $ 12.23 $ 12.04 $ 11.79 $ 12.00
==================================================================================================================================
Net investment income 0.26 0.53 0.54 0.44 0.41
Net realized and unrealized gain/(loss) on investments 0.33 0.30 0.19 0.25 (0.21)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.59 0.83 0.73 0.69 0.20
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.26) (0.53) (0.54) (0.44) (0.41)
Distributions in excess of net investment income -- -- -- (0.00)# --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.26) (0.53) (0.54) (0.44) (0.41)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 12.86 $ 12.53 $ 12.23 $ 12.04 $ 11.79
==================================================================================================================================
Total Return** 4.76% 6.91% 6.11% 6.03% 1.65%
==================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
==================================================================================================================================
Net assets, end of year (in 000s) $ 28,689 $ 21,681 $ 13,948 $ 5,153 $ 11,556
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 4.08%+ 4.27% 4.34% 3.71% 3.44%
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $ 0.23 $ 0.47 $ 0.43 $ 0.34 $ 0.25
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 3.20% 25.60% 58.11% 37.93% 77.03%
- ----------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 0.69%+ 0.68% 0.61% 0.56% 0.23%
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager 1.19%+ 1.18% 1.43% 1.41% 1.63%
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FEDERAL TAX-FREE MONEY FUND
Class R Shares
12/31/97
(unaudited) 1997(c)
<S> <C> <C>
Net Asset Value -- Beginning of Year $ 1.00 $ 1.00
=======================================================================================================
Net investment income 0.016 0.032
Net realized and unrealized gain/(loss) on investments 0.000### 0.000###
- -------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.016 0.032
- -------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.016) (0.032)
Distributions in excess of net investment income -- (0.000)###
- -------------------------------------------------------------------------------------------------------
Total distributions (0.016) (0.032)
- -------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 1.00 $ 1.00
=======================================================================================================
Total Return** 1.58% 3.26%
=======================================================================================================
Ratios to Average Net Assets/Supplemental Data:
=======================================================================================================
Net assets, end of year (in 000s) $ 113,222 $ 114,197
- -------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 3.10%+ 3.24%+
- -------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $ 0.014 $ 0.030
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate -- --
- -------------------------------------------------------------------------------------------------------
Average commission rate paid+++ N/A N/A
- -------------------------------------------------------------------------------------------------------
Expense ratio including interest expense 0.60%+ 0.33%+
- -------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager 1.00%+ 0.69%+
- -------------------------------------------------------------------------------------------------------
<CAPTION>
GOVERNMENT RESERVE FUND
Class R Shares
12/31/97
(unaudited) 1997 1996 1995
<S> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00
=============================================================================================================================
Net investment income/(loss) 0.026 0.049 0.052 0.049
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 0.026 0.049 0.052 0.049
- -----------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.026) (0.049) (0.052) (0.049)
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.026) (0.049) (0.052) (0.049)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
=============================================================================================================================
Total Return** 2.62% 5.03% 5.28% 4.97%
=============================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
=============================================================================================================================
Net assets, end of year (in 000s) $668,301 $ 473,154 $ 439,423 $ 258,956
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 5.14%+ 4.93% 5.17% 4.92%
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager -- $ 0.049 $ 0.050 $ 0.047
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- -- -- 0.63%
- -----------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense -- 0.62% 0.74% 0.79%
- -----------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.56%+ 0.60% 0.60% 0.60%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GOVERNMENT RESERVE FUND
Class P Shares
12/31/97
1994 1993(f) (unaudited) 1997 1996(f)
<S> <C> <C> <C> <C> <C>
Net Asset Value -- Beginning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==================================================================================================================================
Net investment income/(loss) 0.029 0.024 0.025 0.048 0.014
Net realized and unrealized gain/(loss) on investments 0.000### 0.000### 0.000### 0.000### 0.000###
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from investment operations 0.029 0.024 0.025 0.048 0.014
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.029) (0.024) (0.025) (0.048) (0.014)
Distributions from net realized capital gains -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.029) (0.024) (0.025) (0.048) (0.014)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==================================================================================================================================
Total Return** 2.96% 2.41% 2.49% 4.88% 1.38%
==================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
==================================================================================================================================
Net assets, end of year (in 000s) $ 211,129 $ 124,795 -- -- $ 1
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets 2.99% 2.96%+ 4.89%+ 4.68% 4.91%+
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees by Manager $ 0.028 $ 0.013 -- $ 0.048 $ 0.013
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager, including
interest expense 0.71% 0.77%+ -- 0.87% 0.99%
- ----------------------------------------------------------------------------------------------------------------------------------
Expense ratio excluding interest expense 0.60% 0.38%+ 0.81%+ 0.85% 0.85%+
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 per share.
## Per-share numbers have been calculated using the average share method,
which more appropriately represents the per-share data for the period,
since the use of the undistributed income method did not accord with
results of operations.
### Amount represents less than $0.001 per share.
101
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
The Montgomery Funds and The Montgomery Funds II (individually, the "Trust" and,
collectively, the "Trusts") are registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as diversified, open-end management
investment companies. As of December 31, 1997, the Trusts had 24 publicly
offered series (individually, a "Fund" and, collectively, the "Funds"). The
Montgomery Funds included the following: Montgomery Growth Fund, Montgomery
Small Cap Opportunities Fund, Montgomery Small Cap Fund, Montgomery Micro Cap
Fund, Montgomery Equity Income Fund, Montgomery International Growth Fund,
Montgomery International Small Cap Fund, Montgomery Emerging Markets Fund,
Montgomery Emerging Asia Fund, Montgomery Latin America Fund, Montgomery Global
Opportunities Fund, Montgomery Global Communications Fund, Montgomery Select 50
Fund, Montgomery Global Asset Allocation Fund, Montgomery Total Return Bond
Fund, Montgomery Short Duration Government Bond Fund, Montgomery California
Tax-Free Intermediate Bond Fund, Montgomery Government Reserve Fund, Montgomery
California Tax-Free Money Fund and Montgomery Federal Tax-Free Money Fund. The
Montgomery Funds II included the following: Montgomery U.S. Asset Allocation
Fund, Montgomery Emerging Markets Focus Fund, Montgomery Global Long-Short Fund
and Montgomery Institutional Series: Emerging Markets Portfolio.
The Montgomery Funds were organized as a Massachusetts business trust on May 10,
1990, and commenced operations with the Montgomery Small Cap Fund. The
Montgomery Funds II were organized as a Delaware business trust on September 8,
1993, and commenced operations with the Montgomery Institutional Series:
Emerging Markets Portfolio. Prior to the public offerings of shares of each
Fund, a limited number of shares were sold to Montgomery Asset Management, LLC
(or its predecessor), and/or affiliated persons of Montgomery Asset Management
in private placement offerings. Otherwise, no Fund had any significant
operations prior to the date on which it commenced operations (i.e., commenced
selling shares to the public). On December 1, 1995, Growth Fund, Small Cap
Opportunities Fund, Small Cap Fund, Equity Income Fund, International Growth
Fund, Emerging Markets Fund, Select 50 Fund, U.S. Asset Allocation Fund, Short
Duration Government Bond Fund and Government Reserve Fund commenced offering
Class P shares. Any shares outstanding prior to December 1, 1995, were
designated as Class R shares.
The Global Asset Allocation Fund allocates its assets among a diversified group
of five Funds from The Montgomery Funds family: Montgomery Growth Fund,
Montgomery International Growth Fund, Montgomery Emerging Markets Fund,
Montgomery Total Return Bond Fund and Montgomery Government Reserve Fund
(collectively, the "Underlying Funds"). The U.S. Asset Allocation Fund also
allocates its assets among three Funds from The Montgomery Funds family: The
Montgomery Growth Fund, Montgomery Total Return Bond Fund and Montgomery
Government Reserve Fund (also referred to as the "Underlying Funds").
