As filed with the Securities and Exchange Commission on August 12, 1998
File Nos. 33-34841
811-6011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 59
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 60
THE MONTGOMERY FUNDS
(Exact Name of Registrant as Specified in its Charter)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Office)
(415) 572-3863
(Registrant's Telephone Number, Including Area Code)
Greg M. Siemons, Assistant Secretary
101 California Street
San Francisco, California 94104
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to Rule 485(b)
___ on March 31, 1998 pursuant to Rule 485(b)
_X_ 60 days after filing pursuant to Rule 485(a)(1)
___ 75 days after filing pursuant to Rule 485(a)(2)
___ on September 30, 1998 pursuant to Rule 485(a)
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
(415) 835-1600
<PAGE>
THE MONTGOMERY FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:
Facing Sheet
Contents of Registration Statement
Cross-Reference Sheet for the prospectuses for each class of shares of
Montgomery Strategic Fund
Cross-Reference Sheet for the Statement of Additional Information for
Class R, Class P and Class L shares of Montgomery Strategic
Fund
Part A - Prospectus for Class R shares of Montgomery Strategic Fund
Part A - Prospectus for Class P shares of Montgomery Strategic Fund
Part A - Prospectus for Class L shares of Montgomery Strategic Fund
Part B - Statement of Additional Information for Class R, Class P
and Class L shares of Montgomery Strategic Fund
Part C - Other Information
Signature Page
Exhibits
<PAGE>
<TABLE>
THE MONTGOMERY FUNDS
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Prospectus for Class R, Class P and Class L shares of Montgomery Strategic Fund)
<CAPTION>
N-1A Item No. Item Location in the Registration Statement by Heading
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Fees and Expenses of the Fund"
3. Condensed Financial Information "Financial Highlights"
4. General Description Cover Page, "The Fund's Investment Objective and
Policies," "Portfolio Securities," "Other
Investment Practices," "Risk Considerations" and
"General Information"
5. Management of the Fund "The Fund's Investment Objective and Policies,"
"Management of the Fund" and "How to Invest in
the Fund"
5A. Management's Discussion of Fund Not Applicable
Performance
6. Capital Stock and Distributions "Dividends and Distributions," "Taxation" and
"General Information"
7. Purchase of Securities Being "How to Invest in the Fund," "How Net Asset Value
Offered Is Determined," "General Information" and "Backup
Withholding Instructions"
8. Redemption or Repurchase "How to Redeem an Investment in the Fund" and
"General Information"
9. Pending Legal Proceedings Not Applicable
<PAGE>
PART B: Information Required in
Statement of Additional Information
(Statement of Additional Information for
Montgomery Strategic Fund)
N-1A Item No. Item Location in the Registration Statement by Heading
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History "The Trust" and "General Information"
13. Investment Objectives "Investment Objectives and Policies of the Fund,"
"Risk Factors" and "Investment Restrictions"
14. Management of the Registrant "Trustees and Officers"
15. Control Persons and Principal "Trustees and Officers" and "General Information"
Holders of Securities
16. Investment Advisory and Other "Investment Management and Other Services"
Services
17. Brokerage Allocation "Execution of Portfolio Transactions"
18. Capital Stock and Other Securities "The Trust" and "General Information"
19. Purchase, Redemption and Pricing "Additional Purchase and Redemption Information"
of Securities Being Offered and "Determination of Net Asset Value"
20. Tax Status "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of Performance Data "Performance Information"
23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
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PART A
PROSPECTUS FOR CLASS R SHARES
MONTGOMERY STRATEGIC FUND
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<PAGE>
THE MONTGOMERY FUNDS SM
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Invest wisely.(R)
Prospectus
September 30, 1998
Montgomery Strategic Fund
Class R shares of the Montgomery Strategic Fund (the "Fund") are offered in this
prospectus. The Fund's investment objective is capital appreciation which it
seeks to achieve by moving the Fund's investments between long and short
positions based upon whether the Manager believes the equity markets are going
up or down ("market timing"). As with all mutual funds, attainment of the Fund's
investment objective cannot be ensured.
The Fund uses sophisticated investment approaches that may present substantially
higher risks than most mutual funds. It may invest a larger percentage of its
assets in transactions using short sales and other forms of volatile financial
derivatives such as options and futures. The market-timing strategies employed
by the Fund rely upon the ability of the Manager to predict general equity
market trends. Furthermore, even when the Manager has accurately predicted
general equity market trends, the Fund may experience losses if the Manager
selects investments that do not exploit those trends. As a result, the value of
an investment in the Fund may be more volatile than investments in other mutual
funds. The Fund may not be an appropriate investment for conservative investors.
See "Portfolio Securities," "Other Investment Practices" and "Risk
Considerations."
The Fund's Class R shares are sold at net asset value ("NAV") with no sales
load, no commissions, no Rule 12b-1 fees and no exchange fees. The minimum
initial investment in the Fund is $1,000, and subsequent investments must be at
least $100. The Manager or the Distributor may waive these minimums. See "How to
Invest in the Fund."
The Fund is a separate series of The Montgomery Funds, an open-end management
investment company managed by Montgomery Asset Management, LLC (the "Manager"),
a subsidiary of Commerzbank AG. Commerzbank and its affiliates have worldwide
investment management operations and expertise. To benefit from these resources,
the Manager may consult with or rely on its affiliated investment advisory
organizations for research and other investment advice deemed useful by the
Manager. See "Management of the Fund." Funds Distributor, Inc., which is not
affiliated with the Manager, is the distributor of the Fund (the "Distributor").
This prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Please read it and retain it
for future reference. A Statement of Additional Information dated September 30,
1998, as may be revised, has been filed with the Securities and Exchange
Commission (the "SEC"), is incorporated by this reference and is available
without charge by calling (800) 572-FUND (3863). If you are viewing the
electronic version of this prospectus through an on-line computer service, you
may request a printed version free of charge by calling (800) 572-FUND (3863).
The Internet World Wide Web site for The Montgomery Funds is
www.montgomeryfunds.com. The Securities and Exchange Commission maintains a Web
site (www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding The
Montgomery Funds.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
bank. Shares are not insured by the Federal Deposit Insurance Corporation (the
"FDIC"), Federal Reserve Board or any other agency, and are subject to
investment risks, including possible loss of principal amount invested.
Like all mutual funds, these securities have not been approved or disapproved by
the Securities and Exchange Commission or any state securities commission, nor
has the Securities and Exchange Commission or any state securities commission
passed upon the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
1
<PAGE>
Table of Contents
Fees and Expenses of the Fund..............................3
The Fund's Investment Objective and Policies...............4
Portfolio Securities.......................................5
Other Investment Practices.................................6
Risk Considerations........................................9
Management of the Fund....................................11
How to Contact the Fund...................................12
How to Invest in the Fund.................................13
How to Redeem an Investment in the Fund...................15
Exchange Privileges and Restrictions......................17
Brokers and Other Intermediaries..........................17
How Net Asset Value Is Determined.........................18
Dividends and Distributions...............................18
Taxation..................................................19
General Information.......................................19
Backup Withholding Instructions...........................20
Glossary..................................................22
2
<PAGE>
Fees and Expenses of the Fund
<TABLE>
Shareholder Transaction Expenses for the Fund
An investor would pay the following charges when buying or redeeming shares of
the Fund:
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
MAXIMUM SALES LOAD MAXIMUM SALES LOAD MAXIMUM REDEMPTION FEES EXCHANGE FEES
IMPOSED ON PURCHASES IMPOSED ON REINVESTED DEFERRED SALES LOAD
DIVIDENDS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None+ None
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
+Shareholders effecting redemptions via wire transfer may be required to pay
fees, including a $10 wire fee and other fees, that will be directly
deducted from redemption proceeds. Shareholders who request redemption
checks to be sent by Federal Express may be required to pay a $10 fee that
will be directly deducted from redemption proceeds. The Fund reserves the
right, upon 60-days' advance notice to shareholders, to impose a redemption
fee of up to 1.00% on shares redeemed within 90 days of purchase. See "How
to Redeem an Investment in the Fund."
</FN>
</TABLE>
Estimated Annual Operating Expenses (as a percentage of average net assets)
- --------------------------------------------------------------------------------
MONTGOMERY STRATEGIC FUND
- --------------------------------------------------------------------------------
Management Fee 1.50%
- --------------------------------------------------------------------------------
Other Expenses (after reimbursement)* 0.40%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses (after reimbursement)* 1.90%
- --------------------------------------------------------------------------------
*Expenses for the Fund are estimated. The Manager will reduce its fees and
may absorb or reimburse the Fund for certain expenses to the extent
necessary to limit total annual Fund operating expenses to the amount
indicated in the table. The Fund is required to reimburse the Manager for
any reductions in the Manager's fee only during the three years following
that reduction and only if such reimbursement can be achieved within the
foregoing expense limits. The Manager generally seeks reimbursement for the
oldest reductions and waivers before payment by the Fund for fees and
expenses for the current year. Absent the reduction, actual total Fund
operating expenses are estimated to be: 2.65% (1.15% other expenses). The
Manager may terminate these voluntary reductions at any time. See
"Management of the Fund."
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Fund. Operating expenses
are paid out of the Fund's assets and are factored into the Fund's share price.
The Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year.
Example of Expenses for the Fund
Assuming, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of the
Fund's shares would have paid the following total expenses upon redeeming such
shares:
-------------------------------------------------------------------------------
MONTGOMERY STRATEGIC FUND
-------------------------------------------------------------------------------
1 Year $ 19
-------------------------------------------------------------------------------
3 Years $ 60
-------------------------------------------------------------------------------
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
3
<PAGE>
The Fund's Investment Objective and Policies
The investment objective and general investment policies of the Fund are
described below. Specific portfolio securities that may be purchased by the Fund
are described in "Portfolio Securities." Specific investment practices that may
be employed by the Fund are described in "Other Investment Practices." Certain
risks associated with investing in the Fund are described in those sections as
well as in "Risk Considerations." Certain terms used in this prospectus are
defined in the Glossary at the end of this prospectus.
The Fund's investment objective is capital appreciation which, under normal
conditions, it seeks to achieve by moving the Fund's investments between long
and short positions based upon the Manager's perception of the overall direction
of the equity markets. This strategy is popularly known as "market timing." The
market timing techniques, which seek to identify trends in the equity markets at
any given time, include using general market indicators such as: interest rate
and monetary analysis, market sentiment indicators, price and trading volume
statistics, and measures of valuation, as well as other market indicators and
statistics which the Manager believes tend to indicate trends in the overall
performance and the risk of the equity markets. These techniques are not an
all-in or all-out approach that attempts to predict market tops and bottoms.
Instead, they are intended to be a gradual and disciplined approach that reacts
to changes in risk levels as determined by the indicators. The goal is to be
invested consistent with the major trends of the markets. There can be no
assurance that these market timing techniques will provide protection from the
risks of debt or equity investment, enable the Fund to be invested consistent
with the major trends of the markets or enable the Fund to achieve its
investment objective.
Under normal market conditions, equity market exposure will be obtained through
the use of the Standard & Poor's 500 Composite Index (the "S&P 500") derivatives
and investments in equity securities. These derivatives will be backed by a
portfolio of fixed-income securities amounting to at least 65% of the Fund's
total assets. The fixed-income securities will be actively managed in order to
enhance the total return of the portfolio. This Fund generally invests the
remaining 35% of its total assets in a similar manner, but may invest those
assets in investment-grade debt securities and in other investment vehicles. See
"Portfolio Securities," "Risk Considerations" and the Appendix in the Statement
of Additional Information. During the first few months of the Fund's operations,
the Fund may be substantially invested in cash and cash-equivalents.
The S&P 500 is composed of 500 domestic common stocks, most of which are listed
on the New York Stock Exchange. S&P 500 stocks represent approximately
two-thirds of the total market capitalization of all U.S. common stocks. The
weightings of the stocks in the index are based on each stock's relative total
market capitalization.
When S&P 500 derivatives appear to be overvalued relative to the S&P 500, the
Fund may invest up to 100% of its assets in a collection of S&P 500 stocks. The
components of this collection will be determined, without regard to market
capitalization, by statistical techniques that analyze the historical
correlation between the return of each S&P 500 stock and the return on the S&P
500 itself. The Manager may employ fundamental stock analysis only to choose
among stocks that have already met certain statistical correlation criteria.
Positions in S&P 500 futures and options on futures will be entered into only to
the extent they constitute permissible positions for the Fund according to
applicable rules of the Commodity Futures Trading Commission (the "CFTC"). From
time to time, the Manager may be constrained in its ability to use S&P 500
derivatives by CFTC regulations, requirements of the Internal Revenue Code of
1986, as amended (the "Code"), or by an unanticipated inability to close out
positions when it would be most advantageous to do so. Although a large number
of investors use S&P 500 derivatives for both hedging and speculative purposes,
at times the liquidity of such derivatives may be limited.
The Fund uses sophisticated investment approaches that may present substantially
higher risks than most mutual funds. It may invest a larger percentage of its
assets in transactions using short sales and other forms of volatile financial
derivatives such as options and futures. The market-timing strategies employed
by the Fund rely upon the ability of the Manager to predict general equity
market trends. Furthermore, even when the Manager has accurately predicted
general equity market trends, the Fund may be subject to losses if the Manager
selects investments that do not exploit those trends. As a result, the value of
an investment in the Fund may be more volatile than investments in other mutual
funds. The Fund may not be an appropriate investment for conservative investors.
See "Portfolio Securities," "Other Investment Practices" and "Risk
Considerations."
4
<PAGE>
Portfolio Securities
Equity Securities
The Fund may invest in common stocks and may also invest in other types of
equity securities (such as preferred stocks or convertible securities) as well
as equity-derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The Fund may invest in ADRs, EDRs and GDRs and convertible securities that the
Manager regards as a form of equity security. The Fund may also invest up to 5%
of its net assets in warrants.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the Fund to invest in certain markets. Such investments may involve the
payment of substantial premiums above the net asset value of those investment
companies' portfolio securities and are subject to limitations under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Fund also may incur tax liability to the extent that it invests in the stock of
a foreign issuer that is a "passive foreign investment company" regardless of
whether such "passive foreign investment company" makes distributions to the
Fund. See the Statement of Additional Information.
The Fund does not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees. The
Manager has agreed to waive its own management fee with respect to the portion
of the Fund's assets invested in other open-end (but not closed-end) investment
companies.
Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation through anticipated favorable changes in relative foreign exchange
rates, in relative interest rate levels, or in the creditworthiness of issuers.
In selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy, which may be changed by the Board, the Fund
will not invest more than 25% of its total assets in debt securities rated below
investment grade. Subject to this limitation, the Fund may invest in any debt
security, including securities in default. After its purchase by the Fund, a
debt security may cease to be rated or its rating may be reduced below that
required for purchase by the Fund. A security downgraded below the minimum level
may be retained if determined by the Manager and the Board to be in the best
interests of the Fund. See "Risk Considerations."
Debt securities may also consist of participation certificates in large loans
made by financial institutions to various borrowers, typically in the form of
large unsecured corporate loans. These certificates must otherwise comply with
the maturity and credit-quality standards of the Fund and will be limited to 5%
of the Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external (i.e., to foreign lenders) debt
obligations issued by the governments, government entities and companies of
emerging markets countries. The percentage distribution between equity and debt
will vary from country to country based on anticipated trends in inflation and
interest rates; expected rates of economic and corporate profits growth; changes
in government policy; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and terms of trade.
U.S. Government Securities
The Fund may invest in fixed-rate and floating- or variable-rate U.S. government
securities. Certain obligations, including U.S. Treasury bills, notes and bonds,
and mortgage-related securities of the GNMA, are issued or guaranteed by the
U.S. government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, such as those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. The U.S. government does not guarantee the net
asset value of the Fund's shares, however. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
5
<PAGE>
Structured Notes and Indexed Securities
The Fund may invest in structured notes and indexed securities. Structured notes
are debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities include structured notes as well as
securities other than debt securities, the interest rate or principal of which
is determined by an unrelated indicator. Index securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent the
Fund invests in these securities, however, the Manager analyzes these securities
in its overall assessment of the effective duration of the Fund's portfolio in
an effort to monitor the Fund's interest rate risk.
Mortgage-Related Securities and Derivative Securities
The Fund may invest in mortgage-related securities. A mortgage-related security
is an interest in a pool of mortgage loans and is considered a derivative
security. Most mortgage-related securities are pass-through securities, which
means that investors receive payments consisting of a pro rata share of both
principal and interest (less servicing and other fees), as well as unscheduled
prepayments, as mortgages in the underlying mortgage pool are paid off by the
borrowers. These securities are subject to the risk of prepayment. See "Risk
Considerations." Certain mortgage-related securities are subject to high
volatility. The Fund uses these derivative securities in an effort to enhance
return and as a means to make certain investments not otherwise available to the
Fund. See "Hedging and Risk Management Practices" under "Other Investment
Practices" for a discussion of other reasons why the Fund invests in derivative
securities.
Asset-Backed Securities
The Fund may invest up to 5% of its total assets in asset-backed securities.
Like mortgage-related securities, these securities are subject to the risk of
prepayment. See "Risk Considerations."
Other Investment Practices
The Fund also may engage in the investment practices described below, each of
which may involve certain special risks. The Statement of Additional
Information, under the heading "Investment Objective and Policies of the Fund,"
contains more-detailed information about certain of these practices, including
limitations designed to reduce these risks.
Short Sales
The Fund may effect short sales of securities. Short sales are transactions in
which the Fund sells a security or other asset which it does not own, in
anticipation of a decline in the market value of the security or other asset.
The Fund will realize a profit or incur a loss depending upon whether the price
of the security sold short decreases or increases in value between the date of
the short sale and the date on which the Fund replaces the borrowed security.
Short sales are speculative investments and involve special risks, including
greater reliance on the Manager's accurately anticipating the future value of a
security. Short sales also may result in the Fund's recognition of gain for
certain portfolio securities. The Fund will not execute a short sale if, after
giving effect to the short sale, the market value of all securities sold exceeds
100% of the value of the Fund's total assets. See "Risk Considerations" below.
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, the Fund acquires a U.S. government security or other high-grade
liquid debt instrument from a financial institution that simultaneously agrees
to repurchase the same security at a specified time and price. The repurchase
price reflects an agreed-upon rate of return not determined by the coupon rate
on the underlying security. Under the Investment Company Act, repurchase
agreements are considered to be loans by the Fund and must be fully
collateralized by cash, letters of credit, U.S. government securities or other
high-grade liquid debt or equity securities ("collateral assets"). If the seller
defaults on its obligation to repurchase the underlying security, the 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.
Borrowing
The Fund may borrow money from banks in an amount not to exceed one-third of the
value of its total assets to meet temporary or emergency needs, and the Fund may
pledge its assets in connection with such borrowings. The Fund may not purchase
securities while such borrowings exceed 10% of its total assets.
6
<PAGE>
Securities Lending
The Fund may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 30% of the Fund's total assets. Each
securities loan is collateralized with collateral assets in an amount at least
equal to the current market value of the loaned securities, plus accrued
interest. There is a risk of delay in receiving collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially. Furthermore, if the borrower fails
financially, there is a risk that the collateral may be disposed of for less
than the value of the securities originally loaned.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, the Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in the Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager, therefore,
changes the Fund's investments whenever it believes doing so will further the
Fund's investment objective or when it appears that a position of the desired
size cannot be accumulated. Portfolio turnover generally involves some expense
to the Fund, including brokerage commissions, dealer markups and other
transaction costs, and may result in the recognition of capital gains that may
be distributed to shareholders.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager, therefore,
changes the Fund's investments whenever it believes doing so will further the
Fund's investment objective or when it appears that a position of the desired
size cannot be accumulated. The Fund's investment program emphasizes active
portfolio management with a sensitivity to short-term market trends and price
changes in individual securities. Accordingly, the Fund expects to take frequent
trading positions, resulting in portfolio turnover and brokerage expenses that
may exceed those of most investment companies of comparable size. Portfolio
turnover generally involves some expense to the Fund, including brokerage
commissions, dealer markups and other transaction costs, and may result in the
recognition of capital gains that may be distributed to shareholders. Generally,
portfolio turnover in excess of 100% is considered high and increases such
costs. The annual portfolio turnover is expected to be approximately 200% to
250% for the Fund. The Manager will not necessarily limit portfolio turnover to
these levels. High turnover that results in short-term gains may subject the
Fund to California income tax and reduce return. See "Taxation."
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Fund, the Fund may employ certain
risk management practices using the following derivative securities and
techniques (known as "derivatives"): forward currency exchange contracts,
currency options, futures contracts and options on futures contracts on foreign
government securities and currencies. The Board has adopted derivative
guidelines that require the Board to review each new type of derivative that may
be used by the Fund. Markets in some countries currently do not have instruments
available for hedging transactions relating to currencies or to securities
denominated in such currencies or to securities of issuers domiciled or
principally engaged in business in such countries. To the extent that such
instruments do not exist, the Manager may not be able to hedge its investment
effectively in such countries. Furthermore, the Fund engages in hedging
activities only when the Manager deems it to be appropriate and does not
necessarily engage in hedging transactions with respect to each investment.
Hedging transactions involve certain risks. Although the Fund may benefit from
the use of hedging positions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position and a portfolio position is not properly protected, the desired
protection may not be obtained and the Fund may be exposed to risk of financial
loss. In addition, the Fund pays commissions and other costs in connection with
such investments.
Futures and Options on Futures
The Fund may invest in interest rate, stock index and foreign currency futures
contracts and in options on those futures. The use of futures and futures
options for hedging purposes entails numerous risks. There can be no guarantee
that there will be a positive correlation between price movements in the hedging
vehicle and in the portfolio securities being hedged. An incorrect correlation
7
<PAGE>
could result in a loss on both the hedging vehicle and the hedged securities. A
loss on the hedging vehicle means that the portfolio return would have been
greater had hedging not been attempted. A liquid market may not exist at a time
when the Fund seeks to close out a futures contract or a futures option
position. Most futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single day; once the
daily limit has been reached for a particular contract, no trades may be made
that day at a price beyond that limit on that contract. Furthermore, some of
these instruments are relatively new and without a significant trading history.
There can be no assurance that an active secondary market will either develop or
continue to exist for such instruments. An illiquid market may prevent the Fund
from liquidating a position causing the Fund to incur greater losses in that
position.
The Fund will only enter into futures contracts or futures options which are
standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system. The Fund will use
financial futures contracts and options thereon for "bona fide hedging" (as
defined by the CFTC) and non-"bona fide hedging" purposes in accordance with
CFTC regulations. The Fund will enter such non-"bona fide hedging" positions
only to the extent that aggregate initial margin deposits plus premiums paid by
it for open futures option positions, less the amount by which any such
positions are "in-the-money," would not exceed 5% of the Fund's net assets.
To protect against the effect of adverse changes in interest rates, the Fund may
purchase and sell interest rate futures contracts. An interest rate futures
contract is an agreement to purchase or sell debt securities, usually U.S.
government securities, at a specified date and price. In addition, the Fund may
purchase and sell put and call options on interest rate futures contracts in
lieu of entering into the underlying interest rate futures contracts. The Fund
will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
The Fund may write covered straddles consisting of simultaneous call and put
options written on the same underlying futures contract. A straddle will be
covered when sufficient assets are deposited to meet the Fund's immediate
obligations under the straddle. The Fund may use the same liquid assets to cover
both the call and put options where the exercise price of the call and put are
the same, or the exercise price of the call is higher than that of the put. In
such cases, the Fund will also segregate liquid assets equivalent to the amount,
if any, by which the put is "in the money."
Futures contracts and options thereon are derivative instruments. Losses that
may arise from certain futures transactions, particularly those involved in
non-hedging contexts to pursue the Fund's investment objective, are potentially
unlimited. Subject to the regulations of the CFTC, the Fund may invest in
futures contracts and options on futures contracts without limitation as to a
percentage of its assets.
Forward Currency Contracts
A forward currency contract is individually negotiated and privately traded by
currency traders and their customers and creates an obligation to purchase or
sell a specific currency for an agreed-upon price at a future date. The Fund
normally conducts its foreign-currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate in the foreign-currency exchange market at
the time of the transaction, or through entering into forward contracts to
purchase or sell foreign currencies at a future date. The Fund generally does
not enter into forward contracts with terms greater than one year.
The Fund generally enters into forward contracts only under two circumstances.
First, if the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security by entering into a forward contract to buy or sell the
amount of a foreign currency needed to settle the transaction. Second, if the
Manager believes that the currency of a particular foreign country will
substantially rise or fall against the U.S. dollar, it may enter into a forward
contract to buy or sell the currency in an amount approximating the value of
some or all of the Fund's portfolio securities denominated in such currency. The
Fund will not enter into a forward contract if, as a result, it would have more
than one-third of its total assets committed to such contracts (unless it owns
the currency that it is obligated to deliver or has caused its custodian to
segregate segregable assets having a value sufficient to cover its obligations).
Although forward contracts are used primarily to protect the Fund from adverse
currency movements, they involve the risk that currency movements will not be
accurately predicted.
Options on Securities, Securities Indices and Currencies
The Fund may, without limit, purchase put and call options on securities and
currencies traded on U.S. exchanges and, to the extent permitted by law, foreign
exchanges, as well as in the over-the-counter market. The Fund may use such
purchases for purely speculative purposes as well as for hedging risk. The Fund
may purchase call options on securities it does not intend to purchase and may
purchase put options on securities the Fund does not own.
The Fund may purchase call options on securities that it intends to purchase (or
on currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the
8
<PAGE>
applicable currency). The Fund may purchase put options on particular securities
(or on currencies in which those securities are denominated) in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option (or an adverse movement in
the applicable currency). Put options allow the Fund to protect unrealized gains
in an appreciated security that it owns without selling that security. Prior to
expiration, most options are expected to be sold in a closing sale transaction.
Profit or loss from the sale depends upon whether the amount received is more or
less than the premium paid plus transactions costs.
The Fund also may purchase put and call options on stock indices in order to
hedge against risks of stock market or industrywide stock price fluctuations and
for purely speculative purposes. The Fund may purchase options on currencies in
order to hedge its positions in a manner similar to its use of forward
foreign-exchange contracts and futures contracts on currencies and for purely
speculative purposes.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund treats as illiquid any securities subject to restrictions on
repatriation for more than seven days and securities issued in connection with
foreign debt conversion programs that are restricted as to remittance of
invested capital or profit. The Fund also treats as illiquid repurchase
agreements with maturities in excess of seven days. Illiquid securities do not
include securities that are restricted from trading on formal markets for some
period of time but for which an active informal market exists, or securities
that meet the requirements of Rule 144A under the Securities Act of 1933 and
that, subject to review by the Board and guidelines adopted by the Board, the
Manager has determined to be liquid. State securities laws may impose further
limitations on the amount of illiquid or restricted securities that the Fund may
purchase.
Investment Restrictions
The investment objective of the Fund is fundamental and may not be changed
without shareholder approval, but, unless otherwise stated, the Fund's other
investment policies may be changed by the Board. If there is a change in the
investment objective or policies of the Fund, shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current financial positions and goals. The Fund is subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30-days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this prospectus.
Risk Considerations
The Year 2000
The Manager and the Fund's other service providers depend on the smooth
functioning of their computer systems. Unfortunately, because of the way dates
are encoded and calculated, many computer systems in use today cannot recognize
the year 2000, but revert to 1900 or another incorrect date. A computer failure
due to the year 2000 problem could negatively impact the handling of securities
trades, pricing and account services.
The Fund's software vendors and service providers have assured us that they are
prepared to handle these potential problems. There can be no guarantee, however,
that any of these computer systems will be adapted in time. Furthermore, brokers
and other intermediaries that hold shareholder accounts may still experience
incompatibility problems. It is also important to keep in mind that year 2000
problems may negatively impact the companies in which the Fund invests and, by
extension, the value of the shares held in the Fund.
Market Timing
The Fund relies upon market-timing strategies in which the Manager attempts to
predict general equity market trends and invests varying proportions of the
portfolio in long or short positions based upon the direction of the anticipated
trend. There can be no assurance that the Manager will be able to accurately
predict general market trends. Furthermore, even when the Manager has accurately
predicted general equity market trends, the Fund may experience losses if the
Manager selects investments that do not exploit those trends.
Short Sales
When the Manager believes that a security is overvalued, it may sell the
security short and borrow the same security from a broker or other institution
to complete the sale. The Fund may make a profit or incur a loss depending upon
whether the market price of the security decreases or increases between the date
of the short sale and the date on which the Fund must replace the borrowed
security. An increase in the value of a security sold short by the Fund over the
price at which it was sold short will result in a loss to the Fund, and there
can be no assurance that the Fund will be able to close out the position at any
particular time or at an acceptable price. Although the Fund's gain is limited
to the amount at which it sold the security short, its potential loss is limited
only by the maximum attainable price of the security less the price at which the
security was sold. There also is a risk that the borrowed securities would need
to be returned to the brokerage firm on short notice. If that request for the
return of securities occurs at a time when other short sellers of the subject
security are receiving similar requests, a "short squeeze" can occur. This means
that the Fund might be compelled, at the most disadvantageous time, to replace
borrowed securities previously sold short with purchases on the open market,
possibly at prices significantly in excess of the proceeds received earlier. The
successful use of
9
<PAGE>
short selling may be adversely affected by an imperfect correlation between
movements in the price of the security sold short and the securities being
hedged. Short selling also may produce higher than normal portfolio turnover and
may result in increased transaction costs to the Fund.
The Fund also may make short sales against-the-box, in which it sells short
securities it owns or has the right to obtain without payment of additional
consideration. If the Fund makes a short sale against-the-box, it will be
required to set aside securities equivalent in kind and amount to the securities
sold short (or securities convertible or exchangeable into those securities) and
will be required to hold those securities while the short sale is outstanding.
The Fund will incur transaction costs, including interest expenses, in
connection with opening, maintaining and closing short sales against-the-box.
Short sales against-the-box also result in a "constructive sale" and require the
Fund to recognize any taxable gain in the securities set aside for the short
sale.
Until the Fund replaces a borrowed security, it will instruct its Custodian to
identify as unavailable for investment cash, U.S. government securities, or
other liquid debt or equity securities such that the amount so identified plus
any amount deposited with a broker or other custodian as collateral will equal
the current value of the security sold short and will not be less than the value
of the security at the time it was sold short. Depending on arrangements made
with the broker or custodian, the Fund may not receive any payments (including
interest) on collateral deposited with the broker or custodian. A high level of
short sales also may subject the Fund to California income tax and reduce
return. See "Taxation."
Small Companies
While the Fund may invest in mature suppliers of products, services and
technologies, the Fund also may make investments in smaller companies that may
benefit from the development of new products and services. Such smaller
companies may present greater opportunities for capital appreciation but may
involve greater risk than larger, more mature issuers. Such smaller companies
may have limited product lines, markets or financial resources, and their
securities may trade less frequently and in more limited volume than those of
larger, more mature companies. As a result, the prices of their securities may
fluctuate more than those of larger issuers.
Lower-Quality Debt
As an operating policy, which may be changed by the Board without shareholder
approval, the Fund is permitted to invest in medium-quality debt securities, but
does not invest more than 25% of its total assets in high-risk debt securities
below investment-grade quality (sometimes called "junk bonds").
Medium-quality debt securities are those rated or equivalent to BBB by S&P or
Fitch's, or Baa by Moody's. Medium-quality debt securities have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than with higher-grade debt securities. Junk bonds offer greater
speculative characteristics and are regarded as having a great vulnerability to
default although currently having the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
ability to maintain other terms of the contract over any long period of time may
be small. Junk bonds are more subject to default during periods of economic
downturns or increases in interest rates and their yields will fluctuate over
time. It may be more difficult to dispose of or to value junk bonds. Achievement
of the Fund's investment objective may also be more dependent on the Manager's
own credit analysis to the extent the Fund's portfolio includes junk bonds.
Unrated debt securities are not necessarily of lower quality than rated
securities but may not be attractive to as many buyers. Regardless of rating
levels, all debt securities considered for purchase (whether rated or unrated)
are analyzed by the Manager to determine, to the extent reasonably possible,
that the planned investment is sound. From time to time, the Fund may purchase
defaulted debt securities if, in the opinion of the Manager, the issuer may
resume interest payments in the near future.