1. SIGNIFICANT ACCOUNTING POLICIES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosure in the financial statements. Actual
results could differ from those estimates. Information presented in these
financial statements pertains to all the above Funds except for Montgomery
Institutional Series: Emerging Markets Portfolio, Montgomery Emerging Markets
Focus Fund and Montgomery Global Long-Short Fund, which are presented under
separate cover or just commenced operations and have no financial results to
report.
The following is a summary of significant accounting policies.
a. Portfolio Valuation
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 in the case of fixed-income securities, the mean of the
closing bid and ask prices. The Underlying Funds are valued according to their
stated net asset values.
Portfolio securities that are traded primarily on foreign securities exchanges
or for which market quotations are readily available are generally valued at the
last reported sales price on the respective exchanges or markets; except that
when an occurrence subsequent to the time that a value was so established is
likely to have changed said value, the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates. Securities traded on the over-the-counter
market or on the Nasdaq stock market are valued at the mean between the last
available bid and ask price prior to the time of valuation.
For the Government Reserve Fund, California Tax-Free Money Fund and the Federal
Tax-Free Money Fund, portfolio securities are valued at amortized cost, which
means that they are valued at amortized cost rather than at current market
value. Amortized cost involves valuing a portfolio security initially at cost,
and thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Amortized cost approximates market value. Calculations
are made to compare the value of the Fund's 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.
Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations as to their sale) are
valued at fair value as determined in good faith by or under the supervision of
the Trusts' officers in accordance with methods authorized by the Trusts' Board
of Trustees. Short-term securities with maturities of 60 days or less (excluding
the Government Reserve Fund, California Tax-Free Money Fund and the Federal
Tax-Free Money Fund, which value all securities at amortized cost) are carried
at amortized cost, which approximates market value.
102
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
to Financial Statements
b. Forward Foreign-Currency Exchange Contracts
Certain Funds may engage in forward foreign-currency exchange contracts with
off-balance sheet risk in the normal course of investing activities in order to
manage exposure to market risks. Forward foreign-currency exchange contracts are
valued at the forward rate and are marked-to-market daily. The change in market
value is recorded by the Fund as an unrealized gain or loss.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed. Forward foreign-currency exchange contracts
have been used solely to establish a rate of exchange for settlement of
transactions. Although forward foreign-currency exchange contracts limit the
risk of loss due to a decline in the value of the hedged currency, they also
limit any potential gain that might result should the value of the currency
increase. In addition, a Fund could be exposed to risks if the counterparties to
the contracts are unable to meet the terms of their contracts.
c. Foreign Currency
Foreign currencies, investments, and other assets and liabilities are translated
into U.S. dollars at the exchange rates daily, and purchases and sales of
investment securities and income and expenses are translated on the respective
dates of such transactions. Unrealized gains and losses that result from changes
in foreign-currency exchange rates on investments have been included in the
unrealized appreciation/(depreciation) of securities. Net realized
foreign-currency gains and losses resulting from movement in exchange rates
include foreign-currency gains and losses between trade date and settlement date
on investment securities transactions, foreign-currency transactions and the
difference between the amounts of interest and dividends recorded on the books
of a Fund and the amount actually received, and the portion of foreign-currency
gains and losses related to fluctuations in exchange rates between the initial
purchase trade date and subsequent sale trade date.
d. Repurchase Agreements
Each Fund may engage in repurchase agreement transactions either individually or
jointly through a joint repurchase account with other series of the Trusts
pursuant to a joint repurchase agreement. Under the terms of a typical
repurchase agreement, a Fund takes possession of a government debt obligation as
collateral. The Fund also agrees with the counterparty to allow the counterparty
to repurchase, and the Fund to resell, the obligations at a specified date and
price, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, a Fund has the right
to use the collateral to offset losses incurred. There could be potential loss
to the Fund in the event a Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period while a Fund
seeks to assert its rights. The Fund's investment manager, acting under the
supervision of the Board of Trustees, reviews the value of the collateral and
the creditworthiness of those banks and dealers with which a Fund enters into
repurchase agreements to evaluate potential risks. The Funds may also
participate on an individual or joint basis in tri-party repurchase agreements
which involve a counterparty and a custodian bank.
e. Dollar Roll Transactions
Certain Funds may enter into dollar roll transactions with financial
institutions to take advantage of opportunities in the mortgage market. A dollar
roll transaction involves a sale by the Fund of securities with a simultaneous
agreement to repurchase substantially similar securities at an agreed-upon price
at a future date. The securities repurchased will bear the same interest as
those sold, but generally will be collateralized by different pools of mortgages
with different prepayment histories. During the period between the sale and
repurchase, a Fund will not be entitled to receive interest and principal
payments on the securities sold. The Fund will invest the proceeds of the sale
in additional instruments, the income from which, together with any additional
fee income received for the dollar roll, may or may not generate income for the
Fund exceeding the yield on the securities sold. Dollar roll transactions
involve the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of those securities.
f. Short Sales/Forward Commitments
Certain Funds may seek to hedge investments through forward commitments to sell
high-grade liquid debt securities. In some cases, a Fund may enter into forward
commitments to sell securities the Fund does not yet own (but has the right to
acquire). Such forward commitments effectively constitute a form of short sale
and have been limited to date to the Short Duration Government Bond Fund and to
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC") in
connection with certain FHLMC conversion programs. To complete such a
transaction, a Fund must obtain a security that is convertible into the security
it has made a commitment to deliver. Forward commitments involve transaction
costs and entail risk to the extent that interest rates move in a direction
different from that anticipated. There is a risk that the market price will
increase for the security the Fund must purchase. Whenever a Fund engages in
this type of transaction, it maintains other high-quality liquid debt securities
equal in value to the forward commitment in a segregated account with its
custodian.
g. Reverse Repurchase Agreements
Certain Funds may enter into reverse repurchase agreement transactions with
member banks on the Federal Reserve Bank of New York's list of reporting dealers
for leverage purposes. A reverse repurchase agreement involves a sale by the
Fund of securities that it holds with an agreement by the Fund to repurchase the
same securities at an agreed-upon price and date. A reverse repurchase agreement
involves the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of the securities. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a
103
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
determination by the party, or its trustee or receiver, whether to enforce the
Fund's obligation to repurchase the securities. Each Fund establishes a
segregated account with its custodian in which the Fund maintains cash, U.S.
government securities or other high-grade liquid debt obligations equal in value
to its obligations with respect to reverse repurchase agreements.
h. Reverse Dollar Roll Transactions
Certain Funds may enter into 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. Under the 1940 Act, reverse
dollar roll transactions are considered to be loans by a Fund and must be fully
collateralized. If the seller defaults on its obligation to repurchase the
underlying security, a Fund may experience delay or difficulty in exercising its
rights to realize upon the security, may incur a loss if the value of the
security declines and may incur disposition costs in liquidating the security.
i. Futures Contracts
Certain Funds may enter into futures contracts. Upon entering into a futures
contract, a Fund is required to deposit with the custodian on behalf of the
broker an amount of cash or cash equivalents equal to a certain percentage of
the contract amount. This is known as the "initial margin." Subsequent payments
("variation margin") are made or received by a Fund each day, depending on the
daily fluctuation of the value of the contract.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk that a
Fund may not be able to enter into a closing transaction because of an illiquid
secondary market.
j. Options
Certain Funds may enter into options contracts. Upon the purchase of a put
option or a call option by the Fund, a premium is paid and recorded as an
investment, the value of which is marked-to-market daily. When a purchased
option expires, the Fund will realize a loss in the amount of the initial
premium paid. When the Fund enters in a closing transaction, the Fund will
realize a gain or loss depending on whether the proceeds from the closing
transaction are greater or less than the original premium paid. When the Fund
exercises a put option, the proceeds from such sale will be decreased by the
premium originally paid. When the Fund exercises a call option, the cost of the
security that the Fund purchases upon exercise will be increased by the premium
originally paid. When purchased index options are exercised, settlement is made
in cash.