Interest Rates
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate changes. Changes in the
ability of an issuer to make payments of interest and principal and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in the Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of
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<PAGE>
falling interest rates, the prepayment rate tends to increase, shortening the
average life of a pool. Because prepayments of principal generally occur when
interest rates are declining, it is likely that the Fund, to the extent that it
retains the same percentage of debt securities, may have to reinvest the
proceeds of prepayments at lower interest rates than those of its previous
investments. If this occurs, the Fund's yield will correspondingly decline.
Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable duration, although they may have a comparable risk of
decline in market value in periods of rising interest rates. To the extent that
the Fund purchases mortgage-related securities at a premium, unscheduled
prepayments, which are made at par, result in a loss equal to any unamortized
premium. Duration is one of the fundamental tools used by the Manager in
managing interest rate risks including prepayment risks. See duration in the
Glossary.
Equity Swaps
The Fund may invest in equity swaps. Equity swaps are derivatives and their
value can be very volatile. To the extent that the Manager does not accurately
analyze and predict the potential relative fluctuation of the components swapped
with another party, the Fund may suffer a loss. The value of some components of
an equity swap (like the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, during the period a swap is outstanding,
the Fund may suffer a loss if the counterparty defaults.
Lack of Industry Diversification
Diversifying a mutual fund's portfolio across a large number of industries can
reduce industry-related risks by limiting the portion of your investment in any
one industry, although it could also limit the potential reward. The Fund may
invest a maximum of 25% of its total assets in any single industry. Such a heavy
industry concentration could make the Fund's net asset value extremely volatile
and, if economic downturns or other events occur that adversely affect one or
more of the industries the Fund invests in, such events' impact on that Fund
will be more magnified than if the Fund did not have such a narrow
concentration.
Management of the Fund
The Montgomery Funds (the "Trust") has a Board of Trustees (a "Board") that
establishes the Fund's policies and supervises and reviews its management.
Day-to-day operations of the Fund are administered by the officers of the Trust
and by the Manager pursuant to the terms of an investment management agreement
with the Fund.
Montgomery Asset Management, LLC, is the Funds' Manager. The Manager is a
Delaware limited liability company and is registered as an investment adviser
with the SEC under the Investment Advisers Act of 1940, as amended. The Manager
and its predecessor have advised private accounts and mutual funds since 1990.
The Manager is a subsidiary of Commerzbank AG. ("Commerzbank"). Commerzbank, one
of the largest publicly held commercial banks in Germany, had total assets of
approximately $288 billion on December 31, 1997. Commerzbank and its affiliates
had more than $92 billion in assets under management as of October 31, 1997.
Commerzbank's asset management operations involve more than 1,000 employees in
13 countries worldwide.
Portfolio Management
KEVIN T. HAMILTON, CFA, chair of Montgomery Asset Management's Investment
Oversight Committee. Kevin Hamilton coordinates and oversees the investment
decisions of Montgomery's portfolio management teams. Prior to joining
Montgomery Asset Management in 1991, he was a senior vice president and
portfolio manager at Analytic Investment Management, where he managed both
equity and fixed-income portfolios.
WILLIAM C. STEVENS, senior portfolio manager. Prior to joining Montgomery in
1992, Bill Stevens worked at Barclays de Zoete Wedd Securities, where he started
its collateralized mortgage obligation (CMO) and asset-backed securities
trading. From 1990 to 1991, Mr. Stevens traded stripped mortgage securities and
mortgage-related interest rate swaps for the First Boston Company. Prior to that
he worked at Drexel Burnham Lambert, where he was responsible for originating
and trading all of the firm's derivative mortgage-related securities.
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<PAGE>
Management Fees and Other Expenses
<TABLE>
The Manager provides the Fund with advice on buying and selling securities,
manages the Fund's investments, including the placement of orders for portfolio
transactions, furnishes the Fund with office space and certain administrative
services, and provides personnel needed by the Fund with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with the Fund. The Manager also compensates the members of the Board who are
interested persons of the Manager, and assumes the cost of printing prospectuses
and shareholder reports for dissemination to prospective investors. As
compensation, the Fund pays the Manager a management fee (accrued daily but paid
when requested by the Manager) based upon the value of its average daily net
assets, according to the following table:
<CAPTION>
- -------------------------------------------- --------------------------------- ---------------------------
AVERAGE DAILY NET ASSETS MANAGEMENT FEE (ANNUAL
RATE)
- -------------------------------------------- --------------------------------- ---------------------------
<S> <C> <C>
Montgomery Strategic Fund First $250 million 1.50%
Over $250 million 1.25%
- -------------------------------------------- --------------------------------- ---------------------------
</TABLE>
The management fee for the Fund is higher than for most mutual funds. The
Manager also serves as the Fund's Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of the Fund's
administrative operations. As compensation, the Fund pays the Administrator a
monthly fee at the annual rate of seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $250 million).
The Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fee; the Administrator's fee; taxes, if any; brokerage
and commission expenses, if any; interest charges on any borrowings; transfer
agent, custodian, legal and auditing fees; shareholder servicing fees including
fees to third-party servicing agents; fees and expenses of Trustees who are not
interested persons of the Manager; salaries of certain personnel; costs and
expenses of calculating its daily net asset value; costs and expenses of
accounting, bookkeeping and record-keeping required under the Investment Company
Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, Statements of Additional Information and
reports to shareholders; and other expenses relating to the Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses at or below one and nine-tenths of one percent (1.90%)
of the Fund's average net assets. The Manager also may voluntarily reduce
additional amounts to increase the return to the Fund's investors. The Manager
may terminate these voluntary reductions at any time. Any reductions made by the
Manager in its fees are subject to reimbursement by the Fund within the
following three years, provided that the Fund is able to effect such
reimbursement and remain in compliance with applicable expense limitations. The
Manager generally seeks reimbursement for the oldest reductions and waivers
before payment by the Fund for fees and expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating expense for which
the Fund is obligated to pay and the performance of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement, the Manager is entitled to seek reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate broker-dealers and other
intermediaries who distribute the Fund's shares as well as other providers of
shareholder and administrative services. In addition, the Manager, out of its
own funds, may sponsor seminars and educational programs on the Fund for
financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. These factors are more
fully discussed in the Statement of Additional Information; they include, but
are not limited to: reasonableness of commissions; quality of services, and
execution; and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Manager also may
consider sale of the Fund's shares as a factor in selecting broker-dealers for
the Fund's portfolio transactions. See "Execution of Portfolio Transactions" in
the Statement of Additional Information for further information regarding Fund
policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Fund (the "Master Transfer
Agent") and performs certain record-keeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Fund's transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Fund's principal custodian (the
"Custodian").
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How to Contact the Fund
For information on the Fund or your account, call a Montgomery shareholder
service representative at:
(800) 572-FUND (3863)
<TABLE>
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
<CAPTION>
- ---------------------------------------------------------------- --------------------------------------------------------------
REGULAR MAIL EXPRESS MAIL OR OVERNIGHT SERVICE
- ---------------------------------------------------------------- --------------------------------------------------------------
<S> <C>
The Montgomery Funds The Montgomery Funds
P.O. Box 419073 210 West 10th Street, 8th Floor
Kansas City, MO 64141-6073 Kansas City, MO 64105
- ---------------------------------------------------------------- --------------------------------------------------------------
</TABLE>
Visit the Montgomery Funds World Wide Web site at:
www.montgomeryfunds.com
How to Invest in the Fund
The Fund's shares are offered directly to the public, with no sales load, at
their next-determined net asset value after receipt of an order with payment.
The Fund's shares are offered for sale by Funds Distributor, Inc., the Fund's
Distributor, 101 California Street, San Francisco, California 94111, (800)
572-FUND (3863), and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor or certain intermediaries that have an agreement with the
Funds by the close of trading (generally, 4:00 P.M. eastern time, except when
the market closes earlier due to a holiday or for any other reason) on any day
that the New York Stock Exchange (the "NYSE") is open, Fund shares will be
purchased at the Fund's next-determined net asset value. Orders for Fund shares
received after the Fund's cutoff time will be purchased at the next-determined
net asset value after receipt of the order.
Initial Investment
The minimum initial investment in the Fund is $1,000 (including IRAs). The
Manager or the Distributor, at its discretion, may waive this minimum. The Fund
does not accept third-party checks or cash investments. Checks must be in U.S.
dollars and, to avoid fees and delays, drawn only on banks located in the United
States. Purchases may also be made in certain circumstances by payment of
securities. See the Statement of Additional Information for further details.
Initial Investment by Check
o Complete the New Account application. Tell us that you wish to invest in
the Montgomery Strategic Fund. Make your check payable to The Montgomery
Funds.
o A charge may be imposed on checks that do not clear.
Initial Investment by Wire
o Call the Transfer Agent to tell it that you intend to make your initial
investment by wire. Provide the Transfer Agent with your name and the
dollar amount to be invested, and tell the Transfer Agent that you wish to
invest in the Montgomery Strategic Fund. The Transfer Agent will provide
you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire
instructions to ensure accurate handling of your investment.
o A completed New Account application must be sent to the Transfer Agent by
facsimile. The Transfer Agent will provide you with its fax number over the
phone.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
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<PAGE>
For credit to: (shareholder(s) name)
Shareholder account number: (shareholder(s) account number)
Name of Fund: Montgomery Strategic Fund
o Your bank may charge a fee for any wire transfers.
o The Fund and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Initial Investment by Telephone
You are eligible to make an initial investment into the Montgomery Strategic
Fund by telephone under the following conditions:
o You must be a shareholder in another Montgomery Fund.
o You must have been a shareholder for at least 30 days.
o Your existing account registration will be duplicated in the Montgomery
Strategic Fund.
o Your initial telephone purchase into the Montgomery Strategic Fund must
meet initial investment minimums and is limited to the combined aggregate
net asset value of your existing accounts or $10,000, whichever is less.
o The Fund must receive your check or wire transfer within three business
days of the telephone purchase.
o The Fund reserves the right to collect any losses to the Fund from your
existing account(s) that result from a telephone purchase not funded within
three business days.
Subsequent Investments
The minimum subsequent investment in the Fund is $100 (including IRAs). The
Manager or the Distributor, at its discretion, may waive this minimum.
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check
with written instructions indicating the Montgomery Strategic Fund and the
account number to which your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agent's affiliated bank by using the bank wire information under "Initial
Investment by Wire" above.
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572-FUND (3863) before
the Fund's cutoff time.
o Shares for IRAs may not be purchased by phone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
o You should do one of the following to ensure that payment is received in
time:
o Transfer funds directly from your bank account by sending a letter and
a voided check or deposit slip (for a savings account) to the Transfer
Agent.
o Send a check by overnight or second-day courier service.
o Instruct your bank to wire funds to the Transfer Agent's affiliated
bank by using the bank wire information under "Initial Investment by
Wire" above.
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is the Fund's subsequent investment minimum.
14
<PAGE>
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your New Account
application or your letter of instruction. Investments will automatically
be transferred into your Montgomery account from your checking or savings
account.
o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your New Account application or your letter of instruction,
the 20th day of each month will be selected.
o You should allow 20 business days for this service to become effective.
o You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
o Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for the Fund is $100 per payroll deduction
period.
o You may automatically deposit a designated amount of your paycheck directly
into your Montgomery Fund account.
o Please call the Transfer Agent to receive instructions to establish this
service.
Telephone Transactions
You agree to reimburse the Fund for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be cancelled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Fund upon 30-days' written notice or at any time by you by written notice
to the Fund. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by the Fund. The Fund and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Fund employs reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording
certain telephone calls, sending a confirmation and requiring the caller to give
an authorization number or other personal information not likely to be known by
others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Telephone privileges may be revoked at any time by the Fund as to any
shareholder if the Fund believes that a shareholder has abused the telephone
privilege by using abusive language or by purchases and redemptions that appear
to be part of a systematic market-timing strategy.
Retirement Plans
Shares of the Fund are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. The Fund may be available for
purchase through administrators for retirement plans. Investors who purchase
shares as part of a retirement plan should address inquiries and seek investment
servicing from their plan administrators. Plan administrators may receive
compensation from the Fund for performing shareholder services.
Share Certificates
Share certificates will not be issued by the Fund. All shares are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.
How to Redeem an Investment in the Fund
The Fund will redeem all or any portion of an investor's outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of purchase orders, by securities dealers.
Payment of redemption proceeds is made promptly regardless of when redemption
occurs and normally within three days after
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receipt of all documents in proper form, including a written redemption order
with appropriate signature guarantee. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instructions. The Fund may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. Shares tendered
for redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. The procedures for
requesting a redemption are set forth below.
Redeeming by Written Instruction
o Write a letter giving your name and account number and indicating the
Montgomery Strategic Fund and the dollar amount or number of shares you
wish to redeem.
o The letter must be signed the same way your account is registered. If you
have a joint account, all accountholders must sign.
o Signature-guarantee your letter if you want the redemption proceeds to go
to a party other than the account owner(s), your predesignated bank account
or if the dollar amount of the redemption exceeds $50,000. Signature
guarantees may be provided by an eligible guarantor institution such as a
commercial bank, an NASD member firm such as a stockbroker, a savings
association or a national securities exchange. Contact the Transfer Agent
for more information.
o If you do not have a predesignated bank account and want us to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees at the Manager's discretion.
Redeeming By Telephone
o Unless you have declined telephone redemption privileges on your New
Account application, you may redeem shares up to $50,000 by calling the
Transfer Agent before the Fund's cutoff time. This service is not available
for IRA accounts.
o If you included bank wire information on your New Account application or
made subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at least two business days for redemption proceeds to be
credited to your bank account. If you want to wire your redemption proceeds
to arrive at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
o Telephone redemption privileges may be cancelled after an account is opened
by instructing the Transfer Agent in writing. Your request will be
processed upon receipt. Telephone redemption privileges are not available
for IRA accounts.
By establishing telephone redemption privileges, a shareholder authorizes the
Fund and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the authorization. When a shareholder appoints a designee on the
New Account application or by other written authorization, the shareholder
agrees to be bound by the telephone redemption instructions given by the
shareholder's designee. The Fund may change, modify or terminate these
privileges at any time upon 60-days' notice to shareholders. The Fund will not
be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See discussion of Fund telephone
procedures and liability under "Telephone Transactions" above.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in the Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from the Fund
account. Payments may be made either monthly or quarterly on the first day of
each month. Depending on the form of payment requested, shares will be redeemed
up to five business days before the redemption proceeds are scheduled to be
received by the shareholder. The redemption may result in the recognition of
gain or loss for income tax purposes.
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Uncashed Distribution or Redemption Checks
If you choose to receive your distribution or redemption by a check from the
Fund (instead of bank wire), you should follow up to ensure that you have
received the distribution or redemption in a timely manner. The Fund is
responsible only for mailing the distribution or redemption checks and is not
responsible for tracking uncashed checks or determining why checks are uncashed.
If the postal or other delivery service is unable to deliver a check and the
check is returned to the Fund, the Fund will hold the check in a separate
account on your behalf for a reasonable period of time but will not invest the
money in any interest-bearing account. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, the Fund may
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
the Fund decides to make such an involuntary redemption, the shareholder will
first be notified that the value of the shareholder's account is less than the
minimum level and will be allowed 30 days to make an additional investment to
bring the value of that account back up to $1,000 before the Fund takes any
action.
Exchange Privileges and Restrictions
You may exchange shares from another Fund in the Montgomery Funds family with
the same registration, Taxpayer Identification number and address. An exchange
may result in a recognized gain or loss for income tax purposes. See the
discussion of Fund telephone procedures and limitations of liability under
"Telephone Transactions."
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange fee)
after your request is received. Your request is subject to the Fund's
cutoff times.
o Exchange purchases must meet the minimum investment requirements of the
fund you intend to purchase.
o You may exchange for shares of a fund only in states where that Montgomery
fund's shares are qualified for sale and only after you have reviewed a
prospectus of that fund.
o You may not exchange for shares of a Montgomery fund that is not open to
new shareholders unless you have an existing account with that fund.
o Because excessive exchanges can harm a Fund's performance, the Trust
reserves the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-month period. The Fund
may also refuse an exchange into a Fund from which you have redeemed shares
within the previous 90 days (accounts under common control and accounts
with the same Taxpayer Identification number will be counted together). A
shareholder's exchanges may be restricted or refused if the Fund receives,
or the Manager anticipates, simultaneous orders affecting significant
portions of the Fund's assets and, in particular, a pattern of exchanges
coinciding with a market-timing strategy. The Trust reserves the right to
refuse exchanges by any person or group if, in the Manager's judgment, a
Fund would be unable to effectively invest the money in accordance with its
investment objective and policies, or would otherwise be potentially
adversely affected. Although the Trust attempts to provide prior notice to
affected shareholders when it is reasonable to do so, it may impose these
restrictions at any time. The exchange limit may be modified for accounts
in certain institutional retirement plans to conform to plan exchange
limits and U.S. Department of Labor regulations (for those limits, see plan
materials). The Trust reserves the right to terminate or modify the
exchange privileges of Fund shareholders in the future.
Automatic Transfer Service ("ATS")
You may elect systematic exchanges out of any of the Montgomery fixed-income
funds (which include the Montgomery Short Duration Government Bond Fund, the
Montgomery Government Reserve Fund, the Montgomery Total Return Bond Fund, the
Montgomery Federal Tax-Free Money Fund, the Montgomery California Tax-Free
Intermediate Bond Fund and the California Tax-Free Money Fund) into the Fund.
The minimum exchange is $100. Periodically investing a set dollar amount into
the Fund is also referred to as dollar-cost averaging, because the number of
shares purchased will vary depending on the price per share. Your
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account with the Fund must meet the applicable investment minimum of $1,000.
Exchanges out of the fixed-income funds are exempt from the four-exchanges limit
policy.
Brokers and Other Intermediaries
Investing Through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of the Fund from selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as for information pertaining to accounts and any service or transaction
fees that may be charged by these agents. Some of these agents may appoint
subagents. Purchase orders through securities brokers, dealers and other
financial intermediaries are effected at the next-determined net asset value
after receipt of the order by such agent before the Fund's daily cutoff time.
Orders received after that time will be purchased at the next-determined net
asset value. To the extent that these agents perform shareholder servicing
activities for the Fund, they may receive fees from the Fund or the Manager for
such services.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Fund by wire or telephone through
the Distributor or selected securities brokers or dealers. Shareholders should
contact their securities broker or dealer for appropriate instructions and for
information concerning any transaction or service fee that may be imposed by the
broker or dealer. Shareholders are entitled to the net asset value next
determined after receipt of a redemption order by such broker-dealer, provided
the broker-dealer transmits such order on a timely basis to the Transfer Agent
so that it is received before the Fund's cutoff time on a day that the Fund
redeems shares. Orders received after that time are entitled to the net asset
value next determined after receipt.
How Net Asset Value Is Determined
The net asset value of the Fund is determined once daily as of the Fund's cutoff
time on each day that the NYSE is open for trading. Generally, this is 4:00 P.M.
eastern time, or earlier when trading closes earlier. Per-share net asset value
is calculated by dividing the value of the Fund's total net assets by the total
number of the Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed-income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or that
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the manager and the Pricing
Committee of the Board, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign currency-denominated values of such
securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset value, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset value may not be reflected in the Fund's
calculation of its net asset value unless the Manager, under the supervision of
the Board, determines that a particular event would materially affect the Fund's
net asset value.
Dividends and Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Dividends and capital gains are
declared and paid in the last quarter of each year. Additional distributions, if
necessary, may be made following the Fund's fiscal year end (June 30) in order
to avoid the imposition of tax on the Fund. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
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Unless you request cash distributions in writing at least seven business days
prior to the distribution, or on the New Account application, all dividends and
other distributions will be reinvested automatically in additional Class R
shares of the Fund and credited to your account at the closing net asset value
on the reinvestment date. Furthermore, if you have elected to receive cash
distributions in cash and the postal or other delivery service is unable to
deliver checks to your address of record, your distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. Also, as is the case for redemption checks, no
interest will accrue on amounts represented by uncashed distribution checks. See
"Uncashed Distribution or Redemption Checks" above.
Distributions Affect the Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of the
Fund, regardless of how long you have held the shares. Dividends and capital
gains awaiting distribution are included in the Fund's daily net asset value.
The share price of the Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Fund declared a dividend in the amount of $0.50 per share. If the Fund's share
price was $10.00 on December 30, the Fund's share price on December 31 would be
$9.50 barring market fluctuations.
"Buying a Dividend"
If you buy shares of the Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend, and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
The Fund intends to qualify and elect as soon as possible to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), by distributing substantially all of its net
investment income and net capital gains to its shareholders and meeting other
requirements of the Code relating to the sources of its income and
diversification of assets. Accordingly, the Fund generally will not be liable
for federal income tax or excise tax based on net income except to the extent
that its earnings are not distributed or are distributed in a manner that does
not satisfy the requirements of the Code pertaining to the timing of
distributions. If the Fund is unable to meet certain requirements of the Code,
it may be subject to taxation as a corporation. The Fund may also incur tax
liability to the extent that it invests in "passive foreign investment
companies." See "Portfolio Securities" and the Statement of Additional
Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered ordinary
income. Part of the distributions paid by the Fund may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of the Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Fund.
The Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisors regarding the particular tax consequences to them
of an investment in shares of the Fund. Additional information on tax matters
relating to the Fund and its shareholders is included in the Statement of
Additional Information.
General Information
The Trust
The Fund is a series of The Montgomery Funds, a Massachusetts business trust
organized on May 10, 1990 (the "Trust"). The Trust's Agreement and Declaration
of Trust permits the Board to issue an unlimited number of full and fractional
shares of
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beneficial interest, $0.01 par value, in any number of series. The assets and
liabilities of each series within the Trust are separate and distinct from those
of each other series.
This prospectus relates only to the Class R shares of the Fund. The Fund has
designated other classes of shares and may, in the future, designate other
classes of shares for specific purposes. The other classes of shares may have
different fees and expenses than the class of shares offered in this prospectus,
and those different fees and expenses may affect performance. To obtain
information concerning the other classes of shares not offered in this
prospectus, call The Montgomery Funds at (800) 572-FUND (3863) or contact sales
representatives or financial intermediaries who offer those classes.
Shareholder Rights
Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each whole share is entitled to one vote as to any matter on which it is
entitled to vote, and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of its Trust, votes
separately on matters affecting only that Fund (e.g., approval of the Investment
Management Agreement); all series of the Trust vote as a single class on matters
affecting all series of the Trust jointly or the Trust as a whole (e.g.,
election or removal of Trustees). Voting rights are not cumulative, so the
holders of more than 50% of the shares voting in any election of Trustees can,
if they so choose, elect all of the Trustees of that Trust. Although the Trust
is not required and does not intend to hold annual meetings of shareholders,
such meetings may be called by the Trust's Board at its discretion, or upon
demand by the holders of 10% or more of the outstanding shares of the Trust, for
the purpose of electing or removing Trustees. Shareholders may receive
assistance in communicating with other shareholders in connection with the
election or removal of Trustees pursuant to the provisions of Section 16(c) of
the Investment Company Act.
Performance Information
From time to time, the Fund may publish its total return, such as in
advertisements and communications to investors. Performance data may be quoted
separately for the Class R shares as for the other classes. Total return
information generally will include the Fund's average annual compounded rate of
return over the most recent four calendar quarters and over the period from the
Fund's inception of operations. The Fund may also advertise aggregate and
average total return information over different periods of time. The Fund's
average annual compounded rate of return is determined by reference to a
hypothetical $1,000 investment that includes capital appreciation and
depreciation for the stated period according to a specific formula. Aggregate
total return is calculated in a similar manner, except that the results are not
annualized. Total return figures will reflect all recurring charges against the
Fund's income.
Investment results of the Fund will fluctuate over time, and any presentation of
the Fund's total return for any prior period should not be considered as a
representation of what an investor's total return or current yield may be in any
future period. The Fund's annual report contains additional performance
information and is available upon request and without charge by calling (800)
572-FUND (3863).
Legal Opinion
The validity of shares offered by this prospectus will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
During the year, the Fund will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and preauthorized automatic investment, exchange and redemption services
(quarterly).
o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semiannual reports are mailed approximately 60 days after June
30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o An annual updated prospectus is mailed to existing shareholders in October
or November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-FUND (3863).
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Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN or to check the appropriate boxes in the New
Account application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of federal income tax equal to 31% of
taxable dividends, capital-gains distributions, redemptions, exchanges and other
payments made to a shareholder's account. Any tax withheld may be credited
against taxes owed on a shareholder's federal income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the
Internal Revenue Service (the "IRS"). Backup withholding could apply to payments
made to a shareholder's account while awaiting receipt of a TIN. Special rules
apply for certain entities. For example, for an account established under the
Uniform Gifts to Minors Act, the TIN of the minor should be furnished. If a
shareholder has been notified by the IRS that he or she is subject to backup
withholding because he or she failed to report all interest and dividend income
on his or her tax return and the shareholder has not been notified by the IRS
that such withholding will cease, the shareholder should cross out the
appropriate item on the New Account application. Dividends paid to a foreign
shareholder's account by the Fund may be subject to up to 30% withholding
instead of backup withholding.
A shareholder who is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, government agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult a tax
advisor.
---------------------------------
This prospectus is not an offering of the securities herein described in any
state in which such offering is unauthorized. No salesperson, dealer or other
person is authorized to give any information or make any representation other
than those contained in this prospectus, the Statement of Additional Information
or in the Fund's official sales literature.
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Glossary
below investment grade debt securities. Debt securities rated below "investment
grade."
cash equivalents. These are short-term, interest-bearing instruments or deposits
and may include, for example, commercial paper, certificates of deposit,
repurchase agreements, bankers' acceptances, U.S. Treasury bills, bank money
market deposit accounts, master demand notes and money market mutual funds.
These consist of high-quality debt obligations, certificates of deposit and
bankers' acceptances rated at least A-1 by S&P or Prime-1 by Moody's, or the
issuer has an outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
Collateralized Mortgage Obligations (CMOs). These are derivative
mortgage-related securities that separate the cash flows of mortgage pools
into different classes or tranches. Stripped mortgage securities are CMOs
that allocate different proportions of interest and principal payments on a
pool of mortgages. One class may receive all of the interest (the interest
only, or IO class) whereas another may receive all of the principal
(principal only, or PO class). The yield to maturity on any IO or PO class is
extremely sensitive not only to changes in interest rates but also to the
rate of principal payments and prepayments on underlying mortgages. In the
most extreme cases, an IO class may become worthless.
convertible security. This is a fixed-income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
covered call option. A call option is "covered" if the fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option or owns an offsetting call option.
covered put option. A put option is "covered" if the fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
depositary receipts. These include American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other
similar instruments. Depositary receipts are receipts typically issued in
connection with a U.S. or foreign bank or trust company and evidence
ownership of underlying securities issued by a foreign corporation.
derivatives. These include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts, swaps and
options on futures contracts on U.S. government and foreign government
securities and currencies.
duration. Traditionally, a debt security's "term to maturity" characterizes a
security's sensitivity to changes in interest rates "Term to maturity,"
however, measures only the time until a debt security provides its final
payment, taking no account of prematurity payments. Most debt securities
provide interest ("coupon") payments in addition to a final ("par") payment
at maturity, and some securities have call provisions allowing the issuer to
repay the instrument in full before maturity date, each of which affect the
security's response to interest rate changes. "Duration" is considered a more
precise measure of interest rate risk than "term to maturity." Determining
duration may involve the Manager's estimates of future economic parameters,
which may vary from actual future values. Fixed-income securities with
effective durations of three years are more responsive to interest rate
fluctuations than those with effective durations of one year. For example, if
interest rates rise by 1%, the value of securities having an effective
duration of three years will generally decrease by approximately 3%.
emerging markets companies. A company is considered to be an emerging markets
company if its securities are principally traded in the capital market of an
emerging markets country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging markets countries or
from sales made in such emerging markets countries, regardless of where the
securities of such companies are principally traded; or it is organized under
the laws of, and with a principal office in, an emerging markets country. An
emerging markets country is one having an economy and market that are or
would be considered by the World Bank or the United Nations to be emerging or
developing.
FNMA. The Federal National Mortgage Association.
forward currency contracts. This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price
at a future date. The Fund generally does not enter into forward contracts
with terms greater than one year. A fund generally enters into forward
contracts only under two circumstances. First, if a fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security by
entering into a forward contract to buy the amount of a foreign currency
needed to settle the transaction. Second, if the Manager believes that the
currency of a particular foreign country will substantially rise or fall
against the
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U.S. dollar, it may enter into a forward contract to buy or sell the currency
approximating the value of some or all of a fund's portfolio securities
denominated in such currency. A fund will not enter into a forward contract
if, as a result, it would have more than one-third of its total assets
committed to such contracts (unless it owns the currency that it is obligated
to deliver or has caused its custodian to segregate segregable assets having
a value sufficient to cover its obligations). Although forward contracts are
used primarily to protect a fund from adverse currency movements, they
involve the risk that currency movements will not be accurately predicted.
futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. Each fund will have collateral assets equal to the purchase price of
the portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
GNMA. The Government National Mortgage Association.
investment grade. Investment-grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch
(at least Baa), or unrated debt securities deemed to be of comparable quality
by the Manager using guidelines approved by the Board of Trustees.
repurchase agreement. With a repurchase agreement, a fund acquires a U.S.
government security or other high-grade liquid debt instrument from a
financial institution that simultaneously agrees to repurchase the same
security at a specified time and price.
reverse repurchase agreement. In a reverse repurchase agreement, a fund sells to
a financial institution a security that it holds and agrees to repurchase at
an agreed-upon price and date.
securities lending. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with
collateral assets in an amount at least equal to the current market value of
the loaned securities, plus accrued interest. There is a risk of delay in
receiving collateral or in recovering the securities loaned or even a loss of
rights in collateral should the borrower fail financially.
U.S. government securities. These include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities.
warrants. Typically, a warrant is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
when-issued and forward commitment securities. The Fund may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" or "delayed delivery" basis. The
price is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. When-issued securities and
forward commitments may be sold prior to the settlement date, but a fund will
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities. No income accrues on
securities that have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery to a fund. At the time a fund enters into
a transaction on a when-issued or forward commitment basis, it supports its
obligation with collateral assets equal to the value of the when-issued or
forward commitment securities and causes the collateral assets to be marked
to market daily. There is a risk that the securities may not be delivered and
that the fund may incur a loss.
23
<PAGE>
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
(800) 572-3863
Independent Auditors
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
THE MONTGOMERY FUNDSSM
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Invest wisely.(R)
24
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR CLASS P SHARES
MONTGOMERY STRATEGIC FUND
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDSSM
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Invest wisely.(R)
Prospectus
September 30, 1998
Montgomery Strategic Fund
Class P shares of the Montgomery Strategic Fund (the "Fund") are offered in this
prospectus. The Fund's investment objective is capital appreciation which it
seeks to achieve by moving the Fund's investments between long and short
positions based upon whether the Manager believes the equity markets are going
up or down ("market timing"). As with all mutual funds, attainment of the Fund's
investment objective cannot be ensured.
The Fund uses sophisticated investment approaches that may present substantially
higher risks than most mutual funds. It may invest a larger percentage of its
assets in transactions using short sales and other forms of volatile financial
derivatives such as options and futures. The market-timing strategies employed
by the Fund rely upon the ability of the Manager to predict general equity
market trends. Furthermore, even when the Manager has accurately predicted
general equity market trends, the Fund may experience losses if the Manager
selects investments that do not exploit those trends. As a result, the value of
an investment in the Fund may be more volatile than investments in other mutual
funds. The Fund may not be an appropriate investment for conservative investors.
See "Portfolio Securities," "Other Investment Practices" and "Risk
Considerations."
The Fund's Class P shares are only sold through financial intermediaries and
financial professionals at net asset value ("NAV") with no sales load, no
commissions and no exchange fees. The Class P shares are subject to a Rule 12b-1
distribution fee as described in this prospectus. The minimum initial investment
in the Fund is $1,000, and subsequent investments must be at least $100. The
Manager or the Distributor may waive these minimums. See "How to Invest in the
Fund."
The Fund is a separate series of The Montgomery Funds, an open-end management
investment company managed by Montgomery Asset Management, LLC (the "Manager"),
a subsidiary of Commerzbank AG. Commerzbank and its affiliates have worldwide
investment management operations and expertise. To benefit from these resources,
the Manager may consult with or rely on its affiliated investment advisory
organizations for research and other investment advice deemed useful by the
Manager. See "Management of the Fund." Funds Distributor, Inc., which is not
affiliated with the Manager, is the distributor of the Fund (the "Distributor").
This prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Please read it and retain it
for future reference. A Statement of Additional Information dated September 30,
1998, as may be revised, has been filed with the Securities and Exchange
Commission (the "SEC"), is incorporated by this reference and is available
without charge by calling (800) 572-FUND (3863). If you are viewing the
electronic version of this prospectus through an on-line computer service, you
may request a printed version free of charge by calling (800) 572-FUND (3863).
The Internet World Wide Web site for The Montgomery Funds is
www.montgomeryfunds.com. The Securities and Exchange Commission maintains a Web
site (www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding The
Montgomery Funds.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
bank. Shares are not insured by the Federal Deposit Insurance Corporation (the
"FDIC"), Federal Reserve Board or any other agency, and are subject to
investment risks, including possible loss of principal amount invested.
Like all mutual funds, these securities have not been approved or disapproved by
the Securities and Exchange Commission or any state securities commission, nor
has the Securities and Exchange Commission
1
<PAGE>
or any state securities commission passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
2
<PAGE>
Table of Contents
Fees and Expenses of the Fund 4
The Fund's Investment Objective and Policies 5
Portfolio Securities 6
Other Investment Practices 7
Risk Considerations 10
Management of the Fund 12
How to Contact the Fund 14
How to Invest in the Fund 15
How to Redeem an Investment in the Fund 17
Exchange Privileges and Restrictions 19
Brokers and Other Intermediaries 19
How Net Asset Value Is Determined 20
Dividends and Distributions 20
Taxation 21
General Information 21
Backup Withholding Instructions 22
Glossary 24
3
<PAGE>
Fees and Expenses of the Fund
Shareholder Transaction Expenses for the Fund
<TABLE>
An investor would pay the following charges when buying or redeeming shares of
the Fund:
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
MAXIMUM SALES LOAD MAXIMUM SALES LOAD MAXIMUM REDEMPTION FEES EXCHANGE FEES
IMPOSED ON PURCHASES IMPOSED ON REINVESTED DEFERRED SALES LOAD
DIVIDENDS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None+ None
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
+Shareholders effecting redemptions via wire transfer may be required to pay
fees, including a $10 wire fee and other fees, that will be directly
deducted from redemption proceeds. Shareholders who request redemption
checks to be sent by Federal Express may be required to pay a $10 fee that
will be directly deducted from redemption proceeds. The Fund reserves the
right, upon 60-days' advance notice to shareholders, to impose a redemption
fee of up to 1.00% on shares redeemed within 90 days of purchase. See "How
to Redeem an Investment in the Fund."
</FN>
</TABLE>
Estimated Annual Operating Expenses (as a percentage of average net assets)
- --------------------------------------------------------------------------------
MONTGOMERY STRATEGIC FUND
- --------------------------------------------------------------------------------
Management Fee 1.50%
- --------------------------------------------------------------------------------
Other Expenses (after reimbursement)* 0.40%
- --------------------------------------------------------------------------------
12b-1 Fee 0.25%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses (after reimbursement)* 2.15%
- --------------------------------------------------------------------------------
*Expenses for the Fund are estimated. The Manager will reduce its fees and
may absorb or reimburse the Fund for certain expenses to the extent
necessary to limit total annual Fund operating expenses to the amount
indicated in the table. The Fund is required to reimburse the Manager for
any reductions in the Manager's fee only during the three years following
that reduction and only if such reimbursement can be achieved within the
foregoing expense limits. The Manager generally seeks reimbursement for the
oldest reductions and waivers before payment by the Fund for fees and
expenses for the current year. . Absent the reduction, actual total Fund
operating expenses are estimated to be: 2.90% (1.15% other expenses). The
Manager may terminate these voluntary reductions at any time. See
"Management of the Fund."
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Fund. Operating expenses
are paid out of the Fund's assets and are factored into the Fund's share price.
The Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year. Because Rule
12b-1 distribution charges are accounted for on a class-level basis (and not on
an individual shareholder-level basis), individual long-term investors in the
Class P shares of the Fund may over time pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. (the "NASD"), even though all shareholders of that
Class in the aggregate will not. This is recognized and permitted by the NASD.
Example of Expenses for the Fund
Assuming, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of the
Fund's shares would have paid the following total expenses upon redeeming such
shares:
-------------------------------------------------------------------------------
MONTGOMERY STRATEGIC FUND
-------------------------------------------------------------------------------
1 Year $ 22
-------------------------------------------------------------------------------
3 Years $ 67
-------------------------------------------------------------------------------
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
4
<PAGE>
The Fund's Investment Objective and Policies
The investment objective and general investment policies of the Fund are
described below. Specific portfolio securities that may be purchased by the Fund
are described in "." Specific investment practices that may be employed by the
Fund are described in "Other Investment Practices." Certain risks associated
with investing in the Fund are described in those sections as well as in "Risk
Considerations." Certain terms used in this prospectus are defined in the
Glossary at the end of this prospectus.
The Fund's investment objective is capital appreciation which, under normal
conditions, it seeks to achieve by moving the Fund's investments between long
and short positions based upon the Manager's perception of the overall direction
of the equity markets. This strategy is popularly known as "market timing." The
market timing techniques, which seek to identify trends in the equity markets at
any given time, include using general market indicators such as: interest rate
and monetary analysis, market sentiment indicators, price and trading volume
statistics, and measures of valuation, as well as other market indicators and
statistics which the Manager believes tend to indicate trends in the overall
performance and the risk of the equity markets. These techniques are not an
all-in or all-out approach that attempts to predict market tops and bottoms.
Instead, they are intended to be a gradual and disciplined approach that reacts
to changes in risk levels as determined by the indicators. The goal is to be
invested consistent with the major trends of the markets. There can be no
assurance that these market timing techniques will provide protection from the
risks of debt or equity investment, enable the Fund to be invested consistent
with the major trends of the markets or enable the Fund to achieve its
investment objective.
Under normal market conditions, equity market exposure will be obtained through
the use of the Standard & Poor's 500 Composite Index (the "S&P 500") derivatives
and investments in equity securities. These derivatives will be backed by a
portfolio of fixed-income securities amounting to at least 65% of the Fund's
total assets. The fixed-income securities will be actively managed in order to
enhance the total return of the portfolio. This Fund generally invests the
remaining 35% of its total assets in a similar manner, but may invest those
assets in investment-grade debt securities and in other investment vehicles. See
"Portfolio Securities," "Risk Considerations" and the Appendix in the Statement
of Additional Information. During the first few months of the Fund's operations,
the Fund may be substantially invested in cash and cash-equivalents.
The S&P 500 is composed of 500 domestic common stocks, most of which are listed
on the New York Stock Exchange. S&P 500 stocks represent approximately
two-thirds of the total market capitalization of all U.S. common stocks. The
weightings of the stocks in the index are based on each stock's relative total
market capitalization.
When S&P 500 derivatives appear to be overvalued relative to the S&P 500, the
Fund may invest up to 100% of its assets in a collection of S&P 500 stocks. The
components of this collection will be determined, without regard to market
capitalization, by statistical techniques that analyze the historical
correlation between the return of each S&P 500 stock and the return on the S&P
500 itself. The Manager may employ fundamental stock analysis only to choose
among stocks that have already met certain statistical correlation criteria.
Positions in S&P 500 futures and options on futures will be entered into only to
the extent they constitute permissible positions for the Fund according to
applicable rules of the Commodity Futures Trading Commission (the "CFTC"). From
time to time, the Manager may be constrained in its ability to use S&P 500
derivatives by CFTC regulations, requirements of the Internal Revenue Code of
1986, as amended (the "Code"), or by an unanticipated inability to close out
positions when it would be most advantageous to do so. Although a large number
of investors use S&P 500 derivatives for both hedging and speculative purposes,
at times the liquidity of such derivatives may be limited.
The Fund uses sophisticated investment approaches that may present substantially
higher risks than most mutual funds. It may invest a larger percentage of its
assets in transactions using short sales and other forms of volatile financial
derivatives such as options and futures. The market-timing strategies employed
by the Fund rely upon the ability of the Manager to predict general equity
market trends. Furthermore, even when the Manager has accurately predicted
general equity market trends, the Fund may be subject to losses if the Manager
selects investments that do not exploit those trends. As a result, the value of
an investment in the Fund may be more volatile than investments in other mutual
funds. The Fund may not be an appropriate investment for conservative investors.
See "Portfolio Securities," "Other Investment Practices" and "Risk
Considerations."
5
<PAGE>
Portfolio Securities
Equity Securities
The Fund may invest in common stocks and may also invest in other types of
equity securities (such as preferred stocks or convertible securities) as well
as equity-derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The Fund may invest in ADRs, EDRs and GDRs and convertible securities that the
Manager regards as a form of equity security. The Fund may also invest up to 5%
of its net assets in warrants.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the Fund to invest in certain markets. Such investments may involve the
payment of substantial premiums above the net asset value of those investment
companies' portfolio securities and are subject to limitations under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Fund also may incur tax liability to the extent that it invests in the stock of
a foreign issuer that is a "passive foreign investment company" regardless of
whether such "passive foreign investment company" makes distributions to the
Fund. See the Statement of Additional Information.
The Fund does not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees. The
Manager has agreed to waive its own management fee with respect to the portion
of the Fund's assets invested in other open-end (but not closed-end) investment
companies.
Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation through anticipated favorable changes in relative foreign exchange
rates, in relative interest rate levels, or in the creditworthiness of issuers.
In selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy, which may be changed by the Board, the Fund
will not invest more than 25% of its total assets in debt securities rated below
investment grade. Subject to this limitation, the Fund may invest in any debt
security, including securities in default. After its purchase by the Fund, a
debt security may cease to be rated or its rating may be reduced below that
required for purchase by the Fund. A security downgraded below the minimum level
may be retained if determined by the Manager and the Board to be in the best
interests of the Fund. See "Risk Considerations."
Debt securities may also consist of participation certificates in large loans
made by financial institutions to various borrowers, typically in the form of
large unsecured corporate loans. These certificates must otherwise comply with
the maturity and credit-quality standards of the Fund and will be limited to 5%
of the Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external (i.e., to foreign lenders) debt
obligations issued by the governments, government entities and companies of
emerging markets countries. The percentage distribution between equity and debt
will vary from country to country based on anticipated trends in inflation and
interest rates; expected rates of economic and corporate profits growth; changes
in government policy; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and terms of trade.
U.S. Government Securities
The Fund may invest in fixed-rate and floating- or variable-rate U.S. government
securities. Certain obligations, including U.S. Treasury bills, notes and bonds,
and mortgage-related securities of the GNMA, are issued or guaranteed by the
U.S. government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, such as those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. The U.S. government does not guarantee the net
asset value of the Fund's shares, however. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
6
<PAGE>
Structured Notes and Indexed Securities
The Fund may invest in structured notes and indexed securities. Structured notes
are debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities include structured notes as well as
securities other than debt securities, the interest rate or principal of which
is determined by an unrelated indicator. Index securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent the
Fund invests in these securities, however, the Manager analyzes these securities
in its overall assessment of the effective duration of the Fund's portfolio in
an effort to monitor the Fund's interest rate risk.
Mortgage-Related Securities and Derivative Securities
The Fund may invest in mortgage-related securities. A mortgage-related security
is an interest in a pool of mortgage loans and is considered a derivative
security. Most mortgage-related securities are pass-through securities, which
means that investors receive payments consisting of a pro rata share of both
principal and interest (less servicing and other fees), as well as unscheduled
prepayments, as mortgages in the underlying mortgage pool are paid off by the
borrowers. These securities are subject to the risk of prepayment. See "Risk
Considerations." Certain mortgage-related securities are subject to high
volatility. The Fund uses these derivative securities in an effort to enhance
return and as a means to make certain investments not otherwise available to the
Fund. See "Hedging and Risk Management Practices" under "Other Investment
Practices" for a discussion of other reasons why the Fund invests in derivative
securities.
Asset-Backed Securities
The Fund may invest up to 5% of its total assets in asset-backed securities.
Like mortgage-related securities, these securities are subject to the risk of
prepayment. See "Risk Considerations."
Other Investment Practices
The Fund also may engage in the investment practices described below, each of
which may involve certain special risks. The Statement of Additional
Information, under the heading "Investment Objective and Policies of the Fund,"
contains more-detailed information about certain of these practices, including
limitations designed to reduce these risks.
Short Sales
The Fund may effect short sales of securities. Short sales are transactions in
which the Fund sells a security or other asset which it does not own, in
anticipation of a decline in the market value of the security or other asset.
The Fund will realize a profit or incur a loss depending upon whether the price
of the security sold short decreases or increases in value between the date of
the short sale and the date on which the Fund replaces the borrowed security.
Short sales are speculative investments and involve special risks, including
greater reliance on the Manager's accurately anticipating the future value of a
security. Short sales also may result in the Fund's recognition of gain for
certain portfolio securities. The Fund will not execute a short sale if, after
giving effect to the short sale, the market value of all securities sold exceeds
100% of the value of the Fund's total assets. See "Risk Considerations" below.
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, the Fund acquires a U.S. government security or other high-grade
liquid debt instrument from a financial institution that simultaneously agrees
to repurchase the same security at a specified time and price. The repurchase
price reflects an agreed-upon rate of return not determined by the coupon rate
on the underlying security. Under the Investment Company Act, repurchase
agreements are considered to be loans by the Fund and must be fully
collateralized by cash, letters of credit, U.S. government securities or other
high-grade liquid debt or equity securities ("collateral assets"). If the seller
defaults on its obligation to repurchase the underlying security, the 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.
Borrowing
The Fund may borrow money from banks in an amount not to exceed one-third of the
value of its total assets to meet temporary or emergency needs, and the Fund may
pledge its assets in connection with such borrowings. The Fund may not purchase
securities while such borrowings exceed 10% of its total assets.
7
<PAGE>
Securities Lending
The Fund may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 30% of the Fund's total assets. Each
securities loan is collateralized with collateral assets in an amount at least
equal to the current market value of the loaned securities, plus accrued
interest. There is a risk of delay in receiving collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially. Furthermore, if the borrower fails
financially, there is a risk that the collateral may be disposed of for less
than the value of the securities originally loaned.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, the Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in the Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager, therefore,
changes the Fund's investments whenever it believes doing so will further the
Fund's investment objective or when it appears that a position of the desired
size cannot be accumulated. Portfolio turnover generally involves some expense
to the Fund, including brokerage commissions, dealer markups and other
transaction costs, and may result in the recognition of capital gains that may
be distributed to shareholders.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager, therefore,
changes the Fund's investments whenever it believes doing so will further the
Fund's investment objective or when it appears that a position of the desired
size cannot be accumulated. The Fund's investment program emphasizes active
portfolio management with a sensitivity to short-term market trends and price
changes in individual securities. Accordingly, the Fund expects to take frequent
trading positions, resulting in portfolio turnover and brokerage expenses that
may exceed those of most investment companies of comparable size. Portfolio
turnover generally involves some expense to the Fund, including brokerage
commissions, dealer markups and other transaction costs, and may result in the
recognition of capital gains that may be distributed to shareholders. Generally,
portfolio turnover in excess of 100% is considered high and increases such
costs. The annual portfolio turnover is expected to be approximately 200% to
250% for the Fund. The Manager will not necessarily limit portfolio turnover to
these levels. High turnover that results in short-term gains may subject the
Fund to California income tax and reduce return. See "Taxation."
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Fund, the Fund may employ certain
risk management practices using the following derivative securities and
techniques (known as "derivatives"): forward currency exchange contracts,
currency options, futures contracts and options on futures contracts on foreign
government securities and currencies. The Board has adopted derivative
guidelines that require the Board to review each new type of derivative that may
be used by the Fund. Markets in some countries currently do not have instruments
available for hedging transactions relating to currencies or to securities
denominated in such currencies or to securities of issuers domiciled or
principally engaged in business in such countries. To the extent that such
instruments do not exist, the Manager may not be able to hedge its investment
effectively in such countries. Furthermore, the Fund engages in hedging
activities only when the Manager deems it to be appropriate and does not
necessarily engage in hedging transactions with respect to each investment.
Hedging transactions involve certain risks. Although the Fund may benefit from
the use of hedging positions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position and a portfolio position is not properly protected, the desired
protection may not be obtained and the Fund may be exposed to risk of financial
loss. In addition, the Fund pays commissions and other costs in connection with
such investments.
Futures and Options on Futures
The Fund may invest in interest rate, stock index and foreign currency futures
contracts and in options on those futures. The use of futures and futures
options for hedging purposes entails numerous risks. There can be no guarantee
that there will be a positive
8
<PAGE>
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. An incorrect correlation could result in a loss on both
the hedging vehicle and the hedged securities. A loss on the hedging vehicle
means that the portfolio return would have been greater had hedging not been
attempted. A liquid market may not exist at a time when the Fund seeks to close
out a futures contract or a futures option position. Most futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single day; once the daily limit has been reached for a
particular contract, no trades may be made that day at a price beyond that limit
on that contract. Furthermore, some of these instruments are relatively new and
without a significant trading history. There can be no assurance that an active
secondary market will either develop or continue to exist for such instruments.
An illiquid market may prevent the Fund from liquidating a position causing the
Fund to incur greater losses in that position.
The Fund will only enter into futures contracts or futures options which are
standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system. The Fund will use
financial futures contracts and options thereon for "bona fide hedging" (as
defined by the CFTC) and non-"bona fide hedging" purposes in accordance with
CFTC regulations. The Fund will enter such non-"bona fide hedging" positions
only to the extent that aggregate initial margin deposits plus premiums paid by
it for open futures option positions, less the amount by which any such
positions are "in-the-money," would not exceed 5% of the Fund's net assets.
To protect against the effect of adverse changes in interest rates, the Fund may
purchase and sell interest rate futures contracts. An interest rate futures
contract is an agreement to purchase or sell debt securities, usually U.S.
government securities, at a specified date and price. In addition, the Fund may
purchase and sell put and call options on interest rate futures contracts in
lieu of entering into the underlying interest rate futures contracts. The Fund
will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
The Fund may write covered straddles consisting of simultaneous call and put
options written on the same underlying futures contract. A straddle will be
covered when sufficient assets are deposited to meet the Fund's immediate
obligations under the straddle. The Fund may use the same liquid assets to cover
both the call and put options where the exercise price of the call and put are
the same, or the exercise price of the call is higher than that of the put. In
such cases, the Fund will also segregate liquid assets equivalent to the amount,
if any, by which the put is "in the money."
Futures contracts and options thereon are derivative instruments. Losses that
may arise from certain futures transactions, particularly those involved in
non-hedging contexts to pursue the Fund's investment objective, are potentially
unlimited. Subject to the regulations of the CFTC, the Fund may invest in
futures contracts and options on futures contracts without limitation as to a
percentage of its assets.
Forward Currency Contracts
A forward currency contract is individually negotiated and privately traded by
currency traders and their customers and creates an obligation to purchase or
sell a specific currency for an agreed-upon price at a future date. The Fund
normally conducts its foreign-currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate in the foreign-currency exchange market at
the time of the transaction, or through entering into forward contracts to
purchase or sell foreign currencies at a future date. The Fund generally does
not enter into forward contracts with terms greater than one year.
The Fund generally enters into forward contracts only under two circumstances.
First, if the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security by entering into a forward contract to buy or sell the
amount of a foreign currency needed to settle the transaction. Second, if the
Manager believes that the currency of a particular foreign country will
substantially rise or fall against the U.S. dollar, it may enter into a forward
contract to buy or sell the currency in an amount approximating the value of
some or all of the Fund's portfolio securities denominated in such currency. The
Fund will not enter into a forward contract if, as a result, it would have more
than one-third of its total assets committed to such contracts (unless it owns
the currency that it is obligated to deliver or has caused its custodian to
segregate segregable assets having a value sufficient to cover its obligations).
Although forward contracts are used primarily to protect the Fund from adverse
currency movements, they involve the risk that currency movements will not be
accurately predicted.
Options on Securities, Securities Indices and Currencies
The Fund may, without limit, purchase put and call options on securities and
currencies traded on U.S. exchanges and, to the extent permitted by law, foreign
exchanges, as well as in the over-the-counter market. The Fund may use such
purchases for purely speculative purposes as well as for hedging risk. The Fund
may purchase call options on securities it does not intend to purchase and may
purchase put options on securities the Fund does not own.
9
<PAGE>
The Fund may purchase call options on securities that it intends to purchase (or
on currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the applicable currency). The Fund may purchase put options
on particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency). Put options allow
the Fund to protect unrealized gains in an appreciated security that it owns
without selling that security. Prior to expiration, most options are expected to
be sold in a closing sale transaction. Profit or loss from the sale depends upon
whether the amount received is more or less than the premium paid plus
transactions costs.
The Fund also may purchase put and call options on stock indices in order to
hedge against risks of stock market or industrywide stock price fluctuations and
for purely speculative purposes. The Fund may purchase options on currencies in
order to hedge its positions in a manner similar to its use of forward
foreign-exchange contracts and futures contracts on currencies and for purely
speculative purposes.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund treats as illiquid any securities subject to restrictions on
repatriation for more than seven days and securities issued in connection with
foreign debt conversion programs that are restricted as to remittance of
invested capital or profit. The Fund also treats as illiquid repurchase
agreements with maturities in excess of seven days. Illiquid securities do not
include securities that are restricted from trading on formal markets for some
period of time but for which an active informal market exists, or securities
that meet the requirements of Rule 144A under the Securities Act of 1933 and
that, subject to review by the Board and guidelines adopted by the Board, the
Manager has determined to be liquid. State securities laws may impose further
limitations on the amount of illiquid or restricted securities that the Fund may
purchase.
Investment Restrictions
The investment objective of the Fund is fundamental and may not be changed
without shareholder approval, but, unless otherwise stated, the Fund's other
investment policies may be changed by the Board. If there is a change in the
investment objective or policies of the Fund, shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current financial positions and goals. The Fund is subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30-days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this prospectus.
Risk Considerations
The Year 2000
The Manager and the Fund's other service providers depend on the smooth
functioning of their computer systems. Unfortunately, because of the way dates
are encoded and calculated, many computer systems in use today cannot recognize
the year 2000, but revert to 1900 or another incorrect date. A computer failure
due to the year 2000 problem could negatively impact the handling of securities
trades, pricing and account services.
The Fund's software vendors and service providers have assured us that they are
prepared to handle these potential problems. There can be no guarantee, however,
that any of these computer systems will be adapted in time. Furthermore, brokers
and other intermediaries that hold shareholder accounts may still experience
incompatibility problems. It is also important to keep in mind that year 2000
problems may negatively impact the companies in which the Fund invests and, by
extension, the value of the shares held in the Fund.
Market Timing
The Fund relies upon market-timing strategies in which the Manager attempts to
predict general equity market trends and invests varying proportions of the
portfolio in long or short positions based upon the direction of the anticipated
trend. There can be no assurance that the Manager will be able to accurately
predict general market trends. Furthermore, even when the Manager has accurately
predicted general equity market trends, the Fund may experience losses if the
Manager selects investments that do not exploit those trends.
Short Sales
When the Manager believes that a security is overvalued, it may sell the
security short and borrow the same security from a broker or other institution
to complete the sale. The Fund may make a profit or incur a loss depending upon
whether the market price of the security decreases or increases between the date
of the short sale and the date on which the Fund must replace the borrowed
security. An increase in the value of a security sold short by the Fund over the
price at which it was sold short will result in a loss to the Fund, and there
can be no assurance that the Fund will be able to close out the position at any
particular time or at an acceptable price. Although the Fund's gain is limited
to the amount at which it sold the security short, its potential loss is limited
only by the maximum attainable price of the security less the price at which the
security was sold. There also is a risk that the borrowed securities would need
to be returned to the brokerage firm on short notice. If that request for the
return of securities occurs at a time when other short sellers of the subject
security are receiving similar requests, a "short squeeze" can occur. This
10
<PAGE>
means that the Fund might be compelled, at the most disadvantageous time, to
replace borrowed securities previously sold short with purchases on the open
market, possibly at prices significantly in excess of the proceeds received
earlier. The successful use of short selling may be adversely affected by an
imperfect correlation between movements in the price of the security sold short
and the securities being hedged. Short selling also may produce higher than
normal portfolio turnover and may result in increased transaction costs to the
Fund.
The Fund also may make short sales against-the-box, in which it sells short
securities it owns or has the right to obtain without payment of additional
consideration. If the Fund makes a short sale against-the-box, it will be
required to set aside securities equivalent in kind and amount to the securities
sold short (or securities convertible or exchangeable into those securities) and
will be required to hold those securities while the short sale is outstanding.
The Fund will incur transaction costs, including interest expenses, in
connection with opening, maintaining and closing short sales against-the-box.
Short sales against-the-box also result in a "constructive sale" and require the
Fund to recognize any taxable gain in the securities set aside for the short
sale.
Until the Fund replaces a borrowed security, it will instruct its Custodian to
identify as unavailable for investment cash, U.S. government securities, or
other liquid debt or equity securities such that the amount so identified plus
any amount deposited with a broker or other custodian as collateral will equal
the current value of the security sold short and will not be less than the value
of the security at the time it was sold short. Depending on arrangements made
with the broker or custodian, the Fund may not receive any payments (including
interest) on collateral deposited with the broker or custodian. A high level of
short sales also may subject the Fund to California income tax and reduce
return. See "Taxation."
Small Companies
While the Fund may invest in mature suppliers of products, services and
technologies, the Fund also may make investments in smaller companies that may
benefit from the development of new products and services. Such smaller
companies may present greater opportunities for capital appreciation but may
involve greater risk than larger, more mature issuers. Such smaller companies
may have limited product lines, markets or financial resources, and their
securities may trade less frequently and in more limited volume than those of
larger, more mature companies. As a result, the prices of their securities may
fluctuate more than those of larger issuers.
Lower-Quality Debt
As an operating policy, which may be changed by the Board without shareholder
approval, the Fund is permitted to invest in medium-quality debt securities, but
does not invest more than 25% of its total assets in high-risk debt securities
below investment-grade quality (sometimes called "junk bonds").
Medium-quality debt securities are those rated or equivalent to BBB by S&P or
Fitch's, or Baa by Moody's. Medium-quality debt securities have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than with higher-grade debt securities. Junk bonds offer greater
speculative characteristics and are regarded as having a great vulnerability to
default although currently having the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
ability to maintain other terms of the contract over any long period of time may
be small. Junk bonds are more subject to default during periods of economic
downturns or increases in interest rates and their yields will fluctuate over
time. It may be more difficult to dispose of or to value junk bonds. Achievement
of the Fund's investment objective may also be more dependent on the Manager's
own credit analysis to the extent the Fund's portfolio includes junk bonds.
Unrated debt securities are not necessarily of lower quality than rated
securities but may not be attractive to as many buyers. Regardless of rating
levels, all debt securities considered for purchase (whether rated or unrated)
are analyzed by the Manager to determine, to the extent reasonably possible,
that the planned investment is sound. From time to time, the Fund may purchase
defaulted debt securities if, in the opinion of the Manager, the issuer may
resume interest payments in the near future.
Interest Rates
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate changes. Changes in the
ability of an issuer to make payments of interest and principal and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in the Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other
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<PAGE>
factors, including general economic conditions and the underlying location and
age of the mortgage. In periods of rising interest rates, the prepayment rate
tends to decrease, lengthening the average life of a pool of mortgage-related
securities. In periods of falling interest rates, the prepayment rate tends to
increase, shortening the average life of a pool. Because prepayments of
principal generally occur when interest rates are declining, it is likely that
the Fund, to the extent that it retains the same percentage of debt securities,
may have to reinvest the proceeds of prepayments at lower interest rates than
those of its previous investments. If this occurs, the Fund's yield will
correspondingly decline. Thus, mortgage-related securities may have less
potential for capital appreciation in periods of falling interest rates than
other fixed-income securities of comparable duration, although they may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that the Fund purchases mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, result in a loss equal to any
unamortized premium. Duration is one of the fundamental tools used by the
Manager in managing interest rate risks including prepayment risks. See duration
in the Glossary.
Equity Swaps
The Fund may invest in equity swaps. Equity swaps are derivatives and their
value can be very volatile. To the extent that the Manager does not accurately
analyze and predict the potential relative fluctuation of the components swapped
with another party, the Fund may suffer a loss. The value of some components of
an equity swap (like the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, during the period a swap is outstanding,
the Fund may suffer a loss if the counterparty defaults.
Lack of Industry Diversification
Diversifying a mutual fund's portfolio across a large number of industries can
reduce industry-related risks by limiting the portion of your investment in any
one industry, although it could also limit the potential reward. The Fund may
invest a maximum of 25% of its total assets in any single industry. Such a heavy
industry concentration could make the Fund's net asset value extremely volatile
and, if economic downturns or other events occur that adversely affect one or
more of the industries the Fund invests in, such events' impact on that Fund
will be more magnified than if the Fund did not have such a narrow
concentration.
Management of the Fund
The Montgomery Funds (the "Trust") has a Board of Trustees (a "Board") that
establishes the Fund's policies and supervises and reviews its management.
Day-to-day operations of the Fund are administered by the officers of the Trust
and by the Manager pursuant to the terms of an investment management agreement
with the Fund.
Montgomery Asset Management, LLC, is the Funds' Manager. The Manager is a
Delaware limited liability company and is registered as an investment adviser
with the SEC under the Investment Advisers Act of 1940, as amended. The Manager
and its predecessor have advised private accounts and mutual funds since 1990.
The Manager is a subsidiary of Commerzbank AG. ("Commerzbank"). Commerzbank, one
of the largest publicly held commercial banks in Germany, had total assets of
approximately $288 billion on December 31, 1997. Commerzbank and its affiliates
had more than $92 billion in assets under management as of October 31, 1997.
Commerzbank's asset management operations involve more than 1,000 employees in
13 countries worldwide.
Portfolio Management
KEVIN T. HAMILTON, CFA, chair of Montgomery Asset Management's Investment
Oversight Committee. Kevin Hamilton coordinates and oversees the investment
decisions of Montgomery's portfolio management teams. Prior to joining
Montgomery Asset Management in 1991, he was a senior vice president and
portfolio manager at Analytic Investment Management, where he managed both
equity and fixed-income portfolios.
WILLIAM C. STEVENS, senior portfolio manager. Prior to joining Montgomery in
1992, Bill Stevens worked at Barclays de Zoete Wedd Securities, where he started
its collateralized mortgage obligation (CMO) and asset-backed securities
trading. From 1990 to 1991, Mr. Stevens traded stripped mortgage securities and
mortgage-related interest rate swaps for the First Boston Company. Prior to that
he worked at Drexel Burnham Lambert, where he was responsible for originating
and trading all of the firm's derivative mortgage-related securities.
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<PAGE>
Management Fees and Other Expenses
<TABLE>
The Manager provides the Fund with advice on buying and selling securities,
manages the Fund's investments, including the placement of orders for portfolio
transactions, furnishes the Fund with office space and certain administrative
services, and provides personnel needed by the Fund with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with the Fund. The Manager also compensates the members of the Board who are
interested persons of the Manager, and assumes the cost of printing prospectuses
and shareholder reports for dissemination to prospective investors. As
compensation, the Fund pays the Manager a management fee (accrued daily but paid
when requested by the Manager) based upon the value of its average daily net
assets, according to the following table:
<CAPTION>
- -------------------------------------------- --------------------------------- ---------------------------
AVERAGE DAILY NET ASSETS MANAGEMENT FEE (ANNUAL
RATE)
- -------------------------------------------- --------------------------------- ---------------------------
<S> <C> <C>
Montgomery Strategic Fund First $250 million 1.50%
Over $250 million 1.25%
- -------------------------------------------- --------------------------------- ---------------------------
</TABLE>
The management fee for the Fund is higher than for most mutual funds. The
Manager also serves as the Fund's Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of the Fund's
administrative operations. As compensation, the Fund pays the Administrator a
monthly fee at the annual rate of seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $250 million).
The Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fee; the Administrator's fee; taxes, if any; brokerage
and commission expenses, if any; interest charges on any borrowings; transfer
agent, custodian, legal and auditing fees; shareholder servicing fees including
fees to third-party servicing agents; fees and expenses of Trustees who are not
interested persons of the Manager; salaries of certain personnel; costs and
expenses of calculating its daily net asset value; costs and expenses of
accounting, bookkeeping and record-keeping required under the Investment Company
Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, Statements of Additional Information and
reports to shareholders; and other expenses relating to the Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial shareholder of the Class P shares of the Fund
have approved, and the Fund has entered into, a Share Marketing Plan (the
"Plan") with the Manager, as the distribution coordinator, for the Class P
shares. Under the Plan, the Fund will pay distribution fees to the Manager at an
annual rate of 0.25% of the Fund's aggregate average daily net assets
attributable to its Class P shares, to reimburse the Manager for its
distribution costs with respect to that Class.
The Plan provides that the Manager may use the distribution fees received from
the Class to pay for the distribution expenses of that Class, including, but not
limited to (i) incentive compensation paid to the directors, officers and
employees of, agents for and consultants to, the Manager or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, Statements of Additional Information
and reports of the Fund to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Fund and that Class; and (iv) costs involved obtaining whatever information,
analysis and reports with respect to marketing and promotional activities that
the Fund may, from time to time, deem advisable with respect to the distribution
of that Class. Distribution fees are accrued daily and paid monthly, and are
charged as expenses of the Class P shares as accrued.
In adopting the Plan, the Board of Trustees determined that there was a
reasonable likelihood that the Plan would benefit the Fund and the shareholders
of Class P shares. Information with respect to distribution revenues and
expenses is presented to the Board of Trustees quarterly for its consideration
in connection with its deliberations as to the continuance of the Plan. In its
review of the Plan, the Board of Trustees is asked to take into consideration
expenses incurred in connection with the separate distribution of the Class P
shares.
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The Class P shares are not obligated under the Plan to pay any distribution
expenses in excess of the distribution fee. Thus, if the Plan were terminated or
otherwise not continued, no amounts (other than current amounts accrued but not
yet paid) would be owed by the Class to the Manager.
The distribution fee attributable to the Class P shares is designed to permit an
investor to purchase Class P shares through broker-dealers without the
assessment of a front-end sales charge and at the same time to permit the
Manager to compensate broker-dealers on an ongoing basis in connection with the
sale of the Class P shares.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Trustees of the Trust, including a majority of
the Trustees who are not "interested persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the Independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class P
shares.
All distribution fees paid by the Fund under the Plan will be paid in accordance
with Rule 2830 of the NASD Rules of Conduct.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses (excluding the Rule 12b-1 fees) at or below one and
two-tenths of one percent (1.20%) of the Fund's average net assets. The Manager
also may voluntarily reduce additional amounts to increase the return to the
Fund's investors. The Manager may terminate these voluntary reductions at any
time. Any reductions made by the Manager in its fees are subject to
reimbursement by the Fund within the following three years, provided that the
Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations. The Manager generally seeks reimbursement for
the oldest reductions and waivers before payment by the Fund for fees and
expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating expense for which
the Fund is obligated to pay and the performance of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement, the Manager is entitled to seek reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate broker-dealers and other
intermediaries who distribute the Fund's shares as well as other providers of
shareholder and administrative services. In addition, the Manager, out of its
own funds, may sponsor seminars and educational programs on the Fund for
financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. These factors are more
fully discussed in the Statement of Additional Information; they include, but
are not limited to: reasonableness of commissions; quality of services, and
execution; and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Manager also may
consider sale of the Fund's shares as a factor in selecting broker-dealers for
the Fund's portfolio transactions. See "Execution of Portfolio Transactions" in
the Statement of Additional Information for further information regarding Fund
policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Fund (the "Master Transfer
Agent") and performs certain record-keeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Fund's transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Fund's principal custodian (the
"Custodian").
How to Contact the Fund
For information on the Fund or your account, call a Montgomery shareholder
service representative at:
(800) 572-FUND (3863)
<TABLE>
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
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<CAPTION>
- ---------------------------------------------------------------- --------------------------------------------------------------
REGULAR MAIL EXPRESS MAIL OR OVERNIGHT SERVICE
- ---------------------------------------------------------------- --------------------------------------------------------------
<S> <C>
The Montgomery Funds The Montgomery Funds
P.O. Box 419073 210 West 10th Street, 8th Floor
Kansas City, MO 64141-6073 Kansas City, MO 64105
- ---------------------------------------------------------------- --------------------------------------------------------------
</TABLE>
Visit the Montgomery Funds World Wide Web site at:
www.montgomeryfunds.com
How to Invest in the Fund
The Fund's shares are offered only through financial intermediaries and
financial professionals, with no sales load, at their next-determined net asset
value after receipt of an order with payment. The Fund's shares are offered for
sale by Funds Distributor, Inc., the Fund's Distributor, 101 California Street,
San Francisco, California 94111, (800) 572-FUND (3863), and through selected
securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor or certain intermediaries that have an agreement with the
Funds by the close of trading (generally, 4:00 P.M. eastern time, except when
the market closes earlier due to a holiday or for any other reason) on any day
that the New York Stock Exchange (the "NYSE") is open, Fund shares will be
purchased at the Fund's next-determined net asset value. Orders for Fund shares
received after the Fund's cutoff time will be purchased at the next-determined
net asset value after receipt of the order.
Initial Investment
The minimum initial investment in the Fund is $1,000 (including IRAs). The
Manager or the Distributor, at its discretion, may waive this minimum. The Fund
does not accept third-party checks or cash investments. Checks must be in U.S.
dollars and, to avoid fees and delays, drawn only on banks located in the United
States. Purchases may also be made in certain circumstances by payment of
securities. See the Statement of Additional Information for further details.
Initial Investment by Check
o Complete the New Account application. Tell us that you wish to invest in
the Montgomery Strategic Fund. Make your check payable to The Montgomery
Funds.
o A charge may be imposed on checks that do not clear.
Initial Investment by Wire
o Call the Transfer Agent to tell it that you intend to make your initial
investment by wire. Provide the Transfer Agent with your name and the
dollar amount to be invested, and tell the Transfer Agent that you wish to
invest in the Montgomery Strategic Fund. The Transfer Agent will provide
you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire
instructions to ensure accurate handling of your investment.
o A completed New Account application must be sent to the Transfer Agent by
facsimile. The Transfer Agent will provide you with its fax number over the
phone.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For credit to: (shareholder(s) name)
Shareholder account number: (shareholder(s) account number)
Name of Fund: Montgomery Strategic Fund
o Your bank may charge a fee for any wire transfers.
o The Fund and the Distributor each reserve the right to reject any purchase
order in whole or in part.
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<PAGE>
Initial Investment by Telephone
You are eligible to make an initial investment into the Montgomery Strategic
Fund by telephone under the following conditions:
o You must be a shareholder in another Montgomery Fund.
o You must have been a shareholder for at least 30 days.
o Your existing account registration will be duplicated in the Montgomery
Strategic Fund.
o Your initial telephone purchase into the Montgomery Strategic Fund must
meet initial investment minimums and is limited to the combined aggregate
net asset value of your existing accounts or $10,000, whichever is less.
o The Fund must receive your check or wire transfer within three business
days of the telephone purchase.
o The Fund reserves the right to collect any losses to the Fund from your
existing account(s) that result from a telephone purchase not funded within
three business days.
Subsequent Investments
The minimum subsequent investment in the Fund is $100 (including IRAs). The
Manager or the Distributor, at its discretion, may waive this minimum.
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check
with written instructions indicating the Montgomery Strategic Fund and the
account number to which your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agent's affiliated bank by using the bank wire information under "Initial
Investment by Wire" above.
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572-FUND (3863) before
the Fund's cutoff time.
o Shares for IRAs may not be purchased by phone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
o You should do one of the following to ensure that payment is received in
time:
o Transfer funds directly from your bank account by sending a letter and
a voided check or deposit slip (for a savings account) to the Transfer
Agent.
o Send a check by overnight or second-day courier service.
o Instruct your bank to wire funds to the Transfer Agent's affiliated
bank by using the bank wire information under "Initial Investment by
Wire" above.
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is the Fund's subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your New Account
application or your letter of instruction. Investments will automatically
be transferred into your Montgomery account from your checking or savings
account.
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<PAGE>
o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your New Account application or your letter of instruction,
the 20th day of each month will be selected.
o You should allow 20 business days for this service to become effective.
o You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
o Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for the Fund is $100 per payroll deduction
period.
o You may automatically deposit a designated amount of your paycheck directly
into your Montgomery Fund account.
o Please call the Transfer Agent to receive instructions to establish this
service.
Telephone Transactions
You agree to reimburse the Fund for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be cancelled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Fund upon 30-days' written notice or at any time by you by written notice
to the Fund. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by the Fund. The Fund and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Fund employs reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording
certain telephone calls, sending a confirmation and requiring the caller to give
an authorization number or other personal information not likely to be known by
others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Telephone privileges may be revoked at any time by the Fund as to any
shareholder if the Fund believes that a shareholder has abused the telephone
privilege by using abusive language or by purchases and redemptions that appear
to be part of a systematic market-timing strategy.
Retirement Plans
Shares of the Fund are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. The Fund may be available for
purchase through administrators for retirement plans. Investors who purchase
shares as part of a retirement plan should address inquiries and seek investment
servicing from their plan administrators. Plan administrators may receive
compensation from the Fund for performing shareholder services.
Share Certificates
Share certificates will not be issued by the Fund. All shares are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.
How to Redeem an Investment in the Fund
The Fund will redeem all or any portion of an investor's outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of purchase orders, by securities dealers.
Payment of redemption proceeds is made promptly regardless of when redemption
occurs and normally within three days after receipt of all documents in proper
form, including a written redemption order with appropriate signature guarantee.
Redemption proceeds will be mailed or wired in accordance with the shareholder's
instructions. The Fund may suspend the right of redemption under certain
extraordinary circumstances in accordance with the rules of the SEC. In the case
of shares purchased by check and redeemed shortly after the purchase, the
Transfer Agent will not mail redemption proceeds until it has been notified that
the monies used for the purchase have been collected, which may take up to 15
days from the purchase date. Shares tendered for
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redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. The procedures for
requesting a redemption are set forth below.
Redeeming by Written Instruction
o Write a letter giving your name and account number and indicating the
Montgomery Strategic Fund and the dollar amount or number of shares you
wish to redeem.
o The letter must be signed the same way your account is registered. If you
have a joint account, all accountholders must sign.
o Signature-guarantee your letter if you want the redemption proceeds to go
to a party other than the account owner(s), your predesignated bank account
or if the dollar amount of the redemption exceeds $50,000. Signature
guarantees may be provided by an eligible guarantor institution such as a
commercial bank, an NASD member firm such as a stockbroker, a savings
association or a national securities exchange. Contact the Transfer Agent
for more information.
o If you do not have a predesignated bank account and want us to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees at the Manager's discretion.
Redeeming By Telephone
o Unless you have declined telephone redemption privileges on your New
Account application, you may redeem shares up to $50,000 by calling the
Transfer Agent before the Fund's cutoff time. This service is not available
for IRA accounts.
o If you included bank wire information on your New Account application or
made subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at least two business days for redemption proceeds to be
credited to your bank account. If you want to wire your redemption proceeds
to arrive at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
o Telephone redemption privileges may be cancelled after an account is opened
by instructing the Transfer Agent in writing. Your request will be
processed upon receipt. Telephone redemption privileges are not available
for IRA accounts.
By establishing telephone redemption privileges, a shareholder authorizes the
Fund and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the authorization. When a shareholder appoints a designee on the
New Account application or by other written authorization, the shareholder
agrees to be bound by the telephone redemption instructions given by the
shareholder's designee. The Fund may change, modify or terminate these
privileges at any time upon 60-days' notice to shareholders. The Fund will not
be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See discussion of Fund telephone
procedures and liability under "Telephone Transactions" above.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in the Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from the Fund
account. Payments may be made either monthly or quarterly on the first day of
each month. Depending on the form of payment requested, shares will be redeemed
up to five business days before the redemption proceeds are scheduled to be
received by the shareholder. The redemption may result in the recognition of
gain or loss for income tax purposes.
Uncashed Distribution or Redemption Checks
If you choose to receive your distribution or redemption by a check from the
Fund (instead of bank wire), you should follow up to ensure that you have
received the distribution or redemption in a timely manner. The Fund is
responsible only for mailing the distribution or redemption checks and is not
responsible for tracking uncashed checks or determining why checks are uncashed.
If the postal or other delivery service is unable to deliver a check and the
check is returned to the Fund, the Fund will hold the check in a separate
account on your behalf for a reasonable period of time but will not invest the
money in any interest-bearing account. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
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Small Accounts
Due to the relatively high cost of maintaining smaller accounts, the Fund may
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
the Fund decides to make such an involuntary redemption, the shareholder will
first be notified that the value of the shareholder's account is less than the
minimum level and will be allowed 30 days to make an additional investment to
bring the value of that account back up to $1,000 before the Fund takes any
action.
Exchange Privileges and Restrictions
You may exchange shares from another Fund in the Montgomery Funds family with
the same registration, Taxpayer Identification number and address. An exchange
may result in a recognized gain or loss for income tax purposes. See the
discussion of Fund telephone procedures and limitations of liability under
"Telephone Transactions."
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange fee)
after your request is received. Your request is subject to the Fund's
cutoff times.
o Exchange purchases must meet the minimum investment requirements of the
fund you intend to purchase.
o You may exchange for shares of a fund only in states where that Montgomery
fund's shares are qualified for sale and only after you have reviewed a
prospectus of that fund.
o You may not exchange for shares of a Montgomery fund that is not open to
new shareholders unless you have an existing account with that fund.
o Because excessive exchanges can harm a Fund's performance, the Trust
reserves the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-month period. The Fund
may also refuse an exchange into a Fund from which you have redeemed shares
within the previous 90 days (accounts under common control and accounts
with the same Taxpayer Identification number will be counted together). A
shareholder's exchanges may be restricted or refused if the Fund receives,
or the Manager anticipates, simultaneous orders affecting significant
portions of the Fund's assets and, in particular, a pattern of exchanges
coinciding with a market-timing strategy. The Trust reserves the right to
refuse exchanges by any person or group if, in the Manager's judgment, a
Fund would be unable to effectively invest the money in accordance with its
investment objective and policies, or would otherwise be potentially
adversely affected. Although the Trust attempts to provide prior notice to
affected shareholders when it is reasonable to do so, it may impose these
restrictions at any time. The exchange limit may be modified for accounts
in certain institutional retirement plans to conform to plan exchange
limits and U.S. Department of Labor regulations (for those limits, see plan
materials). The Trust reserves the right to terminate or modify the
exchange privileges of Fund shareholders in the future.
Automatic Transfer Service ("ATS")
You may elect systematic exchanges out of any of the Montgomery fixed-income
funds (which include the Montgomery Short Duration Government Bond Fund, the
Montgomery Government Reserve Fund, the Montgomery Total Return Bond Fund, the
Montgomery Federal Tax-Free Money Fund, the Montgomery California Tax-Free
Intermediate Bond Fund and the California Tax-Free Money Fund) into the Fund.
The minimum exchange is $100. Periodically investing a set dollar amount into
the Fund is also referred to as dollar-cost averaging, because the number of
shares purchased will vary depending on the price per share. Your account with
the Fund must meet the applicable investment minimum of $1,000. Exchanges out of
the fixed-income funds are exempt from the four-exchanges limit policy.
Brokers and Other Intermediaries
Investing Through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of the Fund from selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as for information
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pertaining to accounts and any service or transaction fees that may be charged
by these agents. Some of these agents may appoint subagents. Purchase orders
through securities brokers, dealers and other financial intermediaries are
effected at the next-determined net asset value after receipt of the order by
such agent before the Fund's daily cutoff time. Orders received after that time
will be purchased at the next-determined net asset value. To the extent that
these agents perform shareholder servicing activities for the Fund, they may
receive fees from the Fund or the Manager for such services.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Fund by wire or telephone through
the Distributor or selected securities brokers or dealers. Shareholders should
contact their securities broker or dealer for appropriate instructions and for
information concerning any transaction or service fee that may be imposed by the
broker or dealer. Shareholders are entitled to the net asset value next
determined after receipt of a redemption order by such broker-dealer, provided
the broker-dealer transmits such order on a timely basis to the Transfer Agent
so that it is received before the Fund's cutoff time on a day that the Fund
redeems shares. Orders received after that time are entitled to the net asset
value next determined after receipt.
How Net Asset Value Is Determined
The net asset value of the Fund is determined once daily as of the Fund's cutoff
time on each day that the NYSE is open for trading. Generally, this is 4:00 P.M.
eastern time, or earlier when trading closes earlier. Per-share net asset value
is calculated by dividing the value of the Fund's total net assets by the total
number of the Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed-income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or that
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the manager and the Pricing
Committee of the Board, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign currency-denominated values of such
securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset value, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset value may not be reflected in the Fund's
calculation of its net asset value unless the Manager, under the supervision of
the Board, determines that a particular event would materially affect the Fund's
net asset value.
Dividends and Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Dividends and capital gains are
declared and paid in the last quarter of each year. Additional distributions, if
necessary, may be made following the Fund's fiscal year end (June 30) in order
to avoid the imposition of tax on the Fund. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Unless you request cash distributions in writing at least seven business days
prior to the distribution, or on the New Account application, all dividends and
other distributions will be reinvested automatically in additional Class P
shares of the Fund and credited to your account at the closing net asset value
on the reinvestment date. Furthermore, if you have elected to receive cash
distributions in cash and the postal or other delivery service is unable to
deliver checks to your address of record, your distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. Also, as is the case for redemption checks, no
interest will accrue on amounts represented by uncashed distribution checks. See
"Uncashed Distribution or Redemption Checks" above.
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Distributions Affect the Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of the
Fund, regardless of how long you have held the shares. Dividends and capital
gains awaiting distribution are included in the Fund's daily net asset value.
The share price of the Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Fund declared a dividend in the amount of $0.50 per share. If the Fund's share
price was $10.00 on December 30, the Fund's share price on December 31 would be
$9.50 barring market fluctuations.
"Buying a Dividend"
If you buy shares of the Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend, and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
The Fund intends to qualify and elect as soon as possible to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), by distributing substantially all of its net
investment income and net capital gains to its shareholders and meeting other
requirements of the Code relating to the sources of its income and
diversification of assets. Accordingly, the Fund generally will not be liable
for federal income tax or excise tax based on net income except to the extent
that its earnings are not distributed or are distributed in a manner that does
not satisfy the requirements of the Code pertaining to the timing of
distributions. If the Fund is unable to meet certain requirements of the Code,
it may be subject to taxation as a corporation. The Fund may also incur tax
liability to the extent that it invests in "passive foreign investment
companies." See "Portfolio Securities" and the Statement of Additional
Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered ordinary
income. Part of the distributions paid by the Fund may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of the Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Fund.
The Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisors regarding the particular tax consequences to them
of an investment in shares of the Fund. Additional information on tax matters
relating to the Fund and its shareholders is included in the Statement of
Additional Information.
General Information
The Trust
The Fund is a series of The Montgomery Funds, a Massachusetts business trust
organized on May 10, 1990 (the "Trust"). The Trust's Agreement and Declaration
of Trust permits the Board to issue an unlimited number of full and fractional
shares of beneficial interest, $0.01 par value, in any number of series. The
assets and liabilities of each series within the Trust are separate and distinct
from those of each other series.
This prospectus relates only to the Class P shares of the Fund. The Fund has
designated other classes of shares and may, in the future, designate other
classes of shares for specific purposes. The other classes of shares may have
different fees and expenses than the class of shares offered in this prospectus,
and those different fees and expenses may affect performance. To obtain
information concerning the other classes of shares not offered in this
prospectus, call The Montgomery Funds at (800) 572-FUND (3863) or contact sales
representatives or financial intermediaries who offer those classes.
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Shareholder Rights
Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each whole share is entitled to one vote as to any matter on which it is
entitled to vote, and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of its Trust, votes
separately on matters affecting only that Fund (e.g., approval of the Investment
Management Agreement); all series of the Trust vote as a single class on matters
affecting all series of the Trust jointly or the Trust as a whole (e.g.,
election or removal of Trustees). Voting rights are not cumulative, so the
holders of more than 50% of the shares voting in any election of Trustees can,
if they so choose, elect all of the Trustees of that Trust. Although the Trust
is not required and does not intend to hold annual meetings of shareholders,
such meetings may be called by the Trust's Board at its discretion, or upon
demand by the holders of 10% or more of the outstanding shares of the Trust, for
the purpose of electing or removing Trustees. Shareholders may receive
assistance in communicating with other shareholders in connection with the
election or removal of Trustees pursuant to the provisions of Section 16(c) of
the Investment Company Act.
Performance Information
From time to time, the Fund may publish its total return, such as in
advertisements and communications to investors. Performance data may be quoted
separately for the Class P shares as for the other classes. Total return
information generally will include the Fund's average annual compounded rate of
return over the most recent four calendar quarters and over the period from the
Fund's inception of operations. The Fund may also advertise aggregate and
average total return information over different periods of time. The Fund's
average annual compounded rate of return is determined by reference to a
hypothetical $1,000 investment that includes capital appreciation and
depreciation for the stated period according to a specific formula. Aggregate
total return is calculated in a similar manner, except that the results are not
annualized. Total return figures will reflect all recurring charges against the
Fund's income.
Investment results of the Fund will fluctuate over time, and any presentation of
the Fund's total return for any prior period should not be considered as a
representation of what an investor's total return or current yield may be in any
future period. The Fund's annual report contains additional performance
information and is available upon request and without charge by calling (800)
572-FUND (3863).
Legal Opinion
The validity of shares offered by this prospectus will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
During the year, the Fund will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and preauthorized automatic investment, exchange and redemption services
(quarterly).
o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semiannual reports are mailed approximately 60 days after June
30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o An annual updated prospectus is mailed to existing shareholders in October
or November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-FUND (3863).
Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN or to check the appropriate boxes in the New
Account application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of federal income tax equal to 31% of
taxable dividends, capital-gains distributions,
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redemptions, exchanges and other payments made to a shareholder's account. Any
tax withheld may be credited against taxes owed on a shareholder's federal
income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the
Internal Revenue Service (the "IRS"). Backup withholding could apply to payments
made to a shareholder's account while awaiting receipt of a TIN. Special rules
apply for certain entities. For example, for an account established under the
Uniform Gifts to Minors Act, the TIN of the minor should be furnished. If a
shareholder has been notified by the IRS that he or she is subject to backup
withholding because he or she failed to report all interest and dividend income
on his or her tax return and the shareholder has not been notified by the IRS
that such withholding will cease, the shareholder should cross out the
appropriate item on the New Account application. Dividends paid to a foreign
shareholder's account by the Fund may be subject to up to 30% withholding
instead of backup withholding.
A shareholder who is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, government agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult a tax
advisor.
---------------------------------
This prospectus is not an offering of the securities herein described in any
state in which such offering is unauthorized. No salesperson, dealer or other
person is authorized to give any information or make any representation other
than those contained in this prospectus, the Statement of Additional Information
or in the Fund's official sales literature.
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Glossary
below investment grade debt securities. Debt securities rated below "investment
grade."
cash equivalents. These are short-term, interest-bearing instruments or deposits
and may include, for example, commercial paper, certificates of deposit,
repurchase agreements, bankers' acceptances, U.S. Treasury bills, bank money
market deposit accounts, master demand notes and money market mutual funds.
These consist of high-quality debt obligations, certificates of deposit and
bankers' acceptances rated at least A-1 by S&P or Prime-1 by Moody's, or the
issuer has an outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
Collateralized Mortgage Obligations (CMOs). These are derivative
mortgage-related securities that separate the cash flows of mortgage pools
into different classes or tranches. Stripped mortgage securities are CMOs
that allocate different proportions of interest and principal payments on a
pool of mortgages. One class may receive all of the interest (the interest
only, or IO class) whereas another may receive all of the principal
(principal only, or PO class). The yield to maturity on any IO or PO class is
extremely sensitive not only to changes in interest rates but also to the
rate of principal payments and prepayments on underlying mortgages. In the
most extreme cases, an IO class may become worthless.
convertible security. This is a fixed-income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
covered call option. A call option is "covered" if the fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option or owns an offsetting call option.
covered put option. A put option is "covered" if the fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
depositary receipts. These include American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other
similar instruments. Depositary receipts are receipts typically issued in
connection with a U.S. or foreign bank or trust company and evidence
ownership of underlying securities issued by a foreign corporation.
derivatives. These include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts, swaps and
options on futures contracts on U.S. government and foreign government
securities and currencies.
duration. Traditionally, a debt security's "term to maturity" characterizes a
security's sensitivity to changes in interest rates "Term to maturity,"
however, measures only the time until a debt security provides its final
payment, taking no account of prematurity payments. Most debt securities
provide interest ("coupon") payments in addition to a final ("par") payment
at maturity, and some securities have call provisions allowing the issuer to
repay the instrument in full before maturity date, each of which affect the
security's response to interest rate changes. "Duration" is considered a more
precise measure of interest rate risk than "term to maturity." Determining
duration may involve the Manager's estimates of future economic parameters,
which may vary from actual future values. Fixed-income securities with
effective durations of three years are more responsive to interest rate
fluctuations than those with effective durations of one year. For example, if
interest rates rise by 1%, the value of securities having an effective
duration of three years will generally decrease by approximately 3%.
emerging markets companies. A company is considered to be an emerging markets
company if its securities are principally traded in the capital market of an
emerging markets country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging markets countries or
from sales made in such emerging markets countries, regardless of where the
securities of such companies are principally traded; or it is organized under
the laws of, and with a principal office in, an emerging markets country. An
emerging markets country is one having an economy and market that are or
would be considered by the World Bank or the United Nations to be emerging or
developing.
FNMA. The Federal National Mortgage Association.
forward currency contracts. This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price
at a future date. The Fund generally does not enter into forward contracts
with terms greater than one year. A fund generally enters into forward
contracts only under two circumstances. First, if a fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security by
entering into a forward contract to buy the amount of a foreign currency
needed to settle the transaction. Second, if the Manager believes that the
currency of a particular
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foreign country will substantially rise or fall against the U.S. dollar, it
may enter into a forward contract to buy or sell the currency approximating
the value of some or all of a fund's portfolio securities denominated in such
currency. A fund will not enter into a forward contract if, as a result, it
would have more than one-third of its total assets committed to such
contracts (unless it owns the currency that it is obligated to deliver or has
caused its custodian to segregate segregable assets having a value sufficient
to cover its obligations). Although forward contracts are used primarily to
protect a fund from adverse currency movements, they involve the risk that
currency movements will not be accurately predicted.
futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. Each fund will have collateral assets equal to the purchase price of
the portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
GNMA. The Government National Mortgage Association.
investment grade. Investment-grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch
(at least Baa), or unrated debt securities deemed to be of comparable quality
by the Manager using guidelines approved by the Board of Trustees.
repurchase agreement. With a repurchase agreement, a fund acquires a U.S.
government security or other high-grade liquid debt instrument from a
financial institution that simultaneously agrees to repurchase the same
security at a specified time and price.
reverse repurchase agreement. In a reverse repurchase agreement, a fund sells to
a financial institution a security that it holds and agrees to repurchase at
an agreed-upon price and date.
securities lending. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with
collateral assets in an amount at least equal to the current market value of
the loaned securities, plus accrued interest. There is a risk of delay in
receiving collateral or in recovering the securities loaned or even a loss of
rights in collateral should the borrower fail financially.
U.S. government securities. These include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities.
warrants. Typically, a warrant is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
when-issued and forward commitment securities. The Fund may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" or "delayed delivery" basis. The
price is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. When-issued securities and
forward commitments may be sold prior to the settlement date, but a fund will
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities. No income accrues on
securities that have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery to a fund. At the time a fund enters into
a transaction on a when-issued or forward commitment basis, it supports its
obligation with collateral assets equal to the value of the when-issued or
forward commitment securities and causes the collateral assets to be marked
to market daily. There is a risk that the securities may not be delivered and
that the fund may incur a loss.
25
<PAGE>
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
(800) 572-3863
Independent Auditors
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
THE MONTGOMERY FUNDSSM
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Invest wisely.(R)
26
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR CLASS L SHARES
MONTGOMERY STRATEGIC FUND
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDSSM
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Invest wisely.(R)
Prospectus
September 30, 1998
Montgomery Strategic Fund
Class L shares of the Montgomery Strategic Fund (the "Fund") are offered in this
prospectus. The Fund's investment objective is capital appreciation which it
seeks to achieve by moving the Fund's investments between long and short
positions based upon whether the Manager believes the equity markets are going
up or down ("market timing"). As with all mutual funds, attainment of the Fund's
investment objective cannot be ensured.
The Fund uses sophisticated investment approaches that may present substantially
higher risks than most mutual funds. It may invest a larger percentage of its
assets in transactions using short sales and other forms of volatile financial
derivatives such as options and futures. The market-timing strategies employed
by the Fund rely upon the ability of the Manager to predict general equity
market trends. Furthermore, even when the Manager has accurately predicted
general equity market trends, the Fund may experience losses if the Manager
selects investments that do not exploit those trends. As a result, the value of
an investment in the Fund may be more volatile than investments in other mutual
funds. The Fund may not be an appropriate investment for conservative investors.
See "Portfolio Securities," "Other Investment Practices" and "Risk
Considerations."
The Fund's Class L shares are only sold through financial intermediaries and
financial professionals at net asset value ("NAV") with no sales load, no
commissions and no exchange fees. The Class L shares are subject to a Rule 12b-1
distribution fee as described in this prospectus. The minimum initial investment
in the Fund is $1,000, and subsequent investments must be at least $100. The
Manager or the Distributor may waive these minimums. See "How to Invest in the
Fund."
The Fund is a separate series of The Montgomery Funds, an open-end management
investment company managed by Montgomery Asset Management, LLC (the "Manager"),
a subsidiary of Commerzbank AG. Commerzbank and its affiliates have worldwide
investment management operations and expertise. To benefit from these resources,
the Manager may consult with or rely on its affiliated investment advisory
organizations for research and other investment advice deemed useful by the
Manager. See "Management of the Fund." Funds Distributor, Inc., which is not
affiliated with the Manager, is the distributor of the Fund (the "Distributor").
This prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Please read it and retain it
for future reference. A Statement of Additional Information dated September 30,
1998, as may be revised, has been filed with the Securities and Exchange
Commission (the "SEC"), is incorporated by this reference and is available
without charge by calling (800) 572-FUND (3863). If you are viewing the
electronic version of this prospectus through an on-line computer service, you
may request a printed version free of charge by calling (800) 572-FUND (3863).
The Internet World Wide Web site for The Montgomery Funds is
www.montgomeryfunds.com. The Securities and Exchange Commission maintains a Web
site (www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding The
Montgomery Funds.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
bank. Shares are not insured by the Federal Deposit Insurance Corporation (the
"FDIC"), Federal Reserve Board or any other agency, and are subject to
investment risks, including possible loss of principal amount invested.
Like all mutual funds, these securities have not been approved or disapproved by
the Securities and Exchange Commission or any state securities commission, nor
has the Securities and Exchange Commission or any state securities commission
passed upon the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
1
<PAGE>
Table of Contents
Fees and Expenses of the Fund 3
The Fund's Investment Objective and Policies 4
Portfolio Securities 5
Other Investment Practices 6
Risk Considerations 9
Management of the Fund 11
How to Contact the Fund 13
How to Invest in the Fund 14
How to Redeem an Investment in the Fund 16
Exchange Privileges and Restrictions 18
Brokers and Other Intermediaries 18
How Net Asset Value Is Determined 19
Dividends and Distributions 19
Taxation 20
General Information 20
Backup Withholding Instructions 21
Glossary 23
2
<PAGE>
Fees and Expenses of the Fund
<TABLE>
Shareholder Transaction Expenses for the Fund
An investor would pay the following charges when buying or redeeming shares of
the Fund:
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
MAXIMUM SALES LOAD MAXIMUM SALES LOAD MAXIMUM REDEMPTION FEES EXCHANGE FEES
IMPOSED ON PURCHASES IMPOSED ON REINVESTED DEFERRED SALES LOAD
DIVIDENDS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None+ None
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
+Shareholders effecting redemptions via wire transfer may be required to pay
fees, including a $10 wire fee and other fees, that will be directly
deducted from redemption proceeds. Shareholders who request redemption
checks to be sent by Federal Express may be required to pay a $10 fee that
will be directly deducted from redemption proceeds. The Fund reserves the
right, upon 60-days' advance notice to shareholders, to impose a redemption
fee of up to 1.00% on shares redeemed within 90 days of purchase. See "How
to Redeem an Investment in the Fund."