When the Fund writes a call option or a put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
transaction, the Fund realizes a gain (or loss if the cost of the closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security or
index, and the liability related to such option is eliminated. When a call
option is exercised, the Fund realizes a gain or loss from the sale of the
underlying security, and the proceeds from such sale are increased by the
premium originally received. When a put option is exercised, the amount of the
premium originally received will reduce the cost of the security that the Fund
purchased upon exercise. When written index options are exercised, settlement is
made in cash.
The risk associated with purchasing options is limited to the premium originally
paid. The risk in writing a call option is that the Fund may forgo the
opportunity for profit if the market value of the underlying security or index
increases and the option is exercised. The risk in writing a put option is that
the Fund may incur a loss if the market value of the underlying security or
index decreases and the option is exercised. In addition, there is the risk that
the Fund may not be able to enter into a closing transaction because of an
illiquid secondary market.
k. Equity Swaps
Certain Funds may enter into equity swap agreements in order to participate in
foreign markets not currently accessible to the Fund. Pursuant to these
agreements, the Fund pays a swap fee in cash, equal to a fixed percentage based
on a notional amount equal to the Fund's acquisition cost for the underlying
security (the "notional amount"). Additionally, the Fund will make semiannual
payments to the swap counterparty equal to any capital depreciation on the
underlying security, plus a floating-rate payment based on the notional amount
and the six-month LIBOR Rate. The swap counterparty will make semiannual
payments to the Fund equal to any capital appreciation and any dividends
received on the underlying security. During the terms of the agreements, changes
in the underlying value of the swaps are recorded as unrealized gains or losses
and are based on changes in the value of the underlying security. Amounts
received from (paid to) the swap counterparty representing capital appreciation
(depreciation) and dividends on the underlying security are recorded as realized
gain (loss). The Fund is exposed to credit risk in the event of non-performance
by the swap counterparty; however, the Fund does not anticipate non-performance
by the counterparty. The Fund has segregated cash as a reserve for the payment
of liabilities under the equity swap agreements.
l. Dividends and Distributions
Dividends from net investment income, if any, of the Growth Fund, Small Cap
Opportunities Fund, Small Cap Fund, Micro Cap Fund, International Growth Fund,
International Small Cap Fund, Emerging Markets Fund, Emerging Asia Fund, Latin
America Fund, Global Opportunities Fund, Global Communications Fund, Select 50
Fund, U.S. Asset Allocation Fund and Global Asset Allocation Fund are declared
and paid at least annually. Dividends from net investment income of the Total
Return Bond Fund, Short Duration Government Bond Fund, California Tax-Free
Intermediate Bond Fund,
104
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
to Financial Statements
Government Reserve Fund, California Tax-Free Money Fund and Federal Tax-Free
Money Fund are declared daily and paid monthly. Dividends from net investment
income of the Equity Income Fund are declared and paid quarterly.
Distributions of net realized capital gains (including net short-term capital
gains) earned by a Fund are distributed no less frequently than annually.
Additional distributions of net investment income and capital gains for each
Fund may be made in order to avoid the application of a 4% non-deductible excise
tax on certain undistributed amounts of ordinary income and capital gains.
Income distributions and capital-gain distributions are determined in accordance
with income-tax regulations, which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments of
income and gains on various investment securities held by a Fund, timing
differences and differing characterization of distributions made by a Fund.
m. Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Realized gain and loss
from securities transactions are calculated on the specific identified cost
basis of the securities sold. Dividend income is recognized on the ex-dividend
date. Dividend income on foreign securities is recognized as soon as a Fund is
informed of the ex-dividend date. Interest income, including amortization of
discount on short-term investments, is recognized on the accrual basis.
Securities purchased on a when-issued or delayed-delivery basis may be settled a
month or more after the trade date; interest income is not accrued until
settlement date. The Funds instruct their custodian to segregate assets in a
separate account with a current value at least equal to the amount of its
when-issued purchase commitments.
n. Federal Income Taxes
Except for newer Funds that intend to elect and qualify, each Fund has elected
and qualified and it is the intention of each Fund to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), by complying with the applicable requirements of
the Code, and by making distributions of taxable income to shareholders
sufficient to relieve the Fund from all or substantially all federal income
taxes. Accordingly, no provision for federal income taxes is required.
o. Organization Costs
Expenses incurred in connection with the organization of each Fund are amortized
on a straight-line basis over a period of five years from the commencement of
operations. All such costs for the Small Cap, Emerging Markets, Short Duration
Government Bond and Government Reserve Funds have been fully amortized.
p. Cash
Cash, as used in the Statement of Cash Flows, is the amount reported in the
Statement of Assets and Liabilities. Information on cash payments or any cash
movement is presented in the Statement of Cash Flows. Accounting practices that
do not affect reporting activities on a cash basis include unrealized gain or
loss on investment securities and accretion income recognized on investment
securities.
q. Expenses
General expenses of the Trusts are allocated to the relevant Funds based upon
relative net assets. Operating expenses directly attributable to a Fund or a
class of shares are charged to that Fund's or class's operations. Expenses of
each Fund not directly attributable to the operations of any Fund or class of
shares are prorated among the classes based on the relative average net assets
of each Fund or class of shares.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES AND OTHER CONTRACTUAL
COMMITMENTS:
a. Montgomery Asset Management, LLC, is the Funds' Manager (the "Manager"). The
Manager, a Delaware limited liability company, is an investment adviser
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"). The Manager is a
subsidiary of Commerzbank AG, one of the largest publicly held commercial banks
in Germany.
Pursuant to investment management agreements ("Investment Management
Agreements"), the Manager provides each Fund with advice on buying and selling
securities, manages the investments of each Fund including the placement of
orders for portfolio transactions, furnishes each Fund with office space and
certain administrative services, and provides the personnel needed by the Trusts
with respect to the Manager's responsibilities under such agreement. The Manager
has agreed to reduce some or all of its management fee or absorb Fund expenses
if necessary to keep each Fund's annual operating expenses, exclusive of
interest and taxes, at or below the following percentages of each Fund's average
net assets: 1.50% for the Growth Fund; 1.50% for the Small Cap Opportunities
Fund; 1.40% for the Small Cap Fund; 1.75% for the Micro Cap Fund; 0.85% for the
Equity Income Fund; 1.65% for the International Growth Fund; 1.90% for the
International Small Cap Fund, the Emerging Markets Fund, the Emerging Asia Fund,
the Latin America Fund, the Global Opportunities Fund and the Global
Communications Fund; 1.80% for the Select 50 Fund; 0.25% for the U.S. Asset
Allocation Fund (excluding expenses relating to the Underlying Funds or 1.30%
including total expenses of the Underlying Funds); 0.50% for the Global Asset
Allocation Fund (excluding expenses relating to the Underlying Funds or 1.75%
including total expenses of the Underlying Funds); 0.90% for the Total Return
Bond Fund; 0.70% for the Short Duration Government Bond Fund and the California
Tax-Free Intermediate Bond Fund; and 0.60% for the Government Reserve Fund, the
California Tax-Free Money Fund and the Federal Tax-Free Money Fund. Any
reductions or absorptions made to a Fund by the Manager are subject to recovery
within the following two years (three years for the U.S. Asset Allocation Fund),
provided a Fund is able to effect such reimbursement and remain in compliance
with applicable expense limitations. The Manager may terminate these reductions
or absorptions at any time.
105
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
Montgomery Asset Management, LLC, serves as the Funds' administrator (the
"Administrator"). The Administrator performs services with regard to various
aspects of each Fund's administrative operations.
As compensation, each Fund has accrued a monthly management and administration
fee (accrued daily) based upon the average daily net assets of each Fund. The
following effective management fee annual rates include current-year accrued
fees and recoupment of prior-year reductions, but do not include the effect of
current-year fee reductions or expense absorptions:
Management
Effective Fee Including Effective
Management Effect of Administration
Name of Fund Fee Fees Reduced Fee
- --------------------------------------------------------------------------------
Growth Fund ........................ 0.92% 0.92% 0.06%
Small Cap Opportunities Fund ....... 1.54% 1.11% 0.07%
Small Cap Fund ..................... 1.00% 1.00% 0.07%
Micro Cap Fund ..................... 1.33% 1.33% 0.07%
Equity Income Fund ................. 0.96% 0.36% 0.07%
International Growth Fund .......... 2.04% 1.00% 0.07%
International Small Cap Fund ....... 2.53% 1.35% 0.07%
Emerging Markets Fund .............. 1.05% 1.05% 0.06%
Emerging Asia Fund ................. 1.64% 1.15% 0.07%
Latin America Fund ................. 1.25% 0.00% 0.07%
Global Opportunities Fund .......... 2.44% 1.19% 0.07%
Global Communications Fund ......... 1.45% 1.38% 0.07%
Select 50 Fund ..................... 1.34% 1.34% 0.07%
U.S. Asset Allocation Fund ......... 0.00% 0.00% 0.00%
Global Asset Allocation Fund ....... 0.20% 0.00% 0.00%
Total Return Bond Fund ............. 0.50% 0.43% 0.05%
Short Duration
Government Bond Fund .............. 0.66% 0.16% 0.05%
California Tax-Free
Intermediate Bond Fund ............ 0.76% 0.26% 0.05%
Government Reserve Fund ............ 0.36% 0.36% 0.04%
California Tax-Free
Money Fund ........................ 0.61% 0.41% 0.05%
Federal Tax-Free Money Fund ........ 0.77% 0.37% 0.05%
The Manager recouped previously reduced fees and/or absorbed expenses during the
six months ended December 31, 1997. These amounts have been included with
current annual management fees in the Statement of Operations and are part of
the effective management fee shown. The amounts recouped during the six months
ended December 31, 1997, were $452,538, $75,139, $174,274, $303,672, $101,227,
$182,118, $149,697, $103,117, $38,650, $105,801, $32,616, $180,007 and $215,532
for the Small Cap Opportunities, Equity Income, International Growth,
International Small Cap, Emerging Asia, Global Opportunities, Global
Communications, Select 50, Short Duration Government Bond, California Tax-Free
Intermediate Bond, Government Reserve, California Tax-Free Money and Federal
Tax-Free Money Funds, respectively.
For the six months ended December 31, 1997, the Manager has reduced fees and/or
absorbed expenses and has reduced management fees and absorbed expenses subject
to recoupment as follows:
Reduced
Management
Fees and
Absorbed
Expenses
Fees Expenses Subject to
Reduced Absorbed Recoupment
- --------------------------------------------------------------------------------
Small Cap Opportunities Fund ...... $544,262 -- $544,262
Equity Income Fund ................ 124,837 -- 317,703
International Growth Fund ......... 192,671 -- 192,671
International Small Cap Fund ...... 280,699 -- 280,699
Emerging Asia Fund ................ 128,054 -- 128,054
Latin America Fund ................ 56,271 $63,659 119,930
Global Opportunities Fund ......... 191,717 -- 220,281
Global Communications Fund(*) ..... 52,649 -- 45,626
U.S. Asset Allocation Fund ........ -- 16,319 16,319
Global Asset Allocation Fund ...... 1,733 33,174 61,798
Total Return Bond Fund ............ 26,612 -- 26,612
Short Duration
Government Bond Fund ............. 118,856 -- 323,417
California Tax-Free
Intermediate Bond Fund ........... 62,564 -- 152,923
California Tax-Free
Money Fund ....................... 172,638 -- 172,638
Federal Tax-Free Money Fund ....... 235,642 -- 307,176
*For the period ended December 31, 1997, the Global Communications Fund also
waived fees of $7,023.
b. Certain officers and Trustees of the Trusts are, with respect to the Trusts'
Manager and/or principal underwriter, "affiliated persons" as defined in the
1940 Act. Each Trustee who is not an "affiliated person" will receive an annual
retainer and quarterly meeting fee totaling $35,000 per annum, as well as
reimbursement for expenses, for service as a Trustee of all Trusts advised by
the Manager ($25,000 of which will be allocated to the Montgomery Funds and
$5,000 to the Montgomery Funds II).
c. Certain Funds are parties to agreements with financial intermediaries and
recordkeepers related to the Funds' participation in various purchase,
marketplace and retirement programs. The Funds that participate in the programs
make payments to the financial intermediaries and recordkeepers for certain
services provided to shareholders who own shares of the Funds through such
programs. These fees are paid for shareholder servicing and recordkeeping and
are reflected in the Funds' financial statement as "servicing fees." The
Manager, out of its own resources, may make additional payments to financial
intermediaries and recordkeepers in connection with the Funds' participation in
these programs. The following Funds participate in one or more of these
programs: Growth Fund, Small Cap Opportunities Fund, Small Cap Fund, Micro Cap
Fund, Equity Income Fund, International Growth Fund, International Small Cap
Fund, Emerging Markets Fund, Emerging Asia Fund, Latin America Fund, Global
Opportunities Fund, Global Communications Fund, Select 50 Fund, U.S. Asset
Allocation Fund,
106
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
to Financial Statements
Global Asset Allocation Fund, Total Return Bond Fund, Short Duration Government
Bond Fund and California Tax-Free Intermediate Bond Fund.
3. SHARE MARKETING PLAN:
Class P shares of each Fund have adopted a Share Marketing Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act (the "Rule"). Pursuant to that Rule,
the Trusts' Board of Trustees has approved, and each Fund has entered into, the
Plan with Funds Distributor, Inc., the Funds' Distributor, as the distribution
coordinator for the Class P shares. Under the Plan, each Fund will pay
distribution fees to the Distributor at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to its Class P shares, to
reimburse the Distributor for its distribution costs with respect to that class
(the "Class").
The Plan provides that the Distributor may use the distribution fees received
from the Class to pay for the distribution expenses of that Class, including,
but not limited to, (i) incentive compensation paid to the directors, officers
and employees of, agents for and consultants to the Manager or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct-mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, statements of additional information
and reports of the Funds to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Funds and that Class; and (iv) costs involved in obtaining whatever
information, analysis and reports with respect to marketing and promotional
activities that the Funds may, from time to time, deem advisable with respect to
the distribution of that Class. Distribution fees are accrued daily, paid
monthly and charged as expenses of the Class P shares as accrued.