</FN>
</TABLE>
Estimated Annual Operating Expenses (as a percentage of average net assets)
- --------------------------------------------------------------------------------
MONTGOMERY STRATEGIC FUND
- --------------------------------------------------------------------------------
Management Fee 1.50%
- --------------------------------------------------------------------------------
Other Expenses (after reimbursement)* 0.40%
- --------------------------------------------------------------------------------
12b-1 Fee 0.75%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses (after reimbursement)* 2.65%
- --------------------------------------------------------------------------------
*Expenses for the Fund are estimated. The Manager will reduce its fees and
may absorb or reimburse the Fund for certain expenses to the extent
necessary to limit total annual Fund operating expenses to the amount
indicated in the table. The Fund is required to reimburse the Manager for
any reductions in the Manager's fee only during the three years following
that reduction and only if such reimbursement can be achieved within the
foregoing expense limits. The Manager generally seeks reimbursement for the
oldest reductions and waivers before payment by the Fund for fees and
expenses for the current year. Absent the reduction, actual total Fund
operating expenses are estimated to be: 3.40% (1.15% other expenses). The
Manager may terminate these voluntary reductions at any time. See
"Management of the Fund."
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Fund. Operating expenses
are paid out of the Fund's assets and are factored into the Fund's share price.
The Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year. Because Rule
12b-1 distribution charges are accounted for on a class-level basis (and not on
an individual shareholder-level basis), individual long-term investors in the
Class L shares of the Fund may over time pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. (the "NASD"), even though all shareholders of that
Class in the aggregate will not. This is recognized and permitted by the NASD.
Example of Expenses for the Fund
Assuming, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of the
Fund's shares would have paid the following total expenses upon redeeming such
shares:
-------------------------------------------------------------------------------
MONTGOMERY STRATEGIC FUND
-------------------------------------------------------------------------------
1 Year $ 28
-------------------------------------------------------------------------------
3 Years $ 85
-------------------------------------------------------------------------------
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
3
<PAGE>
The Fund's Investment Objective and Policies
The investment objective and general investment policies of the Fund are
described below. Specific portfolio securities that may be purchased by the Fund
are described in "Portfolio Securities." Specific investment practices that may
be employed by the Fund are described in "Other Investment Practices." Certain
risks associated with investing in the Fund are described in those sections as
well as in "Risk Considerations." Certain terms used in this prospectus are
defined in the Glossary at the end of this prospectus.
The Fund's investment objective is capital appreciation which, under normal
conditions, it seeks to achieve by moving the Fund's investments between long
and short positions based upon the Manager's perception of the overall direction
of the equity markets. This strategy is popularly known as "market timing." The
market timing techniques, which seek to identify trends in the equity markets at
any given time, include using general market indicators such as: interest rate
and monetary analysis, market sentiment indicators, price and trading volume
statistics, and measures of valuation, as well as other market indicators and
statistics which the Manager believes tend to indicate trends in the overall
performance and the risk of the equity markets. These techniques are not an
all-in or all-out approach that attempts to predict market tops and bottoms.
Instead, they are intended to be a gradual and disciplined approach that reacts
to changes in risk levels as determined by the indicators. The goal is to be
invested consistent with the major trends of the markets. There can be no
assurance that these market timing techniques will provide protection from the
risks of debt or equity investment, enable the Fund to be invested consistent
with the major trends of the markets or enable the Fund to achieve its
investment objective.
Under normal market conditions, equity market exposure will be obtained through
the use of the Standard & Poor's 500 Composite Index (the "S&P 500") derivatives
and investments in equity securities. These derivatives will be backed by a
portfolio of fixed-income securities amounting to at least 65% of the Fund's
total assets. The fixed-income securities will be actively managed in order to
enhance the total return of the portfolio. This Fund generally invests the
remaining 35% of its total assets in a similar manner, but may invest those
assets in investment-grade debt securities and in other investment vehicles. See
"Portfolio Securities," "Risk Considerations" and the Appendix in the Statement
of Additional Information. During the first few months of the Fund's operations,
the Fund may be substantially invested in cash and cash-equivalents.
The S&P 500 is composed of 500 domestic common stocks, most of which are listed
on the New York Stock Exchange. S&P 500 stocks represent approximately
two-thirds of the total market capitalization of all U.S. common stocks. The
weightings of the stocks in the index are based on each stock's relative total
market capitalization.
When S&P 500 derivatives appear to be overvalued relative to the S&P 500, the
Fund may invest up to 100% of its assets in a collection of S&P 500 stocks. The
components of this collection will be determined, without regard to market
capitalization, by statistical techniques that analyze the historical
correlation between the return of each S&P 500 stock and the return on the S&P
500 itself. The Manager may employ fundamental stock analysis only to choose
among stocks that have already met certain statistical correlation criteria.
Positions in S&P 500 futures and options on futures will be entered into only to
the extent they constitute permissible positions for the Fund according to
applicable rules of the Commodity Futures Trading Commission (the "CFTC"). From
time to time, the Manager may be constrained in its ability to use S&P 500
derivatives by CFTC regulations, requirements of the Internal Revenue Code of
1986, as amended (the "Code"), or by an unanticipated inability to close out
positions when it would be most advantageous to do so. Although a large number
of investors use S&P 500 derivatives for both hedging and speculative purposes,
at times the liquidity of such derivatives may be limited.
The Fund uses sophisticated investment approaches that may present substantially
higher risks than most mutual funds. It may invest a larger percentage of its
assets in transactions using short sales and other forms of volatile financial
derivatives such as options and futures. The market-timing strategies employed
by the Fund rely upon the ability of the Manager to predict general equity
market trends. Furthermore, even when the Manager has accurately predicted
general equity market trends, the Fund may be subject to losses if the Manager
selects investments that do not exploit those trends. As a result, the value of
an investment in the Fund may be more volatile than investments in other mutual
funds. The Fund may not be an appropriate investment for conservative investors.
See "Portfolio Securities," "Other Investment Practices" and "Risk
Considerations."
4
<PAGE>
Portfolio Securities
Equity Securities
The Fund may invest in common stocks and may also invest in other types of
equity securities (such as preferred stocks or convertible securities) as well
as equity-derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The Fund may invest in ADRs, EDRs and GDRs and convertible securities that the
Manager regards as a form of equity security. The Fund may also invest up to 5%
of its net assets in warrants.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the Fund to invest in certain markets. Such investments may involve the
payment of substantial premiums above the net asset value of those investment
companies' portfolio securities and are subject to limitations under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Fund also may incur tax liability to the extent that it invests in the stock of
a foreign issuer that is a "passive foreign investment company" regardless of
whether such "passive foreign investment company" makes distributions to the
Fund. See the Statement of Additional Information.
The Fund does not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees. The
Manager has agreed to waive its own management fee with respect to the portion
of the Fund's assets invested in other open-end (but not closed-end) investment
companies.
Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation through anticipated favorable changes in relative foreign exchange
rates, in relative interest rate levels, or in the creditworthiness of issuers.
In selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy, which may be changed by the Board, the Fund
will not invest more than 25% of its total assets in debt securities rated below
investment grade. Subject to this limitation, the Fund may invest in any debt
security, including securities in default. After its purchase by the Fund, a
debt security may cease to be rated or its rating may be reduced below that
required for purchase by the Fund. A security downgraded below the minimum level
may be retained if determined by the Manager and the Board to be in the best
interests of the Fund. See "Risk Considerations."
Debt securities may also consist of participation certificates in large loans
made by financial institutions to various borrowers, typically in the form of
large unsecured corporate loans. These certificates must otherwise comply with
the maturity and credit-quality standards of the Fund and will be limited to 5%
of the Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external (i.e., to foreign lenders) debt
obligations issued by the governments, government entities and companies of
emerging markets countries. The percentage distribution between equity and debt
will vary from country to country based on anticipated trends in inflation and
interest rates; expected rates of economic and corporate profits growth; changes
in government policy; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and terms of trade.
U.S. Government Securities
The Fund may invest in fixed-rate and floating- or variable-rate U.S. government
securities. Certain obligations, including U.S. Treasury bills, notes and bonds,
and mortgage-related securities of the GNMA, are issued or guaranteed by the
U.S. government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, such as those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. The U.S. government does not guarantee the net
asset value of the Fund's shares, however. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
5
<PAGE>
Structured Notes and Indexed Securities
The Fund may invest in structured notes and indexed securities. Structured notes
are debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities include structured notes as well as
securities other than debt securities, the interest rate or principal of which
is determined by an unrelated indicator. Index securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent the
Fund invests in these securities, however, the Manager analyzes these securities
in its overall assessment of the effective duration of the Fund's portfolio in
an effort to monitor the Fund's interest rate risk.
Mortgage-Related Securities and Derivative Securities
The Fund may invest in mortgage-related securities. A mortgage-related security
is an interest in a pool of mortgage loans and is considered a derivative
security. Most mortgage-related securities are pass-through securities, which
means that investors receive payments consisting of a pro rata share of both
principal and interest (less servicing and other fees), as well as unscheduled
prepayments, as mortgages in the underlying mortgage pool are paid off by the
borrowers. These securities are subject to the risk of prepayment. See "Risk
Considerations." Certain mortgage-related securities are subject to high
volatility. The Fund uses these derivative securities in an effort to enhance
return and as a means to make certain investments not otherwise available to the
Fund. See "Hedging and Risk Management Practices" under "Other Investment
Practices" for a discussion of other reasons why the Fund invests in derivative
securities.
Asset-Backed Securities
The Fund may invest up to 5% of its total assets in asset-backed securities.
Like mortgage-related securities, these securities are subject to the risk of
prepayment. See "Risk Considerations."
Other Investment Practices
The Fund also may engage in the investment practices described below, each of
which may involve certain special risks. The Statement of Additional
Information, under the heading "Investment Objective and Policies of the Fund,"
contains more-detailed information about certain of these practices, including
limitations designed to reduce these risks.
Short Sales
The Fund may effect short sales of securities. Short sales are transactions in
which the Fund sells a security or other asset which it does not own, in
anticipation of a decline in the market value of the security or other asset.
The Fund will realize a profit or incur a loss depending upon whether the price
of the security sold short decreases or increases in value between the date of
the short sale and the date on which the Fund replaces the borrowed security.
Short sales are speculative investments and involve special risks, including
greater reliance on the Manager's accurately anticipating the future value of a
security. Short sales also may result in the Fund's recognition of gain for
certain portfolio securities. The Fund will not execute a short sale if, after
giving effect to the short sale, the market value of all securities sold exceeds
100% of the value of the Fund's total assets. See "Risk Considerations" below.
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, the Fund acquires a U.S. government security or other high-grade
liquid debt instrument from a financial institution that simultaneously agrees
to repurchase the same security at a specified time and price. The repurchase
price reflects an agreed-upon rate of return not determined by the coupon rate
on the underlying security. Under the Investment Company Act, repurchase
agreements are considered to be loans by the Fund and must be fully
collateralized by cash, letters of credit, U.S. government securities or other
high-grade liquid debt or equity securities ("collateral assets"). If the seller
defaults on its obligation to repurchase the underlying security, the 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.
Borrowing
The Fund may borrow money from banks in an amount not to exceed one-third of the
value of its total assets to meet temporary or emergency needs, and the Fund may
pledge its assets in connection with such borrowings. The Fund may not purchase
securities while such borrowings exceed 10% of its total assets.
6
<PAGE>
Securities Lending
The Fund may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 30% of the Fund's total assets. Each
securities loan is collateralized with collateral assets in an amount at least
equal to the current market value of the loaned securities, plus accrued
interest. There is a risk of delay in receiving collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially. Furthermore, if the borrower fails
financially, there is a risk that the collateral may be disposed of for less
than the value of the securities originally loaned.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, the Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in the Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager, therefore,
changes the Fund's investments whenever it believes doing so will further the
Fund's investment objective or when it appears that a position of the desired
size cannot be accumulated. Portfolio turnover generally involves some expense
to the Fund, including brokerage commissions, dealer markups and other
transaction costs, and may result in the recognition of capital gains that may
be distributed to shareholders.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager, therefore,
changes the Fund's investments whenever it believes doing so will further the
Fund's investment objective or when it appears that a position of the desired
size cannot be accumulated. The Fund's investment program emphasizes active
portfolio management with a sensitivity to short-term market trends and price
changes in individual securities. Accordingly, the Fund expects to take frequent
trading positions, resulting in portfolio turnover and brokerage expenses that
may exceed those of most investment companies of comparable size. Portfolio
turnover generally involves some expense to the Fund, including brokerage
commissions, dealer markups and other transaction costs, and may result in the
recognition of capital gains that may be distributed to shareholders. Generally,
portfolio turnover in excess of 100% is considered high and increases such
costs. The annual portfolio turnover is expected to be approximately 200% to
250% for the Fund. The Manager will not necessarily limit portfolio turnover to
these levels. High turnover that results in short-term gains may subject the
Fund to California income tax and reduce return. See "Taxation."
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Fund, the Fund may employ certain
risk management practices using the following derivative securities and
techniques (known as "derivatives"): forward currency exchange contracts,
currency options, futures contracts and options on futures contracts on foreign
government securities and currencies. The Board has adopted derivative
guidelines that require the Board to review each new type of derivative that may
be used by the Fund. Markets in some countries currently do not have instruments
available for hedging transactions relating to currencies or to securities
denominated in such currencies or to securities of issuers domiciled or
principally engaged in business in such countries. To the extent that such
instruments do not exist, the Manager may not be able to hedge its investment
effectively in such countries. Furthermore, the Fund engages in hedging
activities only when the Manager deems it to be appropriate and does not
necessarily engage in hedging transactions with respect to each investment.
Hedging transactions involve certain risks. Although the Fund may benefit from
the use of hedging positions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position and a portfolio position is not properly protected, the desired
protection may not be obtained and the Fund may be exposed to risk of financial
loss. In addition, the Fund pays commissions and other costs in connection with
such investments.
Futures and Options on Futures
The Fund may invest in interest rate, stock index and foreign currency futures
contracts and in options on those futures. The use of futures and futures
options for hedging purposes entails numerous risks. There can be no guarantee
that there will be a positive
7
<PAGE>
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. An incorrect correlation could result in a loss on both
the hedging vehicle and the hedged securities. A loss on the hedging vehicle
means that the portfolio return would have been greater had hedging not been
attempted. A liquid market may not exist at a time when the Fund seeks to close
out a futures contract or a futures option position. Most futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single day; once the daily limit has been reached for a
particular contract, no trades may be made that day at a price beyond that limit
on that contract. Furthermore, some of these instruments are relatively new and
without a significant trading history. There can be no assurance that an active
secondary market will either develop or continue to exist for such instruments.
An illiquid market may prevent the Fund from liquidating a position causing the
Fund to incur greater losses in that position.
The Fund will only enter into futures contracts or futures options which are
standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system. The Fund will use
financial futures contracts and options thereon for "bona fide hedging" (as
defined by the CFTC) and non-"bona fide hedging" purposes in accordance with
CFTC regulations. The Fund will enter such non-"bona fide hedging" positions
only to the extent that aggregate initial margin deposits plus premiums paid by
it for open futures option positions, less the amount by which any such
positions are "in-the-money," would not exceed 5% of the Fund's net assets.
To protect against the effect of adverse changes in interest rates, the Fund may
purchase and sell interest rate futures contracts. An interest rate futures
contract is an agreement to purchase or sell debt securities, usually U.S.
government securities, at a specified date and price. In addition, the Fund may
purchase and sell put and call options on interest rate futures contracts in
lieu of entering into the underlying interest rate futures contracts. The Fund
will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
The Fund may write covered straddles consisting of simultaneous call and put
options written on the same underlying futures contract. A straddle will be
covered when sufficient assets are deposited to meet the Fund's immediate
obligations under the straddle. The Fund may use the same liquid assets to cover
both the call and put options where the exercise price of the call and put are
the same, or the exercise price of the call is higher than that of the put. In
such cases, the Fund will also segregate liquid assets equivalent to the amount,
if any, by which the put is "in the money."
Futures contracts and options thereon are derivative instruments. Losses that
may arise from certain futures transactions, particularly those involved in
non-hedging contexts to pursue the Fund's investment objective, are potentially
unlimited. Subject to the regulations of the CFTC, the Fund may invest in
futures contracts and options on futures contracts without limitation as to a
percentage of its assets.
Forward Currency Contracts
A forward currency contract is individually negotiated and privately traded by
currency traders and their customers and creates an obligation to purchase or
sell a specific currency for an agreed-upon price at a future date. The Fund
normally conducts its foreign-currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate in the foreign-currency exchange market at
the time of the transaction, or through entering into forward contracts to
purchase or sell foreign currencies at a future date. The Fund generally does
not enter into forward contracts with terms greater than one year.
The Fund generally enters into forward contracts only under two circumstances.
First, if the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security by entering into a forward contract to buy or sell the
amount of a foreign currency needed to settle the transaction. Second, if the
Manager believes that the currency of a particular foreign country will
substantially rise or fall against the U.S. dollar, it may enter into a forward
contract to buy or sell the currency in an amount approximating the value of
some or all of the Fund's portfolio securities denominated in such currency. The
Fund will not enter into a forward contract if, as a result, it would have more
than one-third of its total assets committed to such contracts (unless it owns
the currency that it is obligated to deliver or has caused its custodian to
segregate segregable assets having a value sufficient to cover its obligations).
Although forward contracts are used primarily to protect the Fund from adverse
currency movements, they involve the risk that currency movements will not be
accurately predicted.
Options on Securities, Securities Indices and Currencies
The Fund may, without limit, purchase put and call options on securities and
currencies traded on U.S. exchanges and, to the extent permitted by law, foreign
exchanges, as well as in the over-the-counter market. The Fund may use such
purchases for purely speculative purposes as well as for hedging risk. The Fund
may purchase call options on securities it does not intend to purchase and may
purchase put options on securities the Fund does not own.
8
<PAGE>
The Fund may purchase call options on securities that it intends to purchase (or
on currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the applicable currency). The Fund may purchase put options
on particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency). Put options allow
the Fund to protect unrealized gains in an appreciated security that it owns
without selling that security. Prior to expiration, most options are expected to
be sold in a closing sale transaction. Profit or loss from the sale depends upon
whether the amount received is more or less than the premium paid plus
transactions costs.
The Fund also may purchase put and call options on stock indices in order to
hedge against risks of stock market or industrywide stock price fluctuations and
for purely speculative purposes. The Fund may purchase options on currencies in
order to hedge its positions in a manner similar to its use of forward
foreign-exchange contracts and futures contracts on currencies and for purely
speculative purposes.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund treats as illiquid any securities subject to restrictions on
repatriation for more than seven days and securities issued in connection with
foreign debt conversion programs that are restricted as to remittance of
invested capital or profit. The Fund also treats as illiquid repurchase
agreements with maturities in excess of seven days. Illiquid securities do not
include securities that are restricted from trading on formal markets for some
period of time but for which an active informal market exists, or securities
that meet the requirements of Rule 144A under the Securities Act of 1933 and
that, subject to review by the Board and guidelines adopted by the Board, the
Manager has determined to be liquid. State securities laws may impose further
limitations on the amount of illiquid or restricted securities that the Fund may
purchase.
Investment Restrictions
The investment objective of the Fund is fundamental and may not be changed
without shareholder approval, but, unless otherwise stated, the Fund's other
investment policies may be changed by the Board. If there is a change in the
investment objective or policies of the Fund, shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current financial positions and goals. The Fund is subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30-days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this prospectus.
Risk Considerations
The Year 2000
The Manager and the Fund's other service providers depend on the smooth
functioning of their computer systems. Unfortunately, because of the way dates
are encoded and calculated, many computer systems in use today cannot recognize
the year 2000, but revert to 1900 or another incorrect date. A computer failure
due to the year 2000 problem could negatively impact the handling of securities
trades, pricing and account services.
The Fund's software vendors and service providers have assured us that they are
prepared to handle these potential problems. There can be no guarantee, however,
that any of these computer systems will be adapted in time. Furthermore, brokers
and other intermediaries that hold shareholder accounts may still experience
incompatibility problems. It is also important to keep in mind that year 2000
problems may negatively impact the companies in which the Fund invests and, by
extension, the value of the shares held in the Fund.
Market Timing
The Fund relies upon market-timing strategies in which the Manager attempts to
predict general equity market trends and invests varying proportions of the
portfolio in long or short positions based upon the direction of the anticipated
trend. There can be no assurance that the Manager will be able to accurately
predict general market trends. Furthermore, even when the Manager has accurately
predicted general equity market trends, the Fund may experience losses if the
Manager selects investments that do not exploit those trends.
Short Sales
When the Manager believes that a security is overvalued, it may sell the
security short and borrow the same security from a broker or other institution
to complete the sale. The Fund may make a profit or incur a loss depending upon
whether the market price of the security decreases or increases between the date
of the short sale and the date on which the Fund must replace the borrowed
security. An increase in the value of a security sold short by the Fund over the
price at which it was sold short will result in a loss to the Fund, and there
can be no assurance that the Fund will be able to close out the position at any
particular time or at an acceptable price. Although the Fund's gain is limited
to the amount at which it sold the security short, its potential loss is limited
only by the maximum attainable price of the security less the price at which the
security was sold. There also is a risk that the borrowed securities would need
to be returned to the brokerage firm on short notice. If that request for the
return of securities occurs at a time when other short sellers of the subject
security are receiving similar requests, a "short squeeze" can occur. This
9
<PAGE>
means that the Fund might be compelled, at the most disadvantageous time, to
replace borrowed securities previously sold short with purchases on the open
market, possibly at prices significantly in excess of the proceeds received
earlier. The successful use of short selling may be adversely affected by an
imperfect correlation between movements in the price of the security sold short
and the securities being hedged. Short selling also may produce higher than
normal portfolio turnover and may result in increased transaction costs to the
Fund.
The Fund also may make short sales against-the-box, in which it sells short
securities it owns or has the right to obtain without payment of additional
consideration. If the Fund makes a short sale against-the-box, it will be
required to set aside securities equivalent in kind and amount to the securities
sold short (or securities convertible or exchangeable into those securities) and
will be required to hold those securities while the short sale is outstanding.
The Fund will incur transaction costs, including interest expenses, in
connection with opening, maintaining and closing short sales against-the-box.
Short sales against-the-box also result in a "constructive sale" and require the
Fund to recognize any taxable gain in the securities set aside for the short
sale.
Until the Fund replaces a borrowed security, it will instruct its Custodian to
identify as unavailable for investment cash, U.S. government securities, or
other liquid debt or equity securities such that the amount so identified plus
any amount deposited with a broker or other custodian as collateral will equal
the current value of the security sold short and will not be less than the value
of the security at the time it was sold short. Depending on arrangements made
with the broker or custodian, the Fund may not receive any payments (including
interest) on collateral deposited with the broker or custodian. A high level of
short sales also may subject the Fund to California income tax and reduce
return. See "Taxation."
Small Companies
While the Fund may invest in mature suppliers of products, services and
technologies, the Fund also may make investments in smaller companies that may
benefit from the development of new products and services. Such smaller
companies may present greater opportunities for capital appreciation but may
involve greater risk than larger, more mature issuers. Such smaller companies
may have limited product lines, markets or financial resources, and their
securities may trade less frequently and in more limited volume than those of
larger, more mature companies. As a result, the prices of their securities may
fluctuate more than those of larger issuers.
Lower-Quality Debt
As an operating policy, which may be changed by the Board without shareholder
approval, the Fund is permitted to invest in medium-quality debt securities, but
does not invest more than 25% of its total assets in high-risk debt securities
below investment-grade quality (sometimes called "junk bonds").
Medium-quality debt securities are those rated or equivalent to BBB by S&P or
Fitch's, or Baa by Moody's. Medium-quality debt securities have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than with higher-grade debt securities. Junk bonds offer greater
speculative characteristics and are regarded as having a great vulnerability to
default although currently having the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
ability to maintain other terms of the contract over any long period of time may
be small. Junk bonds are more subject to default during periods of economic
downturns or increases in interest rates and their yields will fluctuate over
time. It may be more difficult to dispose of or to value junk bonds. Achievement
of the Fund's investment objective may also be more dependent on the Manager's
own credit analysis to the extent the Fund's portfolio includes junk bonds.
Unrated debt securities are not necessarily of lower quality than rated
securities but may not be attractive to as many buyers. Regardless of rating
levels, all debt securities considered for purchase (whether rated or unrated)
are analyzed by the Manager to determine, to the extent reasonably possible,
that the planned investment is sound. From time to time, the Fund may purchase
defaulted debt securities if, in the opinion of the Manager, the issuer may
resume interest payments in the near future.
Interest Rates
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate changes. Changes in the
ability of an issuer to make payments of interest and principal and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in the Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other
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<PAGE>
factors, including general economic conditions and the underlying location and
age of the mortgage. In periods of rising interest rates, the prepayment rate
tends to decrease, lengthening the average life of a pool of mortgage-related
securities. In periods of falling interest rates, the prepayment rate tends to
increase, shortening the average life of a pool. Because prepayments of
principal generally occur when interest rates are declining, it is likely that
the Fund, to the extent that it retains the same percentage of debt securities,
may have to reinvest the proceeds of prepayments at lower interest rates than
those of its previous investments. If this occurs, the Fund's yield will
correspondingly decline. Thus, mortgage-related securities may have less
potential for capital appreciation in periods of falling interest rates than
other fixed-income securities of comparable duration, although they may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that the Fund purchases mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, result in a loss equal to any
unamortized premium. Duration is one of the fundamental tools used by the
Manager in managing interest rate risks including prepayment risks. See duration
in the Glossary.
Equity Swaps
The Fund may invest in equity swaps. Equity swaps are derivatives and their
value can be very volatile. To the extent that the Manager does not accurately
analyze and predict the potential relative fluctuation of the components swapped
with another party, the Fund may suffer a loss. The value of some components of
an equity swap (like the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, during the period a swap is outstanding,
the Fund may suffer a loss if the counterparty defaults.
Lack of Industry Diversification
Diversifying a mutual fund's portfolio across a large number of industries can
reduce industry-related risks by limiting the portion of your investment in any
one industry, although it could also limit the potential reward. The Fund may
invest a maximum of 25% of its total assets in any single industry. Such a heavy
industry concentration could make the Fund's net asset value extremely volatile
and, if economic downturns or other events occur that adversely affect one or
more of the industries the Fund invests in, such events' impact on that Fund
will be more magnified than if the Fund did not have such a narrow
concentration.
Management of the Fund
The Montgomery Funds (the "Trust") has a Board of Trustees (a "Board") that
establishes the Fund's policies and supervises and reviews its management.
Day-to-day operations of the Fund are administered by the officers of the Trust
and by the Manager pursuant to the terms of an investment management agreement
with the Fund.
Montgomery Asset Management, LLC, is the Funds' Manager. The Manager is a
Delaware limited liability company and is registered as an investment adviser
with the SEC under the Investment Advisers Act of 1940, as amended. The Manager
and its predecessor have advised private accounts and mutual funds since 1990.
The Manager is a subsidiary of Commerzbank AG. ("Commerzbank"). Commerzbank, one
of the largest publicly held commercial banks in Germany, had total assets of
approximately $288 billion on December 31, 1997. Commerzbank and its affiliates
had more than $92 billion in assets under management as of October 31, 1997.
Commerzbank's asset management operations involve more than 1,000 employees in
13 countries worldwide.
Portfolio Management
KEVIN T. HAMILTON, CFA, chair of Montgomery Asset Management's Investment
Oversight Committee. Kevin Hamilton coordinates and oversees the investment
decisions of Montgomery's portfolio management teams. Prior to joining
Montgomery Asset Management in 1991, he was a senior vice president and
portfolio manager at Analytic Investment Management, where he managed both
equity and fixed-income portfolios.
WILLIAM C. STEVENS, senior portfolio manager. Prior to joining Montgomery in
1992, Bill Stevens worked at Barclays de Zoete Wedd Securities, where he started
its collateralized mortgage obligation (CMO) and asset-backed securities
trading. From 1990 to 1991, Mr. Stevens traded stripped mortgage securities and
mortgage-related interest rate swaps for the First Boston Company. Prior to that
he worked at Drexel Burnham Lambert, where he was responsible for originating
and trading all of the firm's derivative mortgage-related securities.
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<PAGE>
Management Fees and Other Expenses
<TABLE>
The Manager provides the Fund with advice on buying and selling securities,
manages the Fund's investments, including the placement of orders for portfolio
transactions, furnishes the Fund with office space and certain administrative
services, and provides personnel needed by the Fund with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with the Fund. The Manager also compensates the members of the Board who are
interested persons of the Manager, and assumes the cost of printing prospectuses
and shareholder reports for dissemination to prospective investors. As
compensation, the Fund pays the Manager a management fee (accrued daily but paid
when requested by the Manager) based upon the value of its average daily net
assets, according to the following table:
<CAPTION>
- -------------------------------------------- --------------------------------- ---------------------------
AVERAGE DAILY NET ASSETS MANAGEMENT FEE (ANNUAL
RATE)
- -------------------------------------------- --------------------------------- ---------------------------
<S> <C> <C>
Montgomery Strategic Fund First $250 million 1.50%
Over $250 million 1.25%
- -------------------------------------------- --------------------------------- ---------------------------
</TABLE>
The management fee for the Fund is higher than for most mutual funds. The
Manager also serves as the Fund's Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of the Fund's
administrative operations. As compensation, the Fund pays the Administrator a
monthly fee at the annual rate of seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $250 million).
The Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fee; the Administrator's fee; taxes, if any; brokerage
and commission expenses, if any; interest charges on any borrowings; transfer
agent, custodian, legal and auditing fees; shareholder servicing fees including
fees to third-party servicing agents; fees and expenses of Trustees who are not
interested persons of the Manager; salaries of certain personnel; costs and
expenses of calculating its daily net asset value; costs and expenses of
accounting, bookkeeping and record-keeping required under the Investment Company
Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, Statements of Additional Information and
reports to shareholders; and other expenses relating to the Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial shareholder of the Class L shares of the Fund
have approved, and the Fund has entered into, a Share Marketing Plan (the
"Plan") with the Manager, as the distribution coordinator, for the Class L
shares. Under the Plan, the Fund will pay distribution fees to the Manager at an
annual rate of 0.25% of the Fund's aggregate average daily net assets
attributable to its Class L shares, to reimburse the Manager for its
distribution costs with respect to that Class.
The Plan provides that the Manager may use the distribution fees received from
the Class to pay for the distribution expenses of that Class, including, but not
limited to (i) incentive compensation paid to the directors, officers and
employees of, agents for and consultants to, the Manager or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, Statements of Additional Information
and reports of the Fund to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Fund and that Class; and (iv) costs involved obtaining whatever information,
analysis and reports with respect to marketing and promotional activities that
the Fund may, from time to time, deem advisable with respect to the distribution
of that Class. Distribution fees are accrued daily and paid monthly, and are
charged as expenses of the Class L shares as accrued.
In adopting the Plan, the Board of Trustees determined that there was a
reasonable likelihood that the Plan would benefit the Fund and the shareholders
of Class L shares. Information with respect to distribution revenues and
expenses is presented to the Board of Trustees quarterly for its consideration
in connection with its deliberations as to the continuance of the Plan. In its
review of the Plan, the Board of Trustees is asked to take into consideration
expenses incurred in connection with the separate distribution of the Class L
shares.
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The Class L shares are not obligated under the Plan to pay any distribution
expenses in excess of the distribution fee. Thus, if the Plan were terminated or
otherwise not continued, no amounts (other than current amounts accrued but not
yet paid) would be owed by the Class to the Manager.
The distribution fee attributable to the Class L shares is designed to permit an
investor to purchase Class L shares through broker-dealers without the
assessment of a front-end sales charge and at the same time to permit the
Manager to compensate broker-dealers on an ongoing basis in connection with the
sale of the Class L shares.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Trustees of the Trust, including a majority of
the Trustees who are not "interested persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the Independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class L
shares.