4. TRANSACTIONS IN SHARES OF A BENEFICIAL INTEREST:
The Trusts have authorized an unlimited number of shares of beneficial interest
which have a par value of $0.01. Because the Government Reserve Fund, the
California Tax-Free Money Fund and the Federal Tax-Free Money Fund are money
market funds, and money market funds sell shares, issue shares for reinvestment
of dividends and redeem shares normally at a constant net asset value of $1 per
share, the numbers of shares represented by such sales, reinvestments and
redemptions are the same as the dollar amounts shown for such transactions.
5. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of long-term securities,
excluding long-term U.S. government securities, during the six months ended
December 31, 1997, were:
Fund Purchases Sales
- --------------------------------------------------------------------------------
Growth Fund ............................... $331,504,302 $277,357,257
Small Cap Opportunities Fund .............. 128,202,842 134,543,903
Small Cap Fund ............................ 72,919,286 85,152,404
Micro Cap Fund ............................ 78,509,280 87,303,080
Equity Income Fund ........................ 11,412,647 12,268,914
International Growth Fund ................. 24,826,170 24,133,920
International Small Cap Fund .............. 22,230,124 28,869,635
Emerging Markets Fund ..................... 500,691,692 458,682,264
Emerging Asia Fund ........................ 41,519,471 47,386,565
Latin America Fund ........................ 13,815,284 5,302,635
Global Opportunities Fund ................. 20,296,889 27,485,500
Global Communications Fund ................ 60,432,106 68,842,402
Select 50 Fund ............................ 205,880,860 157,232,981
U.S. Asset Allocation Fund ................ 246,643,239 89,325,219
Global Asset Allocation Fund .............. 1,519,970 1,414,070
Total Return Bond Fund .................... 33,097,277 21,750,621
California Tax-Free
Intermediate Bond Fund ................... 4,871,933 717,764
The aggregate amount of purchases and sales of long-term U.S. government
securities, during the six months ended December 31, 1997, were:
Fund Purchases Sales
- --------------------------------------------------------------------------------
Total Return Bond Fund .................... $120,616,203 $108,105,430
Short Duration
Government Bond Fund ..................... 119,768,467 106,162,129
b. At December 31, 1997, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and aggregate
gross unrealized depreciation for all securities in which there was an excess of
tax cost over value were as follows:
Tax Basis Tax Basis
Unrealized Unrealized
Fund Appreciation Depreciation
- --------------------------------------------------------------------------------
Growth Fund ............................... $271,495,699 $36,219,061
Small Cap Opportunities Fund .............. 43,395,623 5,083,286
Small Cap Fund ............................ 69,853,282 4,585,538
Micro Cap Fund ............................ 119,113,276 4,045,397
Equity Income Fund ........................ 6,210,293 122,656
International Growth Fund ................. 3,812,513 1,520,846
International Small Cap Fund .............. 4,307,822 5,787,339
Emerging Markets Fund ..................... 157,831,884 88,962,677
Emerging Asia Fund ........................ 1,379,668 10,371,099
Latin America Fund ........................ 315,703 1,278,333
Global Opportunities Fund ................. 3,691,189 1,806,590
Global Communications Fund ................ 33,941,996 6,366,617
Select 50 Fund ............................ 30,364,886 12,195,680
107
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
Tax Basis Tax Basis
Unrealized Unrealized
Fund Appreciation Depreciation
- --------------------------------------------------------------------------------
U.S. Asset Allocation Fund ................. $1,102,803 $8,667,507
Global Asset Allocation Fund ............... 4,517 83,163
Total Return Bond Fund ..................... $1,634,459 $ 36,984
Tax Basis Tax Basis
Unrealized Unrealized
Fund Appreciation Depreciation
- --------------------------------------------------------------------------------
Short Duration
Government Bond Fund .................... $ 303,063 $ 13,843
California Tax-Free
Intermediate Bond Fund .................. 1,048,379 --
c. Information regarding transactions under dollar roll transactions was as
follows:
<TABLE>
<CAPTION>
Average
Maximum Average Average Debt
Amount Amount Amount Shares Per Share
Outstanding Outstanding Outstanding Outstanding Outstanding Fee
During as of During During During Income
Fund Six Months 12/31/97 Six Months Six Months Six Months Earned
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Return Bond Fund $12,093,750 $12,075,000 $7,411,369 7,415,761 $1.20 $63,499
Short Duration Government Bond Fund 1,988,125 -- 549,538 554,348 0.10 1,344
</TABLE>
The average amount outstanding during the year was calculated by totaling
borrowings at the end of each day and dividing the sum by the number of days in
the six months ended December 31, 1997.
d. Information regarding borrowing under reverse repurchase agreements is as
follows:
<TABLE>
<CAPTION>
Average
Maximum Average Average Debt
Amount Amount Shares Per Share
Outstanding Outstanding Outstanding Outstanding Average
During During During During Interest Interest
Fund Six Months Six Months Six Months Six Months Rate Expense
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Return Bond Fund $11,106,375 $2,994,016 3,010,376 $0.48 3.73% $ 94,819
Short Duration Government Bond Fund 25,000,000 7,975,317 5,502,174 1.50 4.75 233,157
</TABLE>
As of December 31, 1997, there were no reverse repurchase agreements
outstanding. The average amount outstanding during the period was calculated by
adding the borrowings at the end of each day and dividing the sum by the number
of days in the six months ended December 31, 1997.
e. The schedule of forward foreign-currency exchange contracts at December 31,
1997, were as follows:
Contract Value Date Value (Note 1)
International Growth Fund:
- --------------------------------------------------------------------------------
Forward Foreign-Currency Exchange Contracts to Buy
(Contract cost $489,960):
860,737,075 Italian lira 01/08/98 $ 486,646
Forward Foreign-Currency Exchange Contracts to Sell
(Contract cost $1,120,221):
138,000,000 Japanese yen 09/08/98 $ 1,097,222
International Small Cap Fund:
- --------------------------------------------------------------------------------
Forward Foreign-Currency Exchange Contracts to Buy
(Contract cost $41,707):
323,336 Swedish krona 01/02/98 $ 40,723
Forward Foreign-Currency Exchange Contracts to Sell
299,604 German Deutschemarks 01/02/98 $ 166,541
226,036 German Deutschemarks 01/05/98 11,607
1,515,021 Japanese yen 01/05/98 125,646
996,308 Japanese yen 12/30/98 8,054
-----
Forward Foreign-Currency Exchange Contracts to Sell
(Contract cost $314,013) $ 311,848
========
108
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
to Financial Statements
Contract Value Date Value (Note 1)
Global Opportunities Fund:
- --------------------------------------------------------------------------------
Forward Foreign-Currency Exchange Contracts to Buy
(Contract cost $6,727):
52,151 Swedish krona 01/02/98 $ 6,568
Global Communications Fund:
- --------------------------------------------------------------------------------
Forward Foreign-Currency Exchange Contracts to Buy
(Contract cost $168,173):
1,303,775 Swedish krona 01/02/98 $ 164,206
Emerging Markets Fund:
- --------------------------------------------------------------------------------
Forward Foreign-Currency Exchange Contracts to Buy
253,262,550 Hungarian forint 01/06/98 $ 1,239,369
2,269,421 South African
commercial rand 01/06/98 466,055
-------
Total Forward Foreign-Currency Exchange Contracts to Buy
(Contract cost $1,714,077) $ 1,705,424
=========
Forward Foreign-Currency Exchange Contracts to Sell
119,715 Brazilian real 01/02/98 $ 107,267
615,966 Egyptian pound 01/02/98 181,033
1,419,129 Malaysian ringgit 01/02/98 364,862
18,475,946 Philippines pesos 01/02/98 456,153
92,538,509 Portuguese escudo 01/02/98 502,790
257,667 Thailand baht 01/02/98 5,520
-----
Total Forward Foreign-Currency Exchange Contracts to Sell
(Contract cost $1,612,765) $ 1,617,625
=========
Select 50 Fund:
- --------------------------------------------------------------------------------
Forward Foreign-Currency Exchange Contracts to Buy
803,642 Netherlands guilder 01/06/98 $ 396,385
114,000,000 Thai baht 01/20/98 2,433,153
119,010,000 Thai baht 07/20/98 2,411,761
---------
Total Forward Foreign-Currency Exchange Contracts to Buy
(Contract cost $6,265,061) $ 5,241,299
=========
Forward Foreign-Currency Exchange Contracts to Sell
97,950,000 Thai baht 01/20/98 $ 2,090,591
135,060,000 Thai baht 07/20/98 2,737,017
---------
Total Forward Foreign-Currency Exchange Contracts to Sell
(Contract cost $6,396,296) $ 4,827,608
=========
f. Certain Funds have entered into equity swap agreements with Robert Flemings &
Co. Limited, London ("Flemings"), with respect to the holdings of foreign equity
securities. Each equity swap is for a period of three years. At December 31,
1997, the Emerging Asia Fund had the following open equity swap agreements:
<TABLE>
<CAPTION>
Swap Floating Termination Unrealized
Underlying Security Notional Amount Fee Rate Rate Date Appreciation/Depreciation
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bajaj Auto ................. $571,373 1.5% LIBOR + 0.50% 06/05/00 (38,911)
MTNL ....................... 811,899 1.5% LIBOR + 0.50% 06/05/00 (156,369)
BHARAT Petroleum ........... 785,095 1.5% LIBOR + 0.50% 06/05/00 (56,658)
Hindustan Petroleum ........ 955,630 1.5% LIBOR + 0.50% 06/18/00 (41,013)
Hindustan Petroleum ........ 127,873 1.5% LIBOR + 0.50% 07/08/00 (4,276)
</TABLE>
g. Certain Funds may lend securities to brokers, dealers and other financial
organizations. Each security loan is collateralized with assets in an amount
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.