All distribution fees paid by the Fund under the Plan will be paid in accordance
with Rule 2830 of the NASD Rules of Conduct.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses (excluding the Rule 12b-1 fees) at or one and
nine-tenths of one percent (1.90%) of the Fund's average net assets. The Manager
also may voluntarily reduce additional amounts to increase the return to the
Fund's investors. The Manager may terminate these voluntary reductions at any
time. Any reductions made by the Manager in its fees are subject to
reimbursement by the Fund within the following three years, provided that the
Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations. The Manager generally seeks reimbursement for
the oldest reductions and waivers before payment by the Fund for fees and
expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating expense for which
the Fund is obligated to pay and the performance of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement, the Manager is entitled to seek reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate broker-dealers and other
intermediaries who distribute the Fund's shares as well as other providers of
shareholder and administrative services. In addition, the Manager, out of its
own funds, may sponsor seminars and educational programs on the Fund for
financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. These factors are more
fully discussed in the Statement of Additional Information; they include, but
are not limited to: reasonableness of commissions; quality of services, and
execution; and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Manager also may
consider sale of the Fund's shares as a factor in selecting broker-dealers for
the Fund's portfolio transactions. See "Execution of Portfolio Transactions" in
the Statement of Additional Information for further information regarding Fund
policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Fund (the "Master Transfer
Agent") and performs certain record-keeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Fund's transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Fund's principal custodian (the
"Custodian").
How to Contact the Fund
For information on the Fund or your account, call a Montgomery shareholder
service representative at:
(800) 572-FUND (3863)
<TABLE>
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
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<CAPTION>
- ---------------------------------------------------------------- --------------------------------------------------------------
REGULAR MAIL EXPRESS MAIL OR OVERNIGHT SERVICE
- ---------------------------------------------------------------- --------------------------------------------------------------
<S> <C>
The Montgomery Funds The Montgomery Funds
P.O. Box 419073 210 West 10th Street, 8th Floor
Kansas City, MO 64141-6073 Kansas City, MO 64105
- ---------------------------------------------------------------- --------------------------------------------------------------
</TABLE>
Visit the Montgomery Funds World Wide Web site at:
www.montgomeryfunds.com
How to Invest in the Fund
The Fund's shares are offered only through financial intermediaries and
financial professionals, with no sales load, at their next-determined net asset
value after receipt of an order with payment. The Fund's shares are offered for
sale by Funds Distributor, Inc., the Fund's Distributor, 101 California Street,
San Francisco, California 94111, (800) 572-FUND (3863), and through selected
securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor or certain intermediaries that have an agreement with the
Funds by the close of trading (generally, 4:00 P.M. eastern time, except when
the market closes earlier due to a holiday or for any other reason) on any day
that the New York Stock Exchange (the "NYSE") is open, Fund shares will be
purchased at the Fund's next-determined net asset value. Orders for Fund shares
received after the Fund's cutoff time will be purchased at the next-determined
net asset value after receipt of the order.
Initial Investment
The minimum initial investment in the Fund is $1,000 (including IRAs). The
Manager or the Distributor, at its discretion, may waive this minimum. The Fund
does not accept third-party checks or cash investments. Checks must be in U.S.
dollars and, to avoid fees and delays, drawn only on banks located in the United
States. Purchases may also be made in certain circumstances by payment of
securities. See the Statement of Additional Information for further details.
Initial Investment by Check
o Complete the New Account application. Tell us that you wish to invest in
the Montgomery Strategic Fund. Make your check payable to The Montgomery
Funds.
o A charge may be imposed on checks that do not clear.
Initial Investment by Wire
o Call the Transfer Agent to tell it that you intend to make your initial
investment by wire. Provide the Transfer Agent with your name and the
dollar amount to be invested, and tell the Transfer Agent that you wish to
invest in the Montgomery Strategic Fund. The Transfer Agent will provide
you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire
instructions to ensure accurate handling of your investment.
o A completed New Account application must be sent to the Transfer Agent by
facsimile. The Transfer Agent will provide you with its fax number over the
phone.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For credit to: (shareholder(s) name)
Shareholder account number: (shareholder(s) account number)
Name of Fund: Montgomery Strategic Fund
o Your bank may charge a fee for any wire transfers.
o The Fund and the Distributor each reserve the right to reject any purchase
order in whole or in part.
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<PAGE>
Initial Investment by Telephone
You are eligible to make an initial investment into the Montgomery Strategic
Fund by telephone under the following conditions:
o You must be a shareholder in another Montgomery Fund.
o You must have been a shareholder for at least 30 days.
o Your existing account registration will be duplicated in the Montgomery
Strategic Fund.
o Your initial telephone purchase into the Montgomery Strategic Fund must
meet initial investment minimums and is limited to the combined aggregate
net asset value of your existing accounts or $10,000, whichever is less.
o The Fund must receive your check or wire transfer within three business
days of the telephone purchase.
o The Fund reserves the right to collect any losses to the Fund from your
existing account(s) that result from a telephone purchase not funded within
three business days.
Subsequent Investments
The minimum subsequent investment in the Fund is $100 (including IRAs). The
Manager or the Distributor, at its discretion, may waive this minimum.
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check
with written instructions indicating the Montgomery Strategic Fund and the
account number to which your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agent's affiliated bank by using the bank wire information under "Initial
Investment by Wire" above.
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572-FUND (3863) before
the Fund's cutoff time.
o Shares for IRAs may not be purchased by phone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
o You should do one of the following to ensure that payment is received in
time:
o Transfer funds directly from your bank account by sending a letter and
a voided check or deposit slip (for a savings account) to the Transfer
Agent.
o Send a check by overnight or second-day courier service.
o Instruct your bank to wire funds to the Transfer Agent's affiliated
bank by using the bank wire information under "Initial Investment by
Wire" above.
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is the Fund's subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your New Account
application or your letter of instruction. Investments will automatically
be transferred into your Montgomery account from your checking or savings
account.
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o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your New Account application or your letter of instruction,
the 20th day of each month will be selected.
o You should allow 20 business days for this service to become effective.
o You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
o Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for the Fund is $100 per payroll deduction
period.
o You may automatically deposit a designated amount of your paycheck directly
into your Montgomery Fund account.
o Please call the Transfer Agent to receive instructions to establish this
service.
Telephone Transactions
You agree to reimburse the Fund for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be cancelled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Fund upon 30-days' written notice or at any time by you by written notice
to the Fund. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by the Fund. The Fund and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Fund employs reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording
certain telephone calls, sending a confirmation and requiring the caller to give
an authorization number or other personal information not likely to be known by
others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Telephone privileges may be revoked at any time by the Fund as to any
shareholder if the Fund believes that a shareholder has abused the telephone
privilege by using abusive language or by purchases and redemptions that appear
to be part of a systematic market-timing strategy.
Retirement Plans
Shares of the Fund are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. The Fund may be available for
purchase through administrators for retirement plans. Investors who purchase
shares as part of a retirement plan should address inquiries and seek investment
servicing from their plan administrators. Plan administrators may receive
compensation from the Fund for performing shareholder services.
Share Certificates
Share certificates will not be issued by the Fund. All shares are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.
How to Redeem an Investment in the Fund
The Fund will redeem all or any portion of an investor's outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of purchase orders, by securities dealers.
Payment of redemption proceeds is made promptly regardless of when redemption
occurs and normally within three days after receipt of all documents in proper
form, including a written redemption order with appropriate signature guarantee.
Redemption proceeds will be mailed or wired in accordance with the shareholder's
instructions. The Fund may suspend the right of redemption under certain
extraordinary circumstances in accordance with the rules of the SEC. In the case
of shares purchased by check and redeemed shortly after the purchase, the
Transfer Agent will not mail redemption proceeds until it has been notified that
the monies used for the purchase have been collected, which may take up to 15
days from the purchase date. Shares tendered for
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redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. The procedures for
requesting a redemption are set forth below.
Redeeming by Written Instruction
o Write a letter giving your name and account number and indicating the
Montgomery Strategic Fund and the dollar amount or number of shares you
wish to redeem.
o The letter must be signed the same way your account is registered. If you
have a joint account, all accountholders must sign.
o Signature-guarantee your letter if you want the redemption proceeds to go
to a party other than the account owner(s), your predesignated bank account
or if the dollar amount of the redemption exceeds $50,000. Signature
guarantees may be provided by an eligible guarantor institution such as a
commercial bank, an NASD member firm such as a stockbroker, a savings
association or a national securities exchange. Contact the Transfer Agent
for more information.
o If you do not have a predesignated bank account and want us to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees at the Manager's discretion.
Redeeming By Telephone
o Unless you have declined telephone redemption privileges on your New
Account application, you may redeem shares up to $50,000 by calling the
Transfer Agent before the Fund's cutoff time. This service is not available
for IRA accounts.
o If you included bank wire information on your New Account application or
made subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at least two business days for redemption proceeds to be
credited to your bank account. If you want to wire your redemption proceeds
to arrive at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
o Telephone redemption privileges may be cancelled after an account is opened
by instructing the Transfer Agent in writing. Your request will be
processed upon receipt. Telephone redemption privileges are not available
for IRA accounts.
By establishing telephone redemption privileges, a shareholder authorizes the
Fund and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the authorization. When a shareholder appoints a designee on the
New Account application or by other written authorization, the shareholder
agrees to be bound by the telephone redemption instructions given by the
shareholder's designee. The Fund may change, modify or terminate these
privileges at any time upon 60-days' notice to shareholders. The Fund will not
be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See discussion of Fund telephone
procedures and liability under "Telephone Transactions" above.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in the Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from the Fund
account. Payments may be made either monthly or quarterly on the first day of
each month. Depending on the form of payment requested, shares will be redeemed
up to five business days before the redemption proceeds are scheduled to be
received by the shareholder. The redemption may result in the recognition of
gain or loss for income tax purposes.
Uncashed Distribution or Redemption Checks
If you choose to receive your distribution or redemption by a check from the
Fund (instead of bank wire), you should follow up to ensure that you have
received the distribution or redemption in a timely manner. The Fund is
responsible only for mailing the distribution or redemption checks and is not
responsible for tracking uncashed checks or determining why checks are uncashed.
If the postal or other delivery service is unable to deliver a check and the
check is returned to the Fund, the Fund will hold the check in a separate
account on your behalf for a reasonable period of time but will not invest the
money in any interest-bearing account. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
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Small Accounts
Due to the relatively high cost of maintaining smaller accounts, the Fund may
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
the Fund decides to make such an involuntary redemption, the shareholder will
first be notified that the value of the shareholder's account is less than the
minimum level and will be allowed 30 days to make an additional investment to
bring the value of that account back up to $1,000 before the Fund takes any
action.
Exchange Privileges and Restrictions
You may exchange shares from another Fund in the Montgomery Funds family with
the same registration, Taxpayer Identification number and address. An exchange
may result in a recognized gain or loss for income tax purposes. See the
discussion of Fund telephone procedures and limitations of liability under
"Telephone Transactions."
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange fee)
after your request is received. Your request is subject to the Fund's
cutoff times.
o Exchange purchases must meet the minimum investment requirements of the
fund you intend to purchase.
o You may exchange for shares of a fund only in states where that Montgomery
fund's shares are qualified for sale and only after you have reviewed a
prospectus of that fund.
o You may not exchange for shares of a Montgomery fund that is not open to
new shareholders unless you have an existing account with that fund.
o Because excessive exchanges can harm a Fund's performance, the Trust
reserves the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-month period. The Fund
may also refuse an exchange into a Fund from which you have redeemed shares
within the previous 90 days (accounts under common control and accounts
with the same Taxpayer Identification number will be counted together). A
shareholder's exchanges may be restricted or refused if the Fund receives,
or the Manager anticipates, simultaneous orders affecting significant
portions of the Fund's assets and, in particular, a pattern of exchanges
coinciding with a market-timing strategy. The Trust reserves the right to
refuse exchanges by any person or group if, in the Manager's judgment, a
Fund would be unable to effectively invest the money in accordance with its
investment objective and policies, or would otherwise be potentially
adversely affected. Although the Trust attempts to provide prior notice to
affected shareholders when it is reasonable to do so, it may impose these
restrictions at any time. The exchange limit may be modified for accounts
in certain institutional retirement plans to conform to plan exchange
limits and U.S. Department of Labor regulations (for those limits, see plan
materials). The Trust reserves the right to terminate or modify the
exchange privileges of Fund shareholders in the future.
Automatic Transfer Service ("ATS")
You may elect systematic exchanges out of any of the Montgomery fixed-income
funds (which include the Montgomery Short Duration Government Bond Fund, the
Montgomery Government Reserve Fund, the Montgomery Total Return Bond Fund, the
Montgomery Federal Tax-Free Money Fund, the Montgomery California Tax-Free
Intermediate Bond Fund and the California Tax-Free Money Fund) into the Fund.
The minimum exchange is $100. Periodically investing a set dollar amount into
the Fund is also referred to as dollar-cost averaging, because the number of
shares purchased will vary depending on the price per share. Your account with
the Fund must meet the applicable investment minimum of $1,000. Exchanges out of
the fixed-income funds are exempt from the four-exchanges limit policy.
Brokers and Other Intermediaries
Investing Through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of the Fund from selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as for information
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pertaining to accounts and any service or transaction fees that may be charged
by these agents. Some of these agents may appoint subagents. Purchase orders
through securities brokers, dealers and other financial intermediaries are
effected at the next-determined net asset value after receipt of the order by
such agent before the Fund's daily cutoff time. Orders received after that time
will be purchased at the next-determined net asset value. To the extent that
these agents perform shareholder servicing activities for the Fund, they may
receive fees from the Fund or the Manager for such services.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Fund by wire or telephone through
the Distributor or selected securities brokers or dealers. Shareholders should
contact their securities broker or dealer for appropriate instructions and for
information concerning any transaction or service fee that may be imposed by the
broker or dealer. Shareholders are entitled to the net asset value next
determined after receipt of a redemption order by such broker-dealer, provided
the broker-dealer transmits such order on a timely basis to the Transfer Agent
so that it is received before the Fund's cutoff time on a day that the Fund
redeems shares. Orders received after that time are entitled to the net asset
value next determined after receipt.
How Net Asset Value Is Determined
The net asset value of the Fund is determined once daily as of the Fund's cutoff
time on each day that the NYSE is open for trading. Generally, this is 4:00 P.M.
eastern time, or earlier when trading closes earlier. Per-share net asset value
is calculated by dividing the value of the Fund's total net assets by the total
number of the Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed-income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or that
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the manager and the Pricing
Committee of the Board, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign currency-denominated values of such
securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset value, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset value may not be reflected in the Fund's
calculation of its net asset value unless the Manager, under the supervision of
the Board, determines that a particular event would materially affect the Fund's
net asset value.
Dividends and Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Dividends and capital gains are
declared and paid in the last quarter of each year. Additional distributions, if
necessary, may be made following the Fund's fiscal year end (June 30) in order
to avoid the imposition of tax on the Fund. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Unless you request cash distributions in writing at least seven business days
prior to the distribution, or on the New Account application, all dividends and
other distributions will be reinvested automatically in additional Class L
shares of the Fund and credited to your account at the closing net asset value
on the reinvestment date. Furthermore, if you have elected to receive cash
distributions in cash and the postal or other delivery service is unable to
deliver checks to your address of record, your distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. Also, as is the case for redemption checks, no
interest will accrue on amounts represented by uncashed distribution checks. See
"Uncashed Distribution or Redemption Checks" above.
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Distributions Affect the Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of the
Fund, regardless of how long you have held the shares. Dividends and capital
gains awaiting distribution are included in the Fund's daily net asset value.
The share price of the Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Fund declared a dividend in the amount of $0.50 per share. If the Fund's share
price was $10.00 on December 30, the Fund's share price on December 31 would be
$9.50 barring market fluctuations.
"Buying a Dividend"
If you buy shares of the Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend, and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
The Fund intends to qualify and elect as soon as possible to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), by distributing substantially all of its net
investment income and net capital gains to its shareholders and meeting other
requirements of the Code relating to the sources of its income and
diversification of assets. Accordingly, the Fund generally will not be liable
for federal income tax or excise tax based on net income except to the extent
that its earnings are not distributed or are distributed in a manner that does
not satisfy the requirements of the Code pertaining to the timing of
distributions. If the Fund is unable to meet certain requirements of the Code,
it may be subject to taxation as a corporation. The Fund may also incur tax
liability to the extent that it invests in "passive foreign investment
companies." See "Portfolio Securities" and the Statement of Additional
Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered ordinary
income. Part of the distributions paid by the Fund may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of the Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Fund.
The Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisors regarding the particular tax consequences to them
of an investment in shares of the Fund. Additional information on tax matters
relating to the Fund and its shareholders is included in the Statement of
Additional Information.
General Information
The Trust
The Fund is a series of The Montgomery Funds, a Massachusetts business trust
organized on May 10, 1990 (the "Trust"). The Trust's Agreement and Declaration
of Trust permits the Board to issue an unlimited number of full and fractional
shares of beneficial interest, $0.01 par value, in any number of series. The
assets and liabilities of each series within the Trust are separate and distinct
from those of each other series.
This prospectus relates only to the Class L shares of the Fund. The Fund has
designated other classes of shares and may, in the future, designate other
classes of shares for specific purposes. The other classes of shares may have
different fees and expenses than the class of shares offered in this prospectus,
and those different fees and expenses may affect performance. To obtain
information concerning the other classes of shares not offered in this
prospectus, call The Montgomery Funds at (800) 572-FUND (3863) or contact sales
representatives or financial intermediaries who offer those classes.
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Shareholder Rights
Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each whole share is entitled to one vote as to any matter on which it is
entitled to vote, and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of its Trust, votes
separately on matters affecting only that Fund (e.g., approval of the Investment
Management Agreement); all series of the Trust vote as a single class on matters
affecting all series of the Trust jointly or the Trust as a whole (e.g.,
election or removal of Trustees). Voting rights are not cumulative, so the
holders of more than 50% of the shares voting in any election of Trustees can,
if they so choose, elect all of the Trustees of that Trust. Although the Trust
is not required and does not intend to hold annual meetings of shareholders,
such meetings may be called by the Trust's Board at its discretion, or upon
demand by the holders of 10% or more of the outstanding shares of the Trust, for
the purpose of electing or removing Trustees. Shareholders may receive
assistance in communicating with other shareholders in connection with the
election or removal of Trustees pursuant to the provisions of Section 16(c) of
the Investment Company Act.
Performance Information
From time to time, the Fund may publish its total return, such as in
advertisements and communications to investors. Performance data may be quoted
separately for the Class L shares as for the other classes. Total return
information generally will include the Fund's average annual compounded rate of
return over the most recent four calendar quarters and over the period from the
Fund's inception of operations. The Fund may also advertise aggregate and
average total return information over different periods of time. The Fund's
average annual compounded rate of return is determined by reference to a
hypothetical $1,000 investment that includes capital appreciation and
depreciation for the stated period according to a specific formula. Aggregate
total return is calculated in a similar manner, except that the results are not
annualized. Total return figures will reflect all recurring charges against the
Fund's income.
Investment results of the Fund will fluctuate over time, and any presentation of
the Fund's total return for any prior period should not be considered as a
representation of what an investor's total return or current yield may be in any
future period. The Fund's annual report contains additional performance
information and is available upon request and without charge by calling (800)
572-FUND (3863).
Legal Opinion
The validity of shares offered by this prospectus will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
During the year, the Fund will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and preauthorized automatic investment, exchange and redemption services
(quarterly).
o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semiannual reports are mailed approximately 60 days after June
30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o An annual updated prospectus is mailed to existing shareholders in October
or November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-FUND (3863).
Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN or to check the appropriate boxes in the New
Account application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of federal income tax equal to 31% of
taxable dividends, capital-gains distributions,
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redemptions, exchanges and other payments made to a shareholder's account. Any
tax withheld may be credited against taxes owed on a shareholder's federal
income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the
Internal Revenue Service (the "IRS"). Backup withholding could apply to payments
made to a shareholder's account while awaiting receipt of a TIN. Special rules
apply for certain entities. For example, for an account established under the
Uniform Gifts to Minors Act, the TIN of the minor should be furnished. If a
shareholder has been notified by the IRS that he or she is subject to backup
withholding because he or she failed to report all interest and dividend income
on his or her tax return and the shareholder has not been notified by the IRS
that such withholding will cease, the shareholder should cross out the
appropriate item on the New Account application. Dividends paid to a foreign
shareholder's account by the Fund may be subject to up to 30% withholding
instead of backup withholding.
A shareholder who is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, government agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult a tax
advisor.
---------------------------------
This prospectus is not an offering of the securities herein described in any
state in which such offering is unauthorized. No salesperson, dealer or other
person is authorized to give any information or make any representation other
than those contained in this prospectus, the Statement of Additional Information
or in the Fund's official sales literature.
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Glossary
below investment grade debt securities. Debt securities rated below "investment
grade."
cash equivalents. These are short-term, interest-bearing instruments or deposits
and may include, for example, commercial paper, certificates of deposit,
repurchase agreements, bankers' acceptances, U.S. Treasury bills, bank money
market deposit accounts, master demand notes and money market mutual funds.
These consist of high-quality debt obligations, certificates of deposit and
bankers' acceptances rated at least A-1 by S&P or Prime-1 by Moody's, or the
issuer has an outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
Collateralized Mortgage Obligations (CMOs). These are derivative
mortgage-related securities that separate the cash flows of mortgage pools
into different classes or tranches. Stripped mortgage securities are CMOs
that allocate different proportions of interest and principal payments on a
pool of mortgages. One class may receive all of the interest (the interest
only, or IO class) whereas another may receive all of the principal
(principal only, or PO class). The yield to maturity on any IO or PO class is
extremely sensitive not only to changes in interest rates but also to the
rate of principal payments and prepayments on underlying mortgages. In the
most extreme cases, an IO class may become worthless.
convertible security. This is a fixed-income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
covered call option. A call option is "covered" if the fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option or owns an offsetting call option.
covered put option. A put option is "covered" if the fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
depositary receipts. These include American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other
similar instruments. Depositary receipts are receipts typically issued in
connection with a U.S. or foreign bank or trust company and evidence
ownership of underlying securities issued by a foreign corporation.
derivatives. These include forward currency exchange contracts, stock options,
currency options, stock and stock index options, futures contracts, swaps and
options on futures contracts on U.S. government and foreign government
securities and currencies.
duration. Traditionally, a debt security's "term to maturity" characterizes a
security's sensitivity to changes in interest rates "Term to maturity,"
however, measures only the time until a debt security provides its final
payment, taking no account of prematurity payments. Most debt securities
provide interest ("coupon") payments in addition to a final ("par") payment
at maturity, and some securities have call provisions allowing the issuer to
repay the instrument in full before maturity date, each of which affect the
security's response to interest rate changes. "Duration" is considered a more
precise measure of interest rate risk than "term to maturity." Determining
duration may involve the Manager's estimates of future economic parameters,
which may vary from actual future values. Fixed-income securities with
effective durations of three years are more responsive to interest rate
fluctuations than those with effective durations of one year. For example, if
interest rates rise by 1%, the value of securities having an effective
duration of three years will generally decrease by approximately 3%.
emerging markets companies. A company is considered to be an emerging markets
company if its securities are principally traded in the capital market of an
emerging markets country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging markets countries or
from sales made in such emerging markets countries, regardless of where the
securities of such companies are principally traded; or it is organized under
the laws of, and with a principal office in, an emerging markets country. An
emerging markets country is one having an economy and market that are or
would be considered by the World Bank or the United Nations to be emerging or
developing.
FNMA. The Federal National Mortgage Association.
forward currency contracts. This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price
at a future date. The Fund generally does not enter into forward contracts
with terms greater than one year. A fund generally enters into forward
contracts only under two circumstances. First, if a fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security by
entering into a forward contract to buy the amount of a foreign currency
needed to settle the transaction. Second, if the Manager believes that the
currency of a particular foreign country will substantially rise or fall
against the
23
<PAGE>
U.S. dollar, it may enter into a forward contract to buy or sell the currency
approximating the value of some or all of a fund's portfolio securities
denominated in such currency. A fund will not enter into a forward contract
if, as a result, it would have more than one-third of its total assets
committed to such contracts (unless it owns the currency that it is obligated
to deliver or has caused its custodian to segregate segregable assets having
a value sufficient to cover its obligations). Although forward contracts are
used primarily to protect a fund from adverse currency movements, they
involve the risk that currency movements will not be accurately predicted.
futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. Each fund will have collateral assets equal to the purchase price of
the portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
GNMA. The Government National Mortgage Association.
investment grade. Investment-grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch
(at least Baa), or unrated debt securities deemed to be of comparable quality
by the Manager using guidelines approved by the Board of Trustees.
repurchase agreement. With a repurchase agreement, a fund acquires a U.S.
government security or other high-grade liquid debt instrument from a
financial institution that simultaneously agrees to repurchase the same
security at a specified time and price.
reverse repurchase agreement. In a reverse repurchase agreement, a fund sells to
a financial institution a security that it holds and agrees to repurchase at
an agreed-upon price and date.
securities lending. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with
collateral assets in an amount at least equal to the current market value of
the loaned securities, plus accrued interest. There is a risk of delay in
receiving collateral or in recovering the securities loaned or even a loss of
rights in collateral should the borrower fail financially.
U.S. government securities. These include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities.
warrants. Typically, a warrant is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
when-issued and forward commitment securities. The Fund may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" or "delayed delivery" basis. The
price is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. When-issued securities and
forward commitments may be sold prior to the settlement date, but a fund will
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities. No income accrues on
securities that have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery to a fund. At the time a fund enters into
a transaction on a when-issued or forward commitment basis, it supports its
obligation with collateral assets equal to the value of the when-issued or
forward commitment securities and causes the collateral assets to be marked
to market daily. There is a risk that the securities may not be delivered and
that the fund may incur a loss.
24
<PAGE>
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
(800) 572-3863
Independent Auditors
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
THE MONTGOMERY FUNDSSM
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
www.montgomeryfunds.com
Invest wisely.(R)
25
<PAGE>
----------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
MONTGOMERY STRATEGIC FUND
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
MONTGOMERY STRATEGIC FUND
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
STATEMENT OF ADDITIONAL INFORMATION
September 30, 1998
The Montgomery Funds (the "Trust") is an open-end management investment company
organized as a Massachusetts business trust with different series of shares of
beneficial interest. The Montgomery Strategic Fund (the "Fund") is a series of
the Trust. The Fund is managed by Montgomery Asset Management, LLC (the
"Manager") and distributed by Funds Distributor, Inc. (the "Distributor"). This
Statement of Additional Information contains information in addition to that set
forth in the prospectuses for the Class R, Class P and Class L shares of the
Fund (the "Prospectuses"), dated September 30, 1998, as may be revised from time
to time. The Prospectuses provide the basic information a prospective investor
should know before purchasing shares of the Fund and may be obtained without
charge at the address or telephone number provided above. This Statement of
Additional Information is not a prospectus and should be read in conjunction
with the Prospectuses.
TABLE OF CONTENTS
The Trust......................................................................2
Investment Objective and Policies of the Fund..................................2
Portfolio Securities...........................................................2
Hedging and Risk Management Practices..........................................4
Other Investment Practices.....................................................7
Risk Factors..................................................................10
Investment Restrictions.......................................................11
Distributions and Tax Information.............................................13
Trustees and Officers.........................................................17
Investment Management and Other Services......................................19
Execution of Portfolio Transactions...........................................22
Additional Purchase and Redemption Information................................24
Determination of Net Asset Value..............................................26
Principal Underwriter.........................................................28
Performance Information.......................................................28
General Information...........................................................30
Financial Statements..........................................................30
Appendix......................................................................32
B-1
<PAGE>
The Trust
The Trust is an open-end management investment company organized as a
Massachusetts business trust on May 10, 1990, and registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Trust currently offers shares of beneficial interest, $0.01 par value per share,
in various series. Each series offers three classes of shares (Class R, Class P
and Class L). This Statement of Additional Information pertains to Class R,
Class P and Class L shares of Montgomery Strategic Fund.
Investment Objective and Policies of the Fund
The investment objective and policies of the Fund are described in detail in the
Prospectuses. The following discussion supplements the discussion in the
Prospectuses.
The Fund is a diversified series of the Trust, an open-end management investment
company offering redeemable shares of beneficial interest. The achievement of
the Fund's investment objective will depend on market conditions generally and
on the Manager's analytical and portfolio management skills.
Portfolio Securities
Depositary Receipts. The Fund may hold securities of foreign issuers in the form
of American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs")
and other similar global instruments available in emerging markets, or other
securities convertible into securities of eligible issuers. These securities may
not necessarily be denominated in the same currency as the securities for which
they may be exchanged. Generally, ADRs in registered form are designed for use
in U.S. securities markets, and EDRs and other similar global instruments in
bearer form are designed for use in European securities markets. For purposes of
the Fund's investment policies, the Fund's investments in ADRs, EDRs and similar
instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.
Other Investment Companies. To the extent permitted in the Prospectuses, the
Fund may invest in securities issued by other investment companies investing in
securities in which the Fund can invest provided that such investment companies
invest in portfolio securities in a manner consistent with the Fund's investment
objective and policies. Applicable provisions of the Investment Company Act
require that the Fund limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 10% of the value of the
Fund's total assets will be invested in the aggregate in securities of
investment companies as a group; and (b) either the Fund and affiliated persons
of the Fund not own together more than 3% of the total outstanding shares of any
one investment company at the time of purchase (and that all shares of the
investment company held by the Fund in excess of 1% of the company's total
outstanding shares be deemed illiquid); or the Fund not invest more than 5% of
its total assets in any one investment company and the investment not represent
more than 3% of the total outstanding voting stock of the investment company at
the time of purchase. As a shareholder of another investment company, the Fund
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that the Fund bears directly in
connection with its own operations.
U.S. Government Securities. Generally, the value of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government securities") held by the Fund will fluctuate inversely with interest
rates. U.S. Government securities in which the Fund may invest include debt
obligations of varying maturities issued by the U.S. Treasury or issued or
guaranteed by an agency
B-2
<PAGE>
or instrumentality of the U.S. Government, including the Federal Housing
Administration ("FHA"), Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Bank, Farm Credit System Financial Assistance
Corporation, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Intermediate Credit Banks, Federal Land Banks, Financing
Corporation, Federal Financing Bank, Federal National Mortgage Association
("FNMA"), Maritime Administration, Tennessee Valley Authority, Resolution
Funding Corporation, Student Loan Marketing Association and Washington
Metropolitan Area Transit Authority. Direct obligations of the U.S. Treasury
include a variety of securities that differ primarily in their interest rates,
maturities and dates of issuance. Because the U.S. Government is not obligated
by law to provide support to an instrumentality that it sponsors, the Fund will
not invest in obligations issued by an instrumentality of the U.S. Government
unless the Manager determines that the instrumentality's credit risk makes its
securities suitable for investment by the Fund.
Risk Factors/Special Considerations Relating to Debt Securities. To the extent
permitted by the Prospectuses, the Fund may invest in fixed income securities
rated below investment grade (commonly called "junk bonds"). The market value of
debt securities generally varies in response to changes in interest rates and
the financial condition of each issuer. During periods of declining interest
rates, the value of debt securities generally increases. Conversely, during
periods of rising interest rates, the value of such securities generally
declines. The net asset value of the Fund will reflect these changes in market
value.
Bonds rated C by Moody's are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing. Bonds rated C by S&P are obligations on which no
interest is being paid. Bonds rated below BBB or Baa are often referred to as
"junk bonds."
Although such bonds may offer higher yields than higher rated securities,
low-rated debt securities generally involve greater price volatility and risk of
principal and income loss, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low-rated debt securities are traded are more limited than those for higher
rated securities. The existence of limited markets for particular securities may
diminish the ability of the Fund to sell the securities at fair value either to
meet redemption requests or to respond to changes in the economy or financial
markets and could adversely affect, and cause fluctuations in, the per share net
asset value of the Fund.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low-rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low-rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the Fund to achieve its investment
objectives may, to the extent it invests in low-rated debt securities, be more
dependent upon such credit analysis than would be the case if the Fund invested
in higher rated debt securities.
Low-rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low-rated debt securities have been found to be less sensitive to
interest rate changes than higher rated debt securities but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a sharper decline in the prices of low-rated debt securities because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low-rated debt securities defaults, the Fund may incur additional expenses to
seek financial recovery.
B-3
<PAGE>
The low-rated bond market is relatively new, and many of the outstanding
low-rated bonds have not endured a major business downturn.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange-rate risks, the Fund may
enter into forward foreign currency exchange contracts ("forward currency
contracts") and foreign currency futures contracts, as well as purchase put or
call options on foreign currencies, as described below. The Fund also may
conduct its foreign currency exchange transactions on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market.
The Fund also may purchase other types of options and futures and may, in the
future, write covered options, as described below and in the Prospectuses.