At December 31, 1997, the Funds had outstanding loans of securities to certain
brokers, dealers or other financial institutions for which the Fund has
segregated cash equivalents to 102% of the market value of loans of domestic
securities and 105% for loans of international securities as collateral with the
Fund's custodian.
h. Under an unsecured Revolving Credit Agreement with Deutschebank (New York),
each of the Funds of The Montgomery Funds and The Montgomery Funds II may, for
one year starting August 6, 1997, borrow (consistent with applicable law and its
investment policies) up to one-third of its net asset value (or such lower limit
applicable to such Fund), provided that the aggregate principal amount of
outstanding loans under the agreement to all Funds does not exceed $300,000,000.
For the six months ended December 31, 1997, there were no borrowings under this
agreement.
109
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
6. FOREIGN SECURITIES:
Certain Funds may purchase securities on foreign security exchanges. Securities
of foreign companies and foreign governments involve special risks and
considerations not typically associated with investing in U.S. companies and the
U.S. government. These risks include, among others, revaluation of currencies,
less-reliable information about issuers, different securities transactions
clearance and settlement practices, and potential future adverse political and
economic developments. These risks are heightened for investments in emerging
markets countries. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more volatile
than those of securities of comparable U.S. companies and the U.S. government.
The Emerging Markets Fund invests at least 65% of its total assets in the equity
securities of companies in emerging markets countries.
7. ILLIQUID AND SPECIAL SITUATION SECURITIES:
Each Fund may not invest more than 15% (10% for Government Reserve Fund,
California Tax-Free Money Fund and Federal Tax-Free Money Fund) of its net
assets in illiquid securities. The securities shown in the table below have been
determined by the Manager to be illiquid because they are restricted or because
there is an exceptionally low trading volume in the primary trading market for
the security at December 31, 1997. These securities are valued at market price.
<TABLE>
<CAPTION>
12/31/97 Market
Acquisition Market Value Per % of Total
Security Date Shares Value Share Cost Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Small Cap Fund:
InMedia Presentations, Inc. ................ 10/01/97 196,096 $ 174,957 $ 0.89 $ 177,771 0.39%
Emerging Markets Fund:
Global Telesystems Group, Inc. ............. 06/17/94 46,389 $ 907,902 $19.57 $ 497,627 0.09
Hemaraj Land and Development
Public Company Ltd. ...................... 07/03/97 384,000 396,958 1.03 1,218,804 0.04
Kepler Weber S.A ........................... 02/10/95 50,500 205,430 4.07 663,465 0.02
Keppel Philippines Holdings, Inc., Class.... 02/28/95 78,039 4,702 0.06 24,900 0.00#
Pepsi International Bottlers ............... 03/20/97 32,000 2,784,000 87.00 3,200,000 0.28
Regional Container Lines ................... 05/10/95 904,800 736,634 0.81 5,224,356 0.08
Telec de Ceara S.A ......................... 04/17/97 4,562,257 1,839,537 0.40 1,902,298 0.19
---------- ----
$ 6,875,163 0.70%
========== ====
Emerging Asia Fund:
Fauji Fertilizer Company Ltd ............... 04/24/97 32,400 $ 62,030 $ 1.91 $ 67,258 0.19%
Global Communications Fund:
Global Telesystems Group, Inc. ............. 04/22/94 450,987 $ 8,826,487 $19.57 $ 3,881,177 6.50%
Grupo Mexicano de Video .................... 07/03/93 105,000 10,276 0.10 1,865,000 0.01
Russian Telecommunications
Development Corporation .................. 12/22/93 200,000 1,434,549 7.17 2,000,000 1.06
---------- ----
$ 10,271,312 7.57%
========== ====
Select 50 Fund:
Hemaraj Land and Development
Public Company Ltd. ...................... 07/11/97 52,000 $ 53,755 $ 1.03 $ 172,139 0.02%
Teleceara PN `C' ........................... 04/17/97 1,360,747 548,664 0.40 567,400 0.24
---------- ----
$ 602,419 0.26%
========== ====
</TABLE>
#Amount equals less than 0.01%.
110
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
to Financial Statements
Certain of the Funds hold foreign currency at December 31, 1997, which may be
illiquid because conversion to U.S. dollars could take more than seven days.
The securities shown in the table below were held by the Funds on December 31,
1997, and are unrestricted securities for which reliable market prices can be
established. These securities are valued at their market prices. Because the
process of reregistering the securities in the Fund's name can take more than
seven days, however, the following shares of each of these securities were
deemed temporarily restricted in the hands of the Fund at December 31, 1997. The
Fund bears the cost of reregistering these securities.
<TABLE>
<CAPTION>
12/31/97 Market
Acquisition Market Value Per % of Total
Security Date Shares Value Share Cost Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Fund:
Adamjee Insurance Company ................ 05/16/95 2,968 $ 5,837 $ 1.97 $ 6,266 0.00%#
Bajaj Auto, Ltd. ......................... 10/27/97 60,100 927,564 15.43 1,002,707 0.09
Castrol (India) Ltd. ..................... 06/20/97 4,249 80,753 19.01 60,511 0.01
Engro Chemicals Pakistan ................. 08/21/95 242 628 2.60 881 0.00#
Fauji Fertilizer Company Ltd. ............ 10/20/97 2,347,000 4,493,359 1.91 5,062,105 0.46
Hindustan Petroleum Corporation Ltd. ..... 06/12/97 10,050 124,215 12.36 131,751 0.01
Housing Development and
Finance Corporation .................... 02/05/96 100 7,851 78.51 7,220 0.00#
ITC Ltd. ................................. 09/15/97 485,000 7,652,360 15.78 7,555,639 0.78
Kirloskar Cummins Ltd. ................... 09/15/97 350,000 4,241,071 12.12 5,110,258 0.43
Lippo Bank (F) ........................... 06/03/97 360,500 39,327 0.11 363,225 0.00#
Madras Cement Ltd. ....................... 10/23/97 7,300 2,335,934 319.99 1,635,179 0.24
Mahanagar Telephone Nigam, Ltd. .......... 09/02/97 54,200 356,724 6.58 367,798 0.04
Oil and Natural Gas Corporation Ltd. ..... 09/19/97 3,650 26,537 7.27 36,750 0.00%#
Pakistan State Oil ....................... 12/17/97 403,846 3,436,814 8.51 3,484,837 0.35
State Bank of India ...................... 03/26/96 150 930 6.20 1,008 0.00#
Tata Engineering and Locomotive
Company, Ltd. .......................... 05/08/96 10 76 7.60 139 0.00#
---------- -----
$ 23,729,980 2.41%
========== =====
</TABLE>
8. CAPITAL LOSS CARRYFORWARDS:
At December 31, 1997, the following Funds had available for federal tax purposes
unused capital losses as follows:
<TABLE>
<CAPTION>
Fund Expiring in 2002 Expiring in 2003 Expiring in 2004 Expiring in 2005
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Opportunities Fund ................. -- -- $849,214 $7,369,128
Short Duration Government Bond Fund .......... -- $192,868 -- --
California Tax-Free Intermediate Bond Fund.... -- 67,274 67,724 --
Government Reserve Fund ...................... $9,889 20,906 5,378 --
California Tax-Free Money Fund ............... -- -- 6,745 --
</TABLE>
Under current tax law, net capital and currency losses realized after October 31
may be deferred and treated as occurring on the first day of the following
fiscal year ended June 30, 1997. The following Funds elected to defer losses
occurring between November 1, 1996, and June 30, 1997, under these rules as
follows:
Fund Amount
- --------------------------------------------------------------------------------
Small Cap Opportunities Fund .................................. $8,360,319
Short Duration Government Bond Fund ........................... 62,290
Government Reserve Fund ....................................... 18,726
Federal Tax-Free Money Fund ................................... 1,588
Such deferred losses will be treated as arising on the first day of the fiscal
year ending June 30, 1998.
111
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
to Financial Statements
9. RESULTS OF VOTING AT SPECIAL SHAREHOLDERS' MEETING
A special meeting of the Funds' shareholders was held on June 23, 1997. The
results of votes taken among shareholders on proposals before them are listed
below (rounded to whole shares and may not total 100% because of rounding):
PROPOSAL 1
For the approval of the new Investment Management Agreement between each Fund
and CAM Acquisition, LLC ("New Montgomery"), pursuant to which New Montgomery
will act as advisor with respect to the assets of the Fund, to become effective
upon the closing of the transaction by which substantially all the assets of
Montgomery Asset Management, L.P., will be acquired by New Montgomery, a
subsidiary of Commerzbank AG.
<TABLE>
<CAPTION>
For Against Abstain Total
---------------------------------------------------------------------------------------
% of % of % of % of
Shares Shares Shares Shares Shares Shares Shares Shares
Fund Voted Voted Voted Voted Voted Voted Voted Voted
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Montgomery Growth Fund ................ 33,252,265 85.3 3,201,377 8.2 2,512,477 6.4 38,966,120 100.0
Montgomery Small Cap Opportunities Fund 8,558,631 86.5 681,769 6.9 653,476 6.6 9,893,876 100.0
Montgomery Small Cap Fund ............. 7,020,876 89.8 343,775 4.4 450,644 5.8 7,815,295 100.0
Montgomery Micro Cap Fund ............. 11,322,554 85.3 1,096,339 8.3 860,334 6.5 13,279,227 100.0
Montgomery Equity Income Fund ......... 1,658,964 87.9 58,975 3.1 168,660 8.9 1,886,599 100.0
Montgomery International Growth Fund .. 1,612,635 92.6 21,237 1.2 107,084 6.2 1,740,956 100.0
Montgomery International Small Cap Fund 2,356,051 91.9 103,081 4.0 103,218 4.0 2,562,349 100.0
Montgomery Emerging Markets Fund ...... 51,218,338 87.8 3,672,102 6.3 3,426,792 5.9 58,317,232 100.0
Montgomery Emerging Asia Fund ......... 1,754,936 91.5 121,600 6.3 42,169 2.2 1,918,705 100.0
Montgomery Global Opportunities Fund .. 1,345,531 93.5 64,134 4.5 28,743 2.0 1,438,408 100.0
Montgomery Global Communications Fund . 5,388,878 85.3 550,675 8.7 380,980 6.0 6,320,533 100.0
Montgomery Select 50 Fund ............. 4,858,465 88.0 395,415 7.2 268,373 4.9 5,522,253 100.0
Montgomery U.S. Asset Allocation Fund . 4,589,808 84.0 484,428 8.9 387,651 7.1 5,461,887 100.0
Montgomery Global Asset Allocation Fund 78,383 87.3 4,253 4.7 7,120 7.9 89,756 100.0
Montgomery Short Duration
Government Bond Fund ................. 4,037,627 95.7 56,189 1.3 123,786 2.9 4,217,602 100.0
Montgomery California Tax-Free
Intermediate Bond Fund ............... 1,580,637 97.8 16,503 1.0 19,698 1.2 1,616,837 100.0
Montgomery Government Reserve Fund .... 464,963,108 98.7 3,438,915 0.7 2,684,528 0.6 471,086,550 100.0
Montgomery California Tax-Free
Money Fund ........................... 57,628,244 90.1 4,797,682 7.5 1,504,430 2.4 63,930,356 100.0
Montgomery Federal Tax-Free Money Fund 46,828,877 85.8 418,093 0.8 7,301,718 13.4 54,548,687 100.0
</TABLE>
PROPOSAL 2
For the election of Cecilia H. Herbert to continue to serve as a Trustee on the
Board of Trustees.
<TABLE>
<CAPTION>
For Against Abstain Total
---------------------------------------------------------------------------------------
% of % of % of % of
Shares Shares Shares Shares Shares Shares Shares Shares
Trust Voted Voted Voted Voted Voted Voted Voted Voted
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Montgomery Funds................... 723,133,580 96.6 12,732,381 1.7 12,854,670 1.7 748,720,632 100.0
</TABLE>
PROPOSAL 3
For the approval of the Agreement and Plan of Reorganization and the
transactions contemplated thereby to convert the Montgomery Asset Allocation
Fund into a fund-of-funds.
<TABLE>
<CAPTION>
For Against Abstain Total
---------------------------------------------------------------------------------------
% of % of % of % of
Shares Shares Shares Shares Shares Shares Shares Shares
Fund Voted Voted Voted Voted Voted Voted Voted Voted
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Montgomery U.S. Asset Allocation Fund.. 2,820,712 79.0 473,213 13.3 276,360 7.7 3,570,285 100.0
</TABLE>
112
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
to Financial Statements
PROPOSAL 4
For approval of authority for the Board of Trustees to approve any future
conversion of each Fund to a feeder fund in a master/feeder fund structure.