Forward Currency Contracts. The Fund may enter into forward currency contracts
to attempt to minimize the risk from adverse changes in the relationship between
the U.S. dollar and foreign currencies. A forward currency contract, which is
individually negotiated and privately traded by currency traders and their
customers, involves an obligation to purchase or sell a specific currency for an
agreed upon price at a future date.
The Fund may enter into a forward currency contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or interest payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When the Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward currency contract to sell an amount of
that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency, or when the Fund believes
that the U.S. dollar may suffer a substantial decline against a foreign
currency, it may enter into a forward currency contract to buy that currency for
a fixed dollar amount.
In connection with the Fund's forward currency contract transactions, an amount
of the Fund's assets equal to the amount of its commitments will be held aside
or segregated to be used to pay for the commitments. Accordingly, the Fund
always will have cash, cash equivalents or liquid equity or debt securities
denominated in the appropriate currency available in an amount sufficient to
cover any commitments under these contracts. Segregated assets used to cover
forward currency contracts will be marked to market on a daily basis. While
these contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of the Fund to utilize forward currency contracts may be restricted. Forward
currency contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance by the Fund
than if it had not entered into such contracts. The Fund generally will not
enter into a forward foreign currency exchange contract with a term greater than
one year.
Futures Contracts and Options on Futures Contracts. To hedge against movements
in interest rates, securities prices or currency exchange rates, the Fund may
purchase and sell various kinds of futures contracts and options on futures
contracts. The Fund also may enter into closing purchase and sale transactions
with respect to any such contracts and options. Futures contracts may be based
on various securities (such as U.S. Government securities), securities indices,
foreign currencies and other financial instruments and indices.
The Fund has filed a notice of eligibility for exclusion from the definition of
the term "commodity pool operator" with the CFTC and the National Futures
Association, which regulate trading in the futures markets, before engaging in
any purchases or sales of futures contracts or options on futures contracts.
B-4
<PAGE>
Pursuant to Section 4.5 of the regulations under the Commodity Exchange Act, the
notice of eligibility included the representation that the Fund will use futures
contracts and related options for bona fide hedging purposes within the meaning
of CFTC regulations, provided that the Fund may hold positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions if the aggregate initial margin and premiums required
to establish such positions will not exceed 5% of the Fund's net assets (after
taking into account unrealized profits and unrealized losses on any such
positions) and that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded from such 5%.
The Fund will attempt to determine whether the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities held by the Fund or which it expects
to purchase. The Fund's futures transactions generally will be entered into only
for traditional hedging purposes -- i.e., futures contracts will be sold to
protect against a decline in the price of securities or currencies and will be
purchased to protect the Fund against an increase in the price of securities it
intends to purchase (or the currencies in which they are denominated). All
futures contracts entered into by the Fund are traded on U.S. exchanges or
boards of trade licensed and regulated by the CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting or "closing" purchase or sale
transactions, which may result in a profit or a loss. While the Fund's futures
contracts on securities or currencies will usually be liquidated in this manner,
the Fund may make or take delivery of the underlying securities or currencies
whenever it appears economically advantageous. A clearing corporation associated
with the exchange on which futures on securities or currencies are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
By using futures contracts to hedge its positions, the Fund seeks to establish
more certainty than would otherwise be possible with respect to the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that the Fund proposes to acquire. For example, when interest rates
are rising or securities prices are falling, the Fund can seek, through the sale
of futures contracts, to offset a decline in the value of its current portfolio
securities. When rates are falling or prices are rising, the Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market with respect to anticipated purchases.
Similarly, the Fund can sell futures contracts on a specified currency to
protect against a decline in the value of such currency and its portfolio
securities which are denominated in such currency. The Fund can purchase futures
contracts on a foreign currency to fix the price in U.S. dollars of a security
denominated in such currency that such Fund has acquired or expects to acquire.
As part of its hedging strategy, the Fund also may enter into other types of
financial futures contracts if, in the opinion of the Manager, there is a
sufficient degree of correlation between price trends for the Fund's portfolio
securities and such futures contracts. Although under some circumstances prices
of securities in the Fund's portfolio may be more or less volatile than prices
of such futures contracts, the Manager will attempt to estimate the extent of
this difference in volatility based on historical patterns and to compensate for
it by having that Fund enter into a greater or lesser number of futures
contracts or by attempting to achieve only a partial hedge against price changes
affecting that Fund's securities portfolio. When hedging of this character is
successful, any depreciation in the value of portfolio securities can be
substantially offset by appreciation in the value of the futures position.
However, any unanticipated appreciation in the value of the Fund's portfolio
securities could be offset substantially by a decline in the value of the
futures position.
B-5
<PAGE>
The acquisition of put and call options on futures contracts gives the Fund the
right (but not the obligation), for a specified price, to sell or purchase the
underlying futures contract at any time during the option period. Purchasing an
option on a futures contract gives the Fund the benefit of the futures position
if prices move in a favorable direction, and limits its risk of loss, in the
event of an unfavorable price movement, to the loss of the premium and
transaction costs.
The Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. The Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by the Fund is potentially
unlimited.
The Fund will engage in transactions in futures contracts and related options
only to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended, for maintaining their qualification
as a regulated investment company for federal income tax purposes.
Options on Securities, Securities Indices and Currencies. The Fund may purchase
put and call options on securities in which they have invested, on foreign
currencies represented in their portfolios and on any securities index based in
whole or in part on securities in which the Fund may invest. The Fund also may
enter into closing sales transactions in order to realize gains or minimize
losses on options they have purchased.
The Fund normally will purchase call options in anticipation of an increase in
the market value of securities of the type in which it may invest or a positive
change in the currency in which such securities are denominated. The purchase of
a call option would entitle the Fund, in return for the premium paid, to
purchase specified securities or a specified amount of a foreign currency at a
specified price during the option period.
The Fund may purchase and sell options traded on U.S. and foreign exchanges.
Although the Fund will generally purchase only those options for which there
appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. For some options, no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for a
variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although the Fund does not currently intend to do so, it may, in the future,
write (i.e., sell) covered put and call options on securities, securities
indices and currencies in which it may invest. A covered call option involves a
Fund's giving another party, in return for a premium, the right to buy specified
securities owned by the Fund at a specified future date and price set at the
time of the contract. A covered call option serves as a partial hedge against
the price decline of the underlying security.
B-6
<PAGE>
However, by writing a covered call option, the Fund gives up the opportunity,
while the option is in effect, to realize gain from any price increase (above
the option exercise price) in the underlying security. In addition, the Fund's
ability to sell the underlying security is limited while the option is in effect
unless the Fund effects a closing purchase transaction.
The Fund also may write covered put options that give the holder of the option
the right to sell the underlying security to the Fund at the stated exercise
price. The Fund will receive a premium for writing a put option but will be
obligated for as long as the option is outstanding to purchase the underlying
security at a price that may be higher than the market value of that security at
the time of exercise. In order to "cover" put options it has written, the Fund
will cause its custodian to segregate cash, cash equivalents, U.S. Government
securities or other liquid equity or debt securities with at least the value of
the exercise price of the put options. In segregating such assets, the custodian
either deposits such assets in a segregated account or separately identifies
such assets and renders them unavailable for investment. The Fund will not write
put options if the aggregate value of the obligations underlying the put options
exceeds 25% of the Fund's total assets.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and result in the institution by an
exchange of special procedures that may interfere with the timely execution of
the Fund's orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectuses, the Fund may enter into
repurchase agreements. The Fund's repurchase agreements generally will involve a
short-term investment in a U.S. Government security or other high-grade liquid
debt security, with the seller of the underlying security agreeing to repurchase
it from the Fund at a mutually agreed-upon time and price. The repurchase price
generally is higher than the purchase price, the difference being interest
income to the Fund. Alternatively, the purchase and repurchase prices may be the
same, with interest at a stated rate due to the Fund together with the
repurchase price on the date of repurchase. In either case, the income to the
Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to maintain the value of
the securities subject to the repurchase agreement at not less than their
repurchase price. The Manager, acting under the supervision of the Board of
Trustees (the "Board"), reviews on a periodic basis the suitability and
creditworthiness, and the value of the collateral, of those sellers with whom
the Fund enters into repurchase agreements to evaluate potential risk. All
repurchase agreements will be made pursuant to procedures adopted and regularly
reviewed by the Board.
The Fund generally will enter into repurchase agreements of short maturities,
from overnight to one week, although the underlying securities will generally
have longer maturities. The Fund regards repurchase agreements with maturities
in excess of seven days as illiquid. To the extent permitted by the
Prospectuses, the Fund may invest in illiquid securities, including repurchase
agreements with maturities greater than seven days.
For purposes of the Investment Company Act, a repurchase agreement is deemed to
be a collateralized loan from the Fund to the seller of the security subject to
the repurchase agreement. It is not clear whether a court would consider the
security acquired by the Fund subject to a repurchase agreement as being owned
by the Fund or as being collateral for a loan by the Fund to the seller. If
bankruptcy or insolvency proceedings are commenced with respect to the seller of
the security before its repurchase under a repurchase agreement, the Fund may
encounter delays and incur costs before being able to sell
B-7
<PAGE>
the security. Delays may involve loss of interest or a decline in price of the
security. If a court characterizes such a transaction as a loan and the Fund has
not perfected a security interest in the security, the Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, the Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for the Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, the Fund also runs
the risk that the seller may fail to repurchase the security. However, the Fund
always requires collateral for any repurchase agreement to which it is a party
in the form of securities acceptable to it, the market value of which is equal
to at least 100% of the amount invested by the Fund plus accrued interest, and
the Fund makes payment against such securities only upon physical delivery or
evidence of book entry transfer to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund, pursuant to its
repurchase agreement, may require the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement at all times equals or exceeds the repurchase price
(including interest) at all times.
The Fund may participate in one or more joint accounts with other funds of the
Trust that may invest in repurchase agreements collateralized either by (i)
obligations issued or guaranteed as to principal and interest by the U.S.
Government or by one of its agencies or instrumentalities, or (ii) privately
issued mortgage-related securities that are in turn collateralized by securities
issued by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using objective criteria. Any
such repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event will have a
duration of more than seven days.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements, as set forth in the Prospectuses. The Fund typically will invest the
proceeds of a reverse repurchase agreement in money market instruments or
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of proceeds involves leverage, and the Fund will
enter into a reverse repurchase agreement for leverage purposes only when the
Manager believes that the interest income to be earned from the investment of
the proceeds would be greater than the interest expense of the transaction. The
Fund also may use the proceeds of reverse repurchase agreements to provide
liquidity to meet redemption requests when sale of the Fund's securities is
disadvantageous.
The Fund causes its custodian to segregate liquid assets, such as cash, U.S.
Government securities or other liquid equity or debt securities equal in value
to its obligations (including accrued interest) with respect to reverse
repurchase agreements. In segregating such assets, the custodian either places
such securities in a segregated account or separately identifies such assets and
renders them unavailable for investment. Such assets are marked to market daily
to ensure that full collateralization is maintained.
Lending of Portfolio Securities. To the extent permitted in the Prospectuses,
the Fund may lend its portfolio securities in order to generate additional
income. Such loans may be made to broker-dealers or other financial institutions
whose creditworthiness is acceptable to the Manager. These loans would be
required to be secured continuously by collateral, including cash, cash
equivalents, irrevocable letters of credit, U.S. Government securities, or other
high-grade liquid debt securities, maintained on a current basis (i.e., marked
to market daily) at an amount at least equal to 100% of the market value of the
securities loaned plus accrued interest. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash to the
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borrower or placing broker. Loans are subject to termination at the option of
the Fund or the borrower at any time. Upon such termination, the Fund is
entitled to obtain the return of the securities loaned within five business
days.
For the duration of the loan, the Fund will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned, will
receive proceeds from the investment of the collateral and will continue to
retain any voting rights with respect to the securities. As with other
extensions of credit, there are risks of delay in recovery or even losses of
rights in the securities loaned should the borrower of the securities fail
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
When-Issued and Forward Commitment Securities. The Fund may purchase securities
on a "when-issued" basis and may purchase or sell securities on a "forward
commitment" or "delayed delivery" basis. The price of such securities is fixed
at the time the commitment to purchase or sell is made, but delivery and payment
for the securities take place at a later date. Normally, the settlement date
occurs within one month of the purchase; during the period between purchase and
settlement, no payment is made by the Fund to the issuer. While the Fund
reserves the right to sell when-issued or delayed delivery securities prior to
the settlement date, the Fund intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes a commitment to purchase a
security on a when-issued or delayed delivery basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The market value of the when-issued securities may be more or less than
the settlement price. The Fund does not believe that its net asset value will be
adversely affected by its purchase of securities on a when-issued or delayed
delivery basis. The Fund causes its custodian to segregate cash, U.S. Government
securities or other liquid equity or debt securities with a value equal in value
to commitments for when-issued or delayed delivery securities. The segregated
securities either will mature or, if necessary, be sold on or before the
settlement date. To the extent that assets of the Fund are held in cash pending
the settlement of a purchase of securities, the Fund will earn no income on
these assets.
Illiquid Securities. To the extent permitted by the Prospectuses, the Fund may
invest in illiquid securities. The term "illiquid securities" for this purpose
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which a Fund has valued the
securities and includes, among others, repurchase agreements maturing in more
than seven days, certain restricted securities and securities that are otherwise
not freely transferable. Illiquid securities also include shares of an
investment company held by the Fund in excess of 1% of the total outstanding
shares of that investment company. Restricted securities may be sold only in
privately negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act"). Illiquid securities acquired by the Fund may include those that
are subject to restrictions on transferability contained in the securities laws
of other countries. Securities that are freely marketable in the country where
they are principally traded, but that would not be freely marketable in the
United States, will not be considered illiquid. Where registration is required,
the Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial
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paper, foreign securities and corporate bonds and notes. These instruments often
are restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not seek to sell
these instruments to the general public, but instead will often depend either on
an efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities sold
pursuant to Rule 144A in many cases provide both readily ascertainable values
for restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. Such markets might include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified buyers
interested in purchasing Rule 144A-eligible restricted securities held by the
Fund, however, could affect adversely the marketability of such portfolio
securities, and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
The Board has delegated the function of making day-to-day determinations of
liquidity to the Manager pursuant to guidelines approved by the Board. The
Manager takes into account a number of factors in reaching liquidity decisions,
including but not limited to (i) the frequency of trades for the security, (ii)
the number of dealers that quote prices for the security, (iii) the number of
dealers that have undertaken to make a market in the security, (iv) the number
of other potential purchasers, and (v) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how bids are
solicited and the mechanics of transfer). The Manager monitors the liquidity of
restricted securities in the Fund's portfolio and reports periodically on such
positions to the Board.
Risk Factors
Foreign Securities. Investors in the Fund should consider carefully the
substantial risks involved in securities of companies located or doing business
in, and governments of, foreign nations, which are in addition to the usual
risks inherent in domestic investments. There may be less publicly available
information about foreign companies comparable to the reports and ratings
published regarding companies in the United States. Foreign companies are often
not subject to uniform accounting, auditing and financial reporting standards,
and auditing practices and requirements often may not be comparable to those
applicable to U.S. companies. Many foreign markets have substantially less
volume than either the established domestic securities exchanges or the OTC
markets. Securities of some foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Commission rates in foreign
countries, which may be fixed rather than subject to negotiation as in the U.S.,
are likely to be higher. In many foreign countries there is less government
supervision and regulation of securities exchanges, brokers and listed companies
than in the U.S., and capital requirements for brokerage firms are generally
lower. Settlement of transactions in foreign securities may, in some instances,
be subject to delays and related administrative uncertainties.
Exchange Rates and Polices. The Fund endeavors to buy and sell foreign
currencies on favorable terms. Some price spreads on currency exchange (to cover
service charges) may be incurred, particularly when the Fund changes investments
from one country to another or when proceeds from the sale of shares in U.S.
dollars are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from repatriating
invested capital and dividends, withhold
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portions of interest and dividends at the source, or impose other taxes, with
respect to the Fund's investments in securities of issuers of that country.
There also is the possibility of expropriation, nationalization, confiscatory or
other taxation, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could adversely affect investments in securities of issuers in
those nations.
The Fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, exchange
control regulations and indigenous economic and political developments.
The Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions that would affect the
liquidity of the Fund's assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The Board also considers the degree of risk
attendant to holding portfolio securities in domestic and foreign securities
depositories (see "Investment Management and Other Services").
Hedging Transactions. While transactions in forward currency contracts, options,
futures contracts and options on futures (i.e., "hedging positions") may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while the Fund may benefit from the use of hedging positions, unanticipated
changes in interest rates, securities prices or currency exchange rates may
result in a poorer overall performance for the Fund than if it had not entered
into any hedging positions. If the correlation between a hedging position and
portfolio position which is intended to be protected is imperfect, the desired
protection may not be obtained, and the Fund may be exposed to risk of financial
loss.
Perfect correlation between the Fund's hedging positions and portfolio positions
may be difficult to achieve because hedging instruments in many foreign
countries are not yet available. In addition, it is not possible to hedge fully
against currency fluctuations affecting the value of securities denominated in
foreign currencies because the value of such securities is likely to fluctuate
as a result of independent factors not related to currency fluctuations.
Investment Restrictions
The following policies and investment restrictions have been adopted by the Fund
and (unless otherwise noted) are fundamental and cannot be changed without the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the Investment Company Act. The Fund may not:
1. With respect to 75% of its total assets, invest in the securities of
any one issuer (other than the U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of such
investment more than 5% of the total assets of the Fund would be
invested in such issuer. There are no limitations with respect to the
remaining 25% of its total assets, except to the extent other
investment restrictions may be applicable.
2. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and policies,
(b) through the lending of up to 30% of its portfolio securities as
described above and in the Prospectuses, or (c) to the extent the entry
into a repurchase agreement is deemed to be a loan.
3. (a) Borrow money, except for temporary or emergency purposes from
a bank, or pursuant to reverse repurchase agreements, and then
not in excess of one-third of the value of its total assets
(including the proceeds of such borrowings, at the lower of
cost or fair market
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value). Any such borrowing will be made only if immediately
thereafter there is an asset coverage of at least 300% of all
borrowings, and no additional investments may be made while
any such borrowings are in excess of 10% of total assets.
Transactions that are fully collateralized in a manner that
does not involve the prohibited issuance of a "senior
security" within the meaning of Section 18(f) of the
Investment Company Act shall not be regarded as borrowings for
the purposes of this restriction.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with permissible borrowings and permissible forward
currency contracts, futures contracts, option contracts or
other hedging transactions.
4. Except as required in connection with permissible hedging activities,
purchase securities on margin or underwrite securities. (This does not
preclude the Fund from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio
securities.)
5. Buy or sell real estate (including interests in real estate limited
partnerships or issuers that qualify as real estate investment trusts
under federal income tax law) or commodities or commodity contracts;
however, the Fund, to the extent not otherwise prohibited in the
Prospectuses or this Statement of Additional Information, may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein, including
real estate investment trusts, and may purchase or sell currencies
(including forward currency exchange contracts), futures contracts and
related options generally as described in the Prospectuses and
Statement of Additional Information. As an operating policy which may
be changed without shareholder approval, the Fund may invest in real
estate investment trusts only up to 10% of its total assets.
6. Invest in securities of other investment companies, except to the
extent permitted by the Investment Company Act and discussed in the
Prospectuses or this Statement of Additional Information, or as such
securities may be acquired as part of a merger, consolidation or
acquisition of assets.
7. Invest, in the aggregate, more than 15% of its net assets in illiquid
securities, including (under current SEC interpretations) restricted
securities (excluding liquid Rule 144A-eligible restricted securities),
securities which are not otherwise readily marketable, repurchase
agreements that mature in more than seven days and over-the-counter
options (and securities underlying such options) purchased by the Fund.
(This is an operating policy which may be changed without shareholder
approval consistent with the Investment Company Act and changes in
relevant SEC interpretations.)
8. Invest in any issuer for purposes of exercising control or management
of the issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company
Act.)
9. Invest more than 25% of the market value of its total assets in the
securities of companies engaged in any one industry. (This does not
apply to investment in the securities of the U.S. Government, its
agencies or instrumentalities.) For purposes of this restriction, the
Fund generally relies on the U.S. Office of Management and Budget's
Standard Industrial Classifications.
10. Issue senior securities, as defined in the Investment Company Act,
except that this restriction shall not be deemed to prohibit the Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into permissible repurchase transactions.
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11. Except as described in the Prospectuses and this Statement of
Additional Information, acquire or dispose of put, call, straddle or
spread options and subject to the following conditions:
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options which are held
at any time do not exceed 5% of the Fund's total assets.
12. Except as and unless described in the Prospectuses and this Statement
of Additional Information, engage in short sales of securities. (This
is an operating policy which may be changed without shareholder
approval, consistent with applicable regulations.)
13. Invest in warrants, valued at the lower of cost or market, in excess of
5% of the value of the Fund's net assets. Warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
(This is an operating policy which may be changed without shareholder
approval.)
14. Purchase more than 10% of the outstanding voting securities of any one
issuer. (This is an operating policy which may be changed without
shareholder approval.)
15. Invest in commodities, except for futures contracts or options on
futures contracts if, as a result thereof, more than 5% of the Fund's
total assets (taken at market value at the time of entering into the
contract) would be committed to initial deposits and premiums on open
futures contracts and options on such contracts.
To the extent these restrictions reflect matters of operating policy which may
be changed without shareholder vote, these restrictions may be amended upon
approval by the Board and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
Distributions and Tax Information
Distributions. The Fund will receive income in the form of dividends and
interest earned on its investments in securities. This income, less the expenses
incurred in its operations, is the Fund's net investment income, substantially
all of which will be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon the amount
of net investment income received by the Fund from its portfolio holdings, is
not guaranteed and is subject to the discretion of the Fund's Board. The Fund
does not pay "interest" or guarantee any fixed rate of return on an investment
in its shares.
The Fund also may derive capital gains or losses in connection with sales or
other dispositions of its portfolio securities. Any net gain the Fund may
realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from previous years), while a distribution from capital gains,
will be distributed to shareholders with and as a part of income dividends. If
during any year the Fund realizes a net gain on transactions involving
investments held more than the period required for long-term capital gain or
loss recognition or otherwise producing long-term capital gains and losses, the
Fund will have a net long-term capital gain. After deduction of the amount of
any net short-term capital loss, the balance (to the extent not offset by any
capital losses
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carried over from previous years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held.
Any dividend or distribution paid by the Fund reduces the Fund's net asset value
per share on the date paid by the amount of the dividend or distribution per
share. Accordingly, a dividend or distribution paid shortly after a purchase of
shares by a shareholder would represent, in substance, a partial return of
capital (to the extent it is paid on the shares so purchased), even though it
would be subject to income taxes.
Dividends and other distributions will be made in the form of additional shares
of the Fund unless the shareholder has otherwise indicated. Investors have the
right to change their election with respect to the reinvestment of dividends and
distributions by notifying the Transfer Agent in writing, but any such change
will be effective only as to dividends and other distributions for which the
record date is seven or more business days after the Transfer Agent has received
the written request.
Tax Information. The Fund intends to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for each taxable year by complying with all
applicable requirements regarding the source of its income, the diversification
of its assets, and the timing of its distributions. The Fund's policy is to
distribute to its shareholders all of its investment company taxable income and
any net realized capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Code, so that the Fund will not be
subject to any federal income or excise taxes based on net income. However, the
Board may elect to pay such excise taxes if it determines that payment is, under
the circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must, among
other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward currency contracts)
derived with respect to the business of investing in stock, securities or
currency, and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the market value of its assets is represented by
cash, cash items, U.S. Government securities, securities of other regulated
investment companies and other securities limited, for purposes of this
calculation, in the case of other securities of any one issuer to an amount not
greater than 5% of the Fund's assets or 10% of the voting securities of the
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, the Fund will not be subject to
federal income tax on taxable income (including realized capital gains) that is
distributed to shareholders in accordance with the timing requirements of the
Code. If the Fund is unable to meet certain requirements of the Code, it may be
subject to taxation as a corporation.
Distributions of net investment income and net realized capital gains by the
Fund will be taxable to shareholders whether made in cash or reinvested by the
Fund in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from prior years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Fund or the securities dealer effecting a redemption of the Fund's shares by
a shareholder will be required to file information reports with the Internal
Revenue Service ("IRS") with respect to
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distributions and payments made to the shareholder. In addition, the Fund will
be required to withhold federal income tax at the rate of 31% on taxable
dividends, redemptions and other payments made to accounts of individual or
other non-exempt shareholders who have not furnished their correct taxpayer
identification numbers and certain required certifications on the Account
Application Form or with respect to which the Fund or the securities dealer has
been notified by the IRS that the number furnished is incorrect or that the
account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions, as stated
in the Prospectuses. In order to avoid the payment of any federal excise tax
based on net income, the Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following year, distributions at
least equal to 98% of its ordinary income for that calendar year and at least
98% of the excess of any capital gains over any capital losses realized in the
one-year period ending October 31 of that year, together with any undistributed
amounts of ordinary income and capital gains (in excess of capital losses) from
the previous calendar year.
The Fund may receive dividend distributions from U.S. corporations. To the
extent that the Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
If more than 50% in value of the total assets of the Fund at the end of its
fiscal year is invested in stock or securities of foreign corporations, the Fund
may elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by the Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata share of the Fund's
foreign source income (including any foreign income taxes paid by the Fund), and
(ii) entitled either to deduct their share of such foreign taxes in computing
their taxable income or to claim a credit for such taxes against their U.S.
income tax, subject to certain limitations under the Code. In this case,
shareholders will be informed by the Fund at the end of each calendar year
regarding the availability of any credits on and the amount of foreign source
income (including or excluding foreign income taxes paid by the Fund) to be
included in their income tax returns. If not more than 50% in value of the
Fund's total assets at the end of its fiscal year is invested in stock or
securities of foreign corporations, the Fund will not be entitled under the Code
to pass through to its shareholders their pro rata share of the foreign taxes
paid by the Fund. In this case, these taxes will be taken as a deduction by the
Fund.
The Fund may be subject to foreign withholding taxes on dividends and interest
earned with respect to securities of foreign corporations. The Fund may invest
up to 10% of its total assets in the stock of foreign investment companies that
may be treated as "passive foreign investment companies" ("PFICs") under the
Code. Certain other foreign corporations, not operated as investment companies,
may nevertheless satisfy the PFIC definition. A portion of the income and gains
that the Fund derives from PFIC stock may be subject to a non-deductible federal
income tax at the Fund level. In some cases, the Fund may be able to avoid this
tax by electing to be taxed currently on its share of the PFIC's income, whether
or not such income is actually distributed by the PFIC. The Fund will endeavor
to limit its exposure to the PFIC tax by investing in PFICs only where the
election to be taxed currently will be made. Because it is not always possible
to identify a foreign issuer as a PFIC in advance of making the investment, the
Fund may incur the PFIC tax in some instances.
Hedging. The use of hedging strategies, such as entering into futures contracts
and forward currency contracts and purchasing options, involves complex rules
that will determine the character and timing of recognition of the income
received in connection therewith by the Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward currency
contracts derived by the Fund with
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respect to its business of investing in securities or foreign currencies will
qualify as permissible income under Subchapter M of the Code.
For accounting purposes, when the Fund purchases an option, the premium paid by
the Fund is recorded as an asset and is subsequently adjusted to the current
market value of the option. Any gain or loss realized by the Fund upon the
expiration or sale of such options held by the Fund generally will be capital
gain or loss.
Any security, option, or other position entered into or held by the Fund that
substantially diminishes the Fund's risk of loss from any other position held by
the Fund may constitute a "straddle" for federal income tax purposes. In
general, straddles are subject to certain rules that may affect the amount,
character and timing of the Fund's gains and losses with respect to straddle
positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward currency contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to certain foreign
currency transactions that may affect the amount, timing and character of
income, gain or loss recognized by the Fund. Under these rules, foreign exchange
gain or loss realized with respect to foreign currency-denominated debt
instruments, forward currency contracts, foreign currency denominated payables
and receivables and foreign currency options and futures contracts (other than
options and futures contracts that are governed by the mark-to-market and 60/40
rules of Section 1256 of the Code and for which no election is made) is treated
as ordinary income or loss. Some part of the Fund's gain or loss on the sale or
other disposition of shares of a foreign corporation may, because of changes in
foreign currency exchange rates, be treated as ordinary income or loss under
Section 988 of the Code rather than as capital gain or loss.
Redemptions and exchanges of shares of the Fund will result in gains or losses
for tax purposes to the extent of the difference between the proceeds and the
shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends during such six-month period. All or a portion
of a loss realized upon the redemption of shares may be disallowed to the extent
shares are purchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
Distributions and redemptions may be subject to state and local income taxes,
and the treatment thereof may differ from the federal income tax treatment.
Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectuses are not
intended to be complete discussions of all applicable federal tax consequences
of an investment in the Fund. The law firm of Paul, Hastings, Janofsky & Walker
LLP has expressed no opinion in respect thereof. Nonresident aliens and foreign
persons are subject to different tax rules, and may be subject to withholding of
up to 30% on
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certain payments received from the Fund. Shareholders are advised to consult
with their own tax advisers concerning the application of foreign, federal,
state and local taxes to an investment in the Fund.
Trustees and Officers
The Trustees of the Trust are responsible for the overall management of each
Fund, including general supervision and review of its investment activities. The
officers (the Trust, as well as two an affiliated Trusts, The Montgomery Funds
and The Montgomery Funds III, have the same officers), who administer each
Fund's daily operations, are appointed by the Boards of Trustees. The current
Trustees and officers of the Trusts performing a policy-making function and
their affiliations and principal occupations for the past five years are set
forth below:
George A. Rio, President and Treasurer (Age 43)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Rio is Executive
Vice President and Client Service Director of Funds Distributor, Inc. (since
April 1998). From June 1995 to March 1998, he was Senior Vice President, Senior
Key Account Manager for Putnam Mutual Funds. From May 1994 to June 1995, he was
Director of business development for First Data Corporation. From September 1993
to May 1994, he was Senior Vice President and Manager of Client Services; and
Director of Internal Audit at the Boston Company.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (Age 31)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered by Morgan, Waterhouse, RCM and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a Senior Paralegal at The Boston Company Advisers, Inc.
("TBCA").
Margaret W. Chambers, Secretary (Age 38)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Chambers is Senior
Vice President and General Counsel of Funds Distributor Inc. (since April 1998).
From August 1996 to March 1998, Ms. Chambers was Vice President and Assistant
General Counsel for Loomis, Sayles & Company, L.P. from January 1986 to July
1996, she was an associate with the law firm of Ropes & Gray.
Christopher J. Kelley, Vice President and Assistant Secretary (Age 33)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in Legal and Compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
Mary A. Nelson, Vice President and Assistant Treasurer (Age 34)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
B-17
<PAGE>
Gary S. MacDonald, Vice President and Assistant Treasurer (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of Bay. Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
Marie E. Connolly, Vice President and Assistant Treasurer (Age 40)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (Age 29)
60 State Street, Suite 130, Boston, Massachusetts 02109. Mr. Conroy is the
Assistant Vice President and Manager of Treasury Services and Administration of
FDI and an officer of certain investment companies advised or administered by
Morgan and Dreyfus or their respective affiliates. Prior to April 1997, Mr.
Conroy was Supervisor of Treasury Services and Administration of FDI. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank
& Trust Company. From December 1991 to March 1993, Mr. Conroy was employed as a
Fund Accountant at The Boston Company, Inc.
Joseph F. Tower, III, Vice President and Assistant Treasurer (Age 36)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of FDI. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company, Inc.
John A. Farnsworth, Trustee (Age 56)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner of Pearson, Caldwell & Farnsworth, Inc., an executive
search consulting firm. From May 1988 to September 1991, Mr. Farnsworth was the
Managing Partner of the San Francisco office of Ward Howell International, Inc.,
and executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
Andrew Cox, Trustee (Age 54)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr. Cox has been
engaged as an independent investment consultant. From September 1976 until June
1988, Mr. Cox was a Vice President of the Founders Group of Mutual Funds,
Denver, Colorado, and Portfolio Manager or Co-Portfolio Manager of several of
the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (Age 49)
B-18
<PAGE>
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was Managing
Director of Morgan Guaranty Trust Company. From 1983 to 1991 she was General
Manager of the bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a member of the Board
of Schools of the Sacred Heart, and is a member of the Archdiocese of San
Francisco Finance Council, where she chairs the Investment Committee.