<TABLE>
<CAPTION>
For Against Abstain Total
---------------------------------------------------------------------------------------
% of % of % of % of
Shares Shares Shares Shares Shares Shares Shares Shares
Fund Voted Voted Voted Voted Voted Voted Voted Voted
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Montgomery Growth Fund ................ 21,002,810 81.0 2,763,902 10.7 2,163,973 8.3 25,930,685 100.0
Montgomery Small Cap Opportunities Fund 5,463,002 83.8 549,655 8.4 558,703 8.5 6,571,360 100.0
Montgomery Small Cap Fund ............. 5,772,664 87.2 373,129 5.6 476,470 7.2 6,622,263 100.0
Montgomery Micro Cap Fund ............. 7,573,852 82.4 914,104 9.9 700,088 7.6 9,188,043 100.0
Montgomery Equity Income Fund ......... 1,081,892 83.8 880,646 6.2 128,776 10.0 1,291,314 100.0
Montgomery International Growth Fund .. 1,317,518 91.7 24,758 1.7 94,942 6.6 1,437,218 100.0
Montgomery International Small Cap Fund 1,327,018 88.8 93,146 6.2 74,670 5.0 1,494,834 100.0
Montgomery Emerging Markets Fund ...... 29,267,382 82.3 3,399,483 9.6 2,880,759 8.1 35,547,623 100.0
Montgomery Emerging Asia Fund ......... 1,097,556 86.0 112,454 8.8 65,915 5.2 1,275,925 100.0
Montgomery Global Opportunities Fund .. 789,674 90.1 56,868 6.5 29,762 3.4 876,303 100.0
Montgomery Global Communications Fund . 3,350,264 81.0 446,631 10.8 337,814 8.2 4,134,709 100.0
Montgomery Select 50 Fund ............. 3,167,062 83.7 351,166 9.3 266,684 7.0 3,784,912 100.0
Montgomery U.S. Asset Allocation Fund . 2,749,593 77.0 508,992 14.3 311,700 8.7 3,570,285 100.0
Montgomery Global Asset Allocation Fund 56,255 81.1 5,754 8.3 7,393 10.7 69,402 100.0
Montgomery Short Duration
Government Bond Fund ................. 2,659,575 88.8 211,432 7.1 124,090 4.1 2,995,097 100.0
Montgomery California Tax-Free
Intermediate Bond Fund ............... 1,033,210 96.5 24,100 2.3 13,357 1.2 1,070,667 100.0
Montgomery Government Reserve Fund .... 243,537,096 95.8 6,038,008 2.4 4,532,285 1.8 254,107,388 100.0
Montgomery California Tax-Free
Money Fund ........................... 56,295,830 88.1 6,327,768 9.9 1,306,758 2.0 63,930,356 100.0
Montgomery Federal Tax-Free Money Fund 50,805,280 93.1 3,037,468 5.6 705,939 1.3 54,548,687 100.0
</TABLE>
PROPOSAL 5
For the approval of certain changes to the fundamental investment restrictions
of certain Funds, as described in the proxy statement.
<TABLE>
<CAPTION>
For Against Abstain Total
---------------------------------------------------------------------------------------
% of % of % of % of
Shares Shares Shares Shares Shares Shares Shares Shares
Fund Voted Voted Voted Voted Voted Voted Voted Voted
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Montgomery Growth Fund ................ 21,266,975 82.0 2,650,851 10.2 2,012,861 7.8 25,930,687 100.0
Montgomery Small Cap Opportunities Fund 5,504,418 83.8 519,679 7.9 547,263 8.3 6,571,360 100.0
Montgomery Small Cap Fund ............. 5,769,863 87.1 375,930 5.7 476,470 7.2 6,622,263 100.0
Montgomery Micro Cap Fund ............. 7,643,476 83.2 856,876 9.3 687,691 7.5 9,188,043 100.0
Montgomery International Small Cap Fund 1,299,083 86.9 111,650 7.5 84,101 5.6 1,494,834 100.0
Montgomery Emerging Markets Fund ...... 29,262,409 82.3 3.447,901 9.7 2,837,313 8.0 35,547,623 100.0
Montgomery Government Reserve Fund .... 245,144,031 96.5 4,914,523 1.9 4,048,835 1.6 254,107,388 100.0
Montgomery California Tax-Free
Money Fund ........................... 58,158,825 91.0 4,154,890 6.5 1,616,641 2.5 63,930,356 100.0
Montgomery Federal Tax-Free Money Fund 50,523,413 92.6 3,034,379 5.6 990,895 1.8 54,548,687 100.0
</TABLE>
113
<PAGE>
- -----------------------------------
The Montgomery Funds
- -----------------------------------
Tax Information
- -----------------------------------
Fiscal Year Ended December 31, 1997
The percentages of total net assets invested in U.S. government and U.S.
government agency obligations at March 31, 1997; June 30, 1997; September 30,
1997; and December 31, 1997, were as follows:
<TABLE>
<CAPTION>
3/31/97 6/30/97 9/30/97 12/31/97
U.S. Asset Allocation Fund:
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Bank 3.2% 5.6% -- --
Federal Home Loan Mortgage Corporation 7.3 8.0 -- --
Federal National Mortgage Association 9.5 5.0 -- --
Government National Mortgage Association 3.5 3.4 -- --
Student Loan Marketing Association 0.8 -- -- --
U.S. Treasury Bonds 8.0 6.5 -- --
U.S. Treasury Notes 7.5 6.6 -- --
Total Return Bond Fund:
- -------------------------------------------------------------------------------------------------
Federal Home Loan Bank -- -- 8.1% 12.8%
Federal Home Loan Mortgage Corporation -- -- 19.5 27.2
Federal National Mortgage Association -- -- 16.0 20.8
Government National Mortgage Association -- -- -- 0.8
Union Acceptance Corporation -- -- 0.5 --
U.S. Treasury Bonds -- -- 12.5 14.2
U.S. Treasury Notes -- -- 30.0 0.2
Short Duration Government Bond Fund:
- -------------------------------------------------------------------------------------------------
Federal Home Loan Bank 28.2% 15.5% 24.9% 15.6%
Federal Home Loan Mortgage Corporation 24.2 38.3 52.8 50.2
Federal National Mortgage Association 13.4 14.1 4.6 24.5
Government National Mortgage Association 2.2 2.2 0.2 0.0#
Student Loan Marketing Association 1.0 0.7 -- --
Union Acceptance Corporation 0.5 0.4 0.3 0.1
U.S. Treasury Notes 38.7 28.8 21.5 9.0
Government Reserve Fund:
- -------------------------------------------------------------------------------------------------
Federal Farm Credit Bank 12.1% 12.9% 7.7% 9.1%
Federal Home Loan Bank 16.8 27.1 33.4 34.7
Federal Home Loan Mortgage Corporation 9.7 10.1 4.4 2.6
Federal National Mortgage Association 0.6 4.5 5.4 5.8
Housing and Urban Development -- 0.2 -- --
Student Loan Marketing Association 11.9 17.9 11.2 15.0
Tennessee Valley Authority -- -- 0.2 0.7
U.S. Sovereign Bonds 0.2 -- 0.1 0.1
U.S. Treasury Bills 0.5 -- -- --
U.S. Treasury Notes 4.3 1.3 -- --
</TABLE>
#Amount represents less than 0.1%.
114
<PAGE>
This report and the financial statements contained herein are provided for the
general information of the shareholders of The Montgomery Funds. This report is
not authorized for distribution to prospective investors in the Funds unless
preceded or accompanied by an effective prospectus.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC or any other agency
and are subject to investment risk, including the possible loss of principal.
Neither The Montgomery Funds nor Montgomery Asset Management is a bank.
For more information on any Montgomery Fund, including charges and expenses,
visit our Web site at www.montgomeryfunds.com or call (800) 572-FUND [3863] for
a free prospectus. Read it carefully before you invest or send money.
Funds Distributor, Inc. 2/98
<PAGE>
[LETTERHEAD OF THE MONTGOMERY FUNDS APPEARS HERE]