R. Stephen Doyle, Chairman of the Board of Trustees (Age 58).*
101 California Street, San Francisco, California 94111. Mr. Doyle has been the
Chairman and a Director of Montgomery Asset Management, Inc., the general
partner of the Manager, and Chairman of the Manager since April 1990. Mr. Doyle
is a managing director of the investment banking firm of Montgomery Securities,
the Fund's former Distributor, and has been employed by Montgomery Securities
since October 1983.
<TABLE>
The officers of the Trust, and the Trustees who are considered "interested
persons" of the Trust, receive no compensation directly from the Trust for
performing the duties of their offices. However, those officers and Trustees who
are officers or partners of the may receive remuneration indirectly because the
Manager will receive a management fee from the Funds and Funds Distributor,
Inc., will receive commissions for executing portfolio transactions for the
Funds. The Trustees who are not affiliated with the Manager or the Distributor
receive an annual retainer and fees and expenses for each regular Board meeting
attended. The aggregate compensation paid by the Trust to each of the Trustees
during the fiscal year ended June 30, 1998, and the aggregate compensation paid
to each of the Trustees during the fiscal year ended June 30, 1998 by all of the
registered investment companies to which the Manager provides investment
advisory services, are set forth below.
<CAPTION>
- -------------------------------- ------------------------------ ------------------------------ -----------------------------
Name of Trustee Aggregate Compensation from Pension or Retirement Total Compensation From the
the Trust Benefits Accrued as Part of Trust and Fund Complex (2
Fund Expenses* additional Trusts)
- -------------------------------- ------------------------------ ------------------------------ -----------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
- -------------------------------- ------------------------------ ------------------------------ -----------------------------
John A. Farnsworth $25,000 -- $35,000
- -------------------------------- ------------------------------ ------------------------------ -----------------------------
Andrew Cox $25,000 -- $35,000
- -------------------------------- ------------------------------ ------------------------------ -----------------------------
Cecilia H. Herbert $25,000 -- $35,000
- -------------------------------- ------------------------------ ------------------------------ -----------------------------
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
Each of the above persons serves in the same capacity for The Montgomery Funds
II and The Montgomery Funds III, investment companies registered under the
Investment Company Act, with separate series of funds managed by the Manager.
Investment Management and Other Services
Investment Management Services. As stated in the Prospectuses, investment
management services are provided to the Fund by Montgomery Asset Management,
LLC, the Manager, pursuant to an Investment Management Agreement dated
[____________________] (the "Agreement"). The Agreement is in effect with
respect to the Fund for two years after the Fund's inclusion in the Trust's
Agreement (on or around the beginning of public operations) and shall continue
in effect thereafter for periods not
- -------------------------------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-19
<PAGE>
exceeding one year so long as such continuation is approved at least annually by
(i) the Board or the vote of a majority of the outstanding shares of the Fund,
and (ii) a majority of the Trustees who are not interested persons of any party
to the Agreement, in each case by a vote cast in person at a meeting called for
the purpose of voting on such approval. The Agreement may be terminated at any
time, without penalty, by the Fund or the Manager upon 60 days' written notice,
and is automatically terminated in the event of its assignment as defined in the
Investment Company Act.
For services performed under the Agreement, the Fund pays the Manager a monthly
management fee (accrued daily but paid when requested by the Manager) based upon
the average daily net assets of the Fund, at the annual rate of one and one-half
of one percent (1.50%) of the first $250 million in average daily net assets and
one and twenty-five one-hundredthds of one percent (1.25%) of average daily
assets over $250 million.
As noted in the Prospectuses, the Manager has agreed to reduce some or all of
its management fee if necessary to keep total operating expenses (excluding any
Rule 12b-1 fees), expressed on an annualized basis, at or below two percent
(2.00%) of the Fund's average net assets. The Manager also may voluntarily
reduce additional amounts to increase the return to the Fund's investors. Any
reductions made by the Manager in its fees are subject to reimbursement by the
Fund within the following three years provided the Fund is able to effect such
reimbursement and remain in compliance with the foregoing expense limitation.
The Manager generally seeks reimbursement for the oldest reductions and waivers
before payment by the Fund for fees and expenses for the current year.
Operating expenses for purposes of the Agreement include the Manager's
management fee but do not include any taxes, interest, brokerage commissions, if
any, expenses incurred in connection with any merger or reorganization, any
extraordinary expenses such as litigation, and such other expenses as may be
deemed excludable with the prior written approval of any state securities
commission imposing an expense limitation. The Manager may also at its
discretion from time to time pay for other Fund expenses from its own funds or
reduce the management fee of the Fund in excess of that required.
The Agreement was approved with respect to the Fund by the Board at a duly
called meeting. In considering the Agreement, the Trustees specifically
considered and approved the provision which permits the Manager to seek
reimbursement of any reduction made to its management fee within the three-year
period following such reduction subject to the Fund's ability to effect such
reimbursement and remain in compliance with applicable expense limitations. The
Trustees also considered that any such management fee reimbursement will be
accounted for on the financial statements of the Fund as a contingent liability
of the Fund and will appear as a footnote to the Fund's financial statements
until such time as it appears that the Fund will be able to effect such
reimbursement. At such time as it appears probable that the Fund is able to
effect such reimbursement, the amount of reimbursement that the Fund is able to
effect will be accrued as an expense of the Fund for that current period.
The Manager also may act as an investment adviser or administrator to other
persons, entities, and corporations, including other investment companies.
Please refer to the table above, which indicates officers and trustees who are
affiliated persons of the Trust and who are also affiliated persons of the
Manager.
The use of the name "Montgomery" by the Trust and by the Fund is pursuant to the
consent of the Manager, which may be withdrawn if the Manager ceases to be the
Manager of the Fund.
Share Marketing Plan. The Trust has adopted a Share Marketing Plan (or Rule
12b-1 Plan) (the "12b-1 Plan") with respect to the Fund pursuant to Rule 12b-1
under the Investment Company Act. The Manager serves as the distribution
coordinator under the 12b-1 Plan and, as such, receives any fees paid by the
Fund pursuant to the 12b-1 Plan.
B-20
<PAGE>
The Board, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the 12b-1 Plan or in any agreement related to the 12b-1 Plan (the
"Independent Trustees"), at their regular quarterly meeting, adopted the 12b-1
Plan for the Class P and Class L shares of the Fund. The initial shareholder of
the Class P and Class L shares of the Fund approved the 12b-1 Plan covering each
Class prior to offering those Classes to the public. Class R shares are not
covered by the 12b-1 Plan.
Under the 12b-1 Plan, the Fund pays distribution fees to the Manager at an
annual rate of 0.25% of the Fund's aggregate average daily net assets
attributable to its Class P shares and at an annual rate of 0.75% of the Fund's
aggregate average daily net assets attributable to its Class L shares,
respectively, to reimburse the Manager for its expenses in connection with the
promotion and distribution of those Classes.
The 12b-1 Plan provides that the Manager may use the distribution fees received
from the Class of the Fund covered by the 12b-1 Plan only to pay for the
distribution expenses of that Class. Distribution fees are accrued daily and
paid monthly, and are charged as expenses of the Class P and Class L shares as
accrued.
Class P and Class L shares are not obligated under the 12b-1 Plan to pay any
distribution expense in excess of the distribution fee. Thus, if the 12b-1 Plan
were terminated or otherwise not continued, no amounts (other than current
amounts accrued but not yet paid) would be owed by the Class to the Manager.
The 12b-1 Plan provides that it shall continue in effect from year to year
provided that a majority of the Board, including a majority of the Independent
Trustees, vote annually to continue the 12b-1 Plan. The 12b-1 Plan (and any
distribution agreement between the Fund, the Distributor or the Manager and a
selling agent with respect to the Class P or Class L shares) may be terminated
without penalty upon at least 60-days' notice by the Distributor or the Manager,
or by the Fund by vote of a majority of the Independent Trustees, or by vote of
a majority of the outstanding shares (as defined in the Investment Company Act)
of the Class to which the 12b-1 Plan applies.
All distribution fees paid by the Fund under the 12b-1 Plan will be paid in
accordance with Rule 2830 of the NASD Rules of Conduct, as such Rule may change
from time to time. Pursuant to the 12b-1 Plan, the Board will review at least
quarterly a written report of the distribution expenses incurred by the Manager
on behalf of the Class P and Class L shares of the Fund. In addition, as long as
the 12b-1 Plan remains in effect, the selection and nomination of Trustees who
are not interested persons (as defined in the Investment Company Act) of the
Trust shall be made by the Trustees then in office who are not interested
persons of the Trust.
Shareholder Services Plan. The Trust has adopted a Shareholder Services Plan
(the "Services Plan") with respect to the Fund. The Manager (or its affiliate)
serves as the service provider under the Services Plan and, as such, receives
any fees paid by the Fund pursuant to the Services Plan. The Trust has not yet
implemented the Services Plan for the Fund and has not set a date for
implementation. Affected shareholders will be notified at least 60 days before
implementation of the Services Plan.
The Board, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the Services Plan or in any agreement related to the Services Plan
(the "Independent Trustees"), at their regular quarterly meeting, adopted the
Services Plan for the Class P and Class L shares of the Fund. The initial
shareholder of the Class P and Class L shares of the Fund approved the Services
Plan covering each Class prior to offering those Classes to the public. Class R
shares are not covered by the Services Plan.
B-21
<PAGE>
Under the Services Plan, when implemented, Class P and Class L of the Fund will
pay a continuing service fee to the Manager, the Distributor or other service
providers, in an amount, computed and prorated on a daily basis, equal to 0.25%
per annum of the average daily net assets of Class P and Class L shares of the
Fund. Such amounts are compensation for providing certain services to clients
owning shares of Class P or Class L of the Fund, including personal services
such as processing purchase and redemption transactions, assisting in change of
address requests and similar administrative details, and providing other
information and assistance with respect to the Fund, including responding to
shareholder inquiries.
The Distributor. The Distributor may provide certain administrative services to
the Fund on behalf of the Manager. The Distributor will also perform investment
banking, investment advisory and brokerage services for persons other than the
Fund, including issuers of securities in which the Fund may invest. These
activities from time to time may result in a conflict of interests of the
Distributor with those of the Fund, and may restrict the ability of the
Distributor to provide services to the Fund.
The Custodian. Morgan Stanley Trust Company serves as principal Custodian of the
Fund's assets, which are maintained at the Custodian's principal office and at
the offices of its branches and agencies throughout the world. The Custodian has
entered into agreements with foreign sub-custodians approved by the Trustees
pursuant to Rule 17f-5 under the Investment Company Act. The Custodian, its
branches and sub-custodians generally hold certificates for the securities in
their custody, but may, in certain cases, have book records with domestic and
foreign securities depositories, which in turn have book records with the
transfer agents of the issuers of the securities. Compensation for the services
of the Custodian is based on a schedule of charges agreed on from time to time.
Execution of Portfolio Transactions
In all purchases and sales of securities for the Fund, the primary consideration
is to obtain the most favorable price and execution available. Pursuant to the
Agreement, the Manager determines which securities are to be purchased and sold
by the Fund and which broker-dealers are eligible to execute the Fund's
portfolio transactions, subject to the instructions of, and review by, the Fund
and the Board. Purchases and sales of securities within the U.S. other than on a
securities exchange will generally be executed directly with a "market-maker"
unless, in the opinion of the Manager or the Fund, a better price and execution
can otherwise be obtained by using a broker for the transaction.
The Fund contemplates purchasing most equity securities directly in the
securities markets located in emerging or developing countries or in the
over-the-counter markets. A Fund purchasing ADRs and EDRs may purchase those
listed on stock exchanges, or traded in the over-the-counter markets in the U.S.
or Europe, as the case may be. ADRs, like other securities traded in the U.S.,
will be subject to negotiated commission rates. The foreign and domestic debt
securities and money market instruments in which the Fund may invest may be
traded in the over-the-counter markets.
Purchases of portfolio securities for the Fund also may be made directly from
issuers or from underwriters. Where possible, purchase and sale transactions
will be effected through dealers (including banks) which specialize in the types
of securities which the Fund will be holding, unless better executions are
available elsewhere. Dealers and underwriters usually act as principals for
their own account. Purchases from underwriters will include a concession paid by
the issuer to the underwriter and purchases from dealers will include the spread
between the bid and the asked price. If the execution and price offered by more
than one dealer or underwriter are comparable, the order may be allocated to a
dealer or underwriter that has provided research or other services as discussed
below.
B-22
<PAGE>
In placing portfolio transactions, the Manager will use its best efforts to
choose a broker-dealer capable of providing the services necessary generally to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the firm's ability to execute trades in a specific market required by
the Fund, such as in an emerging market, the size of the order, the difficulty
of execution, the operational facilities of the firm involved, the firm's risk
in positioning a block of securities, and other factors.
Provided the Trust's officers are satisfied that the Fund is receiving the most
favorable price and execution available, the Manager may also consider the sale
of the Fund's shares as a factor in the selection of broker-dealers to execute
its portfolio transactions. The placement of portfolio transactions with
broker-dealers who sell shares of the Fund is subject to rules adopted by the
National Association of Securities Dealers, Inc. ("NASD").
While the Fund's general policy is to seek first to obtain the most favorable
price and execution available, in selecting a broker-dealer to execute portfolio
transactions, weight may also be given to the ability of a broker-dealer to
furnish brokerage, research and statistical services to the Fund or to the
Manager, even if the specific services were not imputed just to the Fund and may
be lawfully and appropriately used by the Manager in advising other clients. The
Manager considers such information, which is in addition to, and not in lieu of,
the services required to be performed by it under the Agreement, to be useful in
varying degrees, but of indeterminable value. In negotiating any commissions
with a broker or evaluating the spread to be paid to a dealer, the Fund may
therefore pay a higher commission or spread than would be the case if no weight
were given to the furnishing of these supplemental services, provided that the
amount of such commission or spread has been determined in good faith by the
Fund and the Manager to be reasonable in relation to the value of the brokerage
and/or research services provided by such broker-dealer, which services either
produce a direct benefit to the Fund or assist the Manager in carrying out its
responsibilities to the Fund. The standard of reasonableness is to be measured
in light of the Manager's overall responsibilities to the Fund.
Investment decisions for the Funds are made independently from those of other
client accounts of the Manager or its affiliates, and suitability is always a
paramount consideration. Nevertheless, it is possible that at times the same
securities will be acceptable for the Fund and for one or more of such client
accounts. The Manager and its personnel may have interests in one or more of
those client accounts, either through direct investment or because of management
fees based on gains in the account. The Manager has adopted allocation
procedures to ensure the fair allocation of securities and prices between the
Fund and the Manager's various other accounts. These procedures emphasize the
desirability of bunching trades and price averaging (see below) to achieve
objective fairness among clients advised by the same portfolio manager or
portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use allocation methodologies that are appropriate to their investment discipline
on client accounts.
To the extent any of the Manager's client accounts and the Fund seek to acquire
the same security at the same general time (especially if the security is thinly
traded or is a small cap stock), the Fund may not be able to acquire as large a
portion of such security as it desires, or it may have to pay a higher price or
obtain a lower yield for such security. Similarly, the Fund may not be able to
obtain as high a price for, or as large an execution of, an order to sell any
particular security at the same time. If one or more of such client accounts
simultaneously purchases or sells the same security that the Fund is purchasing
or selling, each day's transactions in such security generally will be allocated
between the Fund and all such client accounts in a manner deemed equitable by
the Manager, taking into account the respective
B-23
<PAGE>
sizes of the accounts, the amount being purchased or sold and other factors
deemed relevant by the Manager. In many cases, the Fund's transactions are
bunched with the transactions for other client accounts. It is recognized that
in some cases this system could have a detrimental effect on the price or value
of the security insofar as the Fund is concerned. In other cases, however, it is
believed that the ability of the Fund to participate in volume transactions may
produce better executions for the Fund.
The Manager's sell discipline for the Fund's investment in issuers is based on
the premise of a long-term investment horizon; however, sudden changes in
valuation levels arising from, for example, new macroeconomic policies,
political developments, and industry conditions could change the assumed time
horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by the Manager in determining the appropriate investment horizon.
Sell decisions at the country level are dependent on the results of the
Manager's asset allocation model. Some countries impose restrictions on
repatriation of capital and/or dividends which would lengthen the Manager's
assumed time horizon in those countries. In addition, the rapid pace of
privatization and initial public offerings creates a flood of new opportunities
which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of factors
including current stock valuation relative to the estimated fair value range, or
a high P/E relative to expected growth. Negative changes in the relevant
industry sector, or a reduction in international competitiveness and a declining
financial flexibility may also signal a sell.
The Fund does not effect securities transactions through brokers in accordance
with any formula, nor does it effect securities transactions through such
brokers solely for selling shares of the Fund. However, as stated above,
Montgomery Securities may act as one of the Fund's brokers in the purchase and
sale of portfolio securities, and other brokers who execute brokerage
transactions as described above may from time to time effect purchases of shares
of the Fund for their customers.
Depending on the Manager's view of market conditions, the Fund may or may not
purchase securities with the expectation of holding them to maturity, although
its general policy is to hold securities to maturity. The Fund may, however,
sell securities prior to maturity to meet redemptions or as a result of a
revised management evaluation of the issuer.
Additional Purchase and Redemption Information
The Trust reserves the right in its sole discretion to (i) suspend the continued
offering of the Fund's shares, and (ii) reject purchase orders in whole or in
part when in the judgment of the Manager or the Distributor such suspension or
rejection is in the best interest of the Fund.
When in the judgment of the Manager it is in the best interests of the Fund, an
investor may purchase shares of the Fund by tendering payment in kind in the
form of securities, provided that any such tendered securities are readily
marketable, their acquisition is consistent with the Fund's investment objective
and policies, and the tendered securities are otherwise acceptable to the Fund's
Manager. For the purposes of sales of shares of the Fund for such securities,
the tendered securities shall be valued at the identical time and in the
identical manner that the portfolio securities of the Fund are valued for the
purpose of calculating the net asset value of the Fund's shares. A shareholder
who purchases shares of the Fund by tendering payment for the shares in the form
of other securities may be required to recognize gain or loss for income tax
purposes on the difference, if any, between the adjusted basis of the securities
tendered to the Fund and the purchase price of the Fund's shares acquired by the
shareholder.
B-24
<PAGE>
Payments to shareholders for shares of the Fund redeemed directly from the Fund
will be made as promptly as possible but no later than three days after receipt
by the Transfer Agent of the written request in proper form, with the
appropriate documentation as stated in the Prospectuses, except that the Fund
may suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the New York Stock Exchange ("NYSE") is restricted as
determined by the SEC or the NYSE is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC (upon application by
the Fund pursuant to Section 22(e) of the Investment Company Act) making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of the Fund's shareholders.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed, but, as
described below or under abnormal conditions that make payment in cash unwise,
the Fund may make payment partly in its portfolio securities with a current
amortized cost or market value, as appropriate, equal to the redemption price.
Although the Fund does not anticipate that it will normally make any part of a
redemption payment in securities, if such payment were made, an investor may
incur brokerage costs in converting such securities to cash. The Trust has
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Fund pay in cash all requests for redemption
by any shareholder of record limited in amount, however, during any 90-day
period to the lesser of $250,000 or 1% of the value of the Trust's net assets at
the beginning of such period.
When in the judgment of the Manager it is in the best interests of the Fund, an
investor may redeem shares of the Fund and receive securities from the Fund's
portfolio selected by the Manager in its sole discretion, provided that such
redemption is not expected to affect the Fund's ability to attain its investment
objective or otherwise materially affect its operations. For the purposes of
redemptions in kind, the redeemed securities shall be valued at the identical
time and in the identical manner that the other portfolio securities are valued
for purposes of calculating the net asset value of the Fund's shares.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the Fund's portfolio
securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Fund are available for purchase by any
retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and
individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Fund through an IRA, there is
available through the Fund a prototype individual retirement account and custody
agreement. The custody agreement provides that DST Systems, Inc. will act as
custodian under the plan, and will furnish custodial services for an annual
maintenance fee per participating account of $10. (These fees are in addition to
the normal custodian charges paid by the Fund and will be deducted automatically
from each Participant's account.) For further details, including the right to
appoint a successor custodian, see the plan and custody agreements and the IRA
Disclosure Statement as provided by the Fund. An IRA that invests in shares of
the Fund may also be used by employers who have adopted a Simplified Employee
Pension Plan. Individuals or employers who wish to invest in shares of the Fund
under a custodianship with another bank or trust company must make individual
arrangements with such institution.
The IRA Disclosure Statement available from the Fund contains more information
on the amount investors may contribute and the deductibility of IRA
contributions. In summary, for tax years prior to January 1, 1998, an individual
may make deductible contributions to the IRA of up to 100% of earned
compensation, not to exceed $2,000 annually (or $4,000 to two IRAs if there is a
non-working spouse). An IRA may be established whether or not the amount of the
contribution is deductible. Generally, a full deduction for federal income tax
purposes will only be allowed to taxpayers who meet one of the following two
additional tests:
B-25
<PAGE>
(a) the individual and the individual's spouse are each not an active
participant in an employer's qualified retirement plan, or
(b) the individual's adjusted gross income (with some modifications) before
the IRA deduction is (i) $40,000 or less for married couples filing
jointly, or (ii) $25,000 or less for single individuals. The maximum
deduction is reduced for a married couple filing jointly with a
combined adjusted gross income (before the IRA deduction) between
$40,000 and $50,000, and for a single individual with an adjusted gross
income (before the IRA deduction) between $25,000 and $35,000.
It is advisable for an investor considering the funding of any retirement plan
to consult with an attorney or to obtain advice from a competent retirement plan
consultant with respect to the requirements of such plans and the tax aspects
thereof.
Determination of Net Asset Value
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
As noted in the Prospectuses, the net asset value of shares of the Fund
generally will be determined at least once daily as of 4:00 P.M., eastern time,
(or earlier when trading closes earlier) on each day the NYSE is open for
trading. It is expected that the NYSE will be closed on Saturdays and Sundays
and on New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. The
national bank holidays, in addition to New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas, include January 2, Good Friday, Columbus Day, Veteran's Day and
December 26. The Fund may, but does not expect to, determine the net asset
values of its shares on any day when the NYSE is not open for trading if there
is sufficient trading in its portfolio securities on such days to affect
materially per-share net asset value.
Generally, trading in and valuation of foreign securities is substantially
completed each day at various times prior to the close of the NYSE. In addition,
trading in and valuation of foreign securities may not take place on every day
in which the NYSE is open for trading. Furthermore, trading takes place in
various foreign markets on days in which the NYSE is not open for trading and on
which the Funds' net asset values are not calculated. Occasionally, events
affecting the values of such securities in U.S. dollars on a day on which a Fund
calculates its net asset value may occur between the times when such securities
are valued and the close of the NYSE that will not be reflected in the
computation of that Fund's net asset value unless the Board or its delegates
deem that such events would materially affect the net asset value, in which case
an adjustment would be made.
Generally, the Fund's investments are valued at market value or, in the absence
of a market value, at fair value as determined in good faith by the Manager and
the Trust's Pricing Committee pursuant to procedures approved by or under the
direction of the Board.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded on
securities exchanges are valued at the last sale price on the exchange on which
such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
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<PAGE>
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60 days are
valued at current market prices, as discussed above. Short-term securities with
60 days or less remaining to maturity are, unless conditions indicate otherwise,
amortized to maturity based on their cost to the Fund if acquired within 60 days
of maturity or, if already held by the Fund on the 60th day, based on the value
determined on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Fund are valued on the basis of valuations provided by
dealers in those instruments, by an independent pricing service, approved by the
Board, or at fair value as determined in good faith by procedures approved by
the Board. Any such pricing service, in determining value, will use information
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analyses and evaluations
of various relationships between securities and yield to maturity information.
An option that is written by the Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last offer price. An option that
is purchased by the Fund is generally valued at the last sale price or, in the
absence of the last sale price, the last bid price. The value of a futures
contract equals the unrealized gain or loss on the contract that is determined
by marking the contract to the current settlement price for a like contract on
the valuation date of the futures contract if the securities underlying the
futures contract experience significant price fluctuations after the
determination of the settlement price. When a settlement price cannot be used,
futures contracts will be valued at their fair market value as determined by or
under the direction of the Board.
If any securities held by the Fund are restricted as to resale or do not have
readily available market quotations, the Manager and the Trust's Pricing
Committee determine their fair value, following procedures approved by the
Board. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Fund in connection with such
disposition) In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of foreign currencies are
translated into U.S. dollars at the official exchange rate or, alternatively, at
the mean of the current bid and asked prices of such currencies against the U.S.
dollar last quoted by a major bank that is a regular participant in the foreign
exchange market or on the basis of a pricing service that takes into account the
quotes provided by a number of such major banks. If neither of these
alternatives is available or both are deemed not to provide a suitable
methodology for converting a foreign currency into U.S. dollars, the Board in
good faith will establish a conversion rate for such currency.
All other assets of the Fund are valued in such manner as the Boards in good
faith deem appropriate to reflect their fair value.
B-27
<PAGE>
Principal Underwriter
The Distributor acts as the Fund's principal underwriter in a continuous public
offering of the Fund's shares. The Distributor is currently registered as a
broker-dealer with the SEC and in all 50 states, and is a member of most of the
principal securities exchanges in the U.S. and is a member of the NASD. The
Underwriting Agreement between the Fund and the Distributor is in effect for two
years from when the Fund commences public offerings, and shall continue in
effect thereafter for periods not exceeding one year if approved at least
annually by (i) the Board or the vote of a majority of the outstanding
securities of the Fund (as defined in the Investment Company Act), and (ii) a
majority of the Trustees who are not interested persons of any such party, in
each case by a vote cast in person at a meeting called for the purpose of voting
on such approval. The Underwriting Agreement may be terminated without penalty
by the parties thereto upon 60 days' written notice, and is automatically
terminated in the event of its assignment as defined in the Investment Company
Act. There are no underwriting commissions paid with respect to sales of the
Fund's shares.
Performance Information
As noted in the Prospectuses, the Fund may, from time to time, quote various
performance figures in advertisements and investor communications to illustrate
its past performance. Performance figures will be calculated separately for
Class R, Class P and Class L shares.
Average Annual Total Return. Total return may be stated for any relevant period
as specified in the advertisement or communication. Any statements of total
return for the Fund will be accompanied by information on the Fund's average
annual compounded rate of return over the most recent four calendar quarters and
the period from the Fund's inception of operations. The Fund may also advertise
aggregate and average total return information over different periods of time.
The Fund's "average annual total return" figures are computed according to a
formula prescribed by the SEC, expressed as follows:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of a
1-, 5- or 10-year period at the end of each
respective period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions and complete
redemption of the hypothetical investment at
the end of the measuring period.
Aggregate Total Return. The Fund's "aggregate total return" figures represent
the cumulative change in the value of an investment in the Fund for the
specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of a
l-, 5- or 10-year period at the end of a l-,
5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions and complete
B-28
<PAGE>
redemption of the hypothetical investment at
the end of the measuring period.
The Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses. The
total return information also assumes cash investments and redemptions and,
therefore, includes the applicable expense reimbursement fees discussed in the
Prospectuses. Consequently, any given performance quotation should not be
considered representative of the Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in the Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
Comparisons. To help investors better evaluate how an investment in the Fund
might satisfy their investment objectives, advertisements and other materials
regarding the Fund may discuss various financial publications. Materials may
also compare performance (as calculated above) to performance as reported by
other investments, indices, and averages. The following publications, indices
and averages may be used:
(a) Standard & Poor's 500 Composite Stock Index, one or more of the Morgan
Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
(b) Bank Rate Monitor--A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings
account rates and average loan rates.
(c) Lipper - Mutual Fund Performance Analysis and Lipper Fixed Income Fund
Performance Analysis--A ranking service that measures total return and
average current yield for the mutual fund industry and ranks individual
mutual fund performance over specified time periods assuming
reinvestment of all distributions, exclusive of any applicable sales
charges.
(d) Salomon Brothers Bond Market Roundup--A weekly publication which
reviews yield spread changes in the major sectors of the money,
government agency, futures, options, mortgage, corporate, Yankee,
Eurodollar, municipal, and preferred stock markets. This publication
also summarizes changes in banking statistics and reserve aggregates.
In addition, one or more portfolio managers or other employees of the Manager
may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolios, that the averages are generally
unmanaged, and that the items included in the calculations of such averages may
not be identical to the formulae used by the Fund to calculate its figures.
The Fund may also publish its relative rankings as determined by independent
mutual fund ranking services such as Lipper Analytical Services, Inc. and
Morningstar, Inc.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's total return for any period should
not be considered as a representation of what an investment may earn or what an
investor's total return may be in any future period.
Reasons to Invest in the Fund. From time to time the Fund may publish or
distribute information and reasons supporting the Manager's belief that a
particular Fund may be appropriate for investors at a particular time. The
information will generally be based on internally generated estimates resulting
from the Manager's research activities and projections from independent sources.
These sources may include,
B-29
<PAGE>
but are not limited to, Barings, The WEFA Group, Consensus Estimate, Datastream,
Micropal, I/B/E/S Consensus Forecast, Worldscope and Reuters as well as both
local and international brokerage firms. For example, the Fund may suggest that
certain countries or areas may be particularly appealing to investors because of
interest rate movements, increasing exports and/or economic growth.
Research. The Manager has made intensive research one of the important
characteristics of The Montgomery Partners Series style. Extensive research into
companies that are not well known--discovering new opportunities for
investment--is a theme that may be used for each Fund. In-depth research,
however, goes beyond gaining an understanding of unknown opportunities. The
portfolio analysts have also developed new ways of gaining information about
well-known parts of the domestic market.
General Information
Investors in the Fund will be informed of the Fund's progress through periodic
reports. Financial statements will be submitted to shareholders semi-annually,
at least one of which will be certified by independent public accountants. The
expenses incurred in connection with the establishment and registration of
shares of the Fund as a separate series of the Trust have been assumed by the
Fund and are being amortized over a period of five years commencing with the
date of the Fund's inception. The Manager has agreed, to the extent necessary,
to advance the organizational expenses incurred by the Fund and will be
reimbursed for such expenses after commencement of the Fund's operations.
Investors purchasing shares of the Fund bear such expenses only as they are
amortized daily against the Fund's investment income.
As noted above, Morgan Stanley and Trust Company (the "Custodian") acts as
custodian of the securities and other assets of the Fund. The Custodian does not
participate in decisions relating to the purchase and sale of securities by the
Fund.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, is the Fund's Master Transfer Agent. The Master Transfer Agent has
delegated certain transfer agent functions to DST Systems, Inc., P.O. Box
419073, Kansas City, Missouri 64141-6073, the Fund's Transfer and Dividend
Disbursing Agent.
_____________________, 555 California Street, San Francisco, California 94104,
are the independent auditors for the Fund.
The validity of shares offered hereby will be passed on Paul, Hastings, Janofsky
& Walker LLP, 345 California Street, San Francisco, California 94104.
Among the Trustees' powers enumerated in the Agreement and Declaration of Trust
is the authority to terminate the Trust or any series of the Trust, or to merge
or consolidate the Trust or one or more of its series with another trust or
company without the need to seek shareholder approval of any such action.
The Trust is registered with the Securities and Exchange Commission as a
non-diversified management investment company, although the Fund is a
diversified series of the Trust. Such a registration does not involve
supervision of the management or policies of the Fund. The Prospectuses and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of the Registration
Statement may be obtained from the SEC upon payment of the prescribed fee.
B-30
<PAGE>
Financial Statements
The Fund has not yet commenced operations and, therefore, has not yet prepared
financial statements for public distribution.
B-31
<PAGE>
Appendix
Description ratings for Standard & Poor's Ratings Group ("S&P"); Moody's
Investors Service, Inc., ("Moody's"), Fitch Investors Service, L.P. ("Fitch")
and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
Standard & Poor's Rating Group
Bond Ratings
AAA Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB Bonds rated BB have less near-term vulnerability to default
than other speculative grade debt. However, they face major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B Bonds rated B have a greater vulnerability to default but
presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay
interest and repay principal.
CCC Bonds rated CCC have a current identifiable vulnerability to
default and are dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayment of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC-rating.
D Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus (+) or a
minus (-) sign designation, which is used to show relative standing
within the major rating categories, except in the AAA (Prime Grade)
category.
Commercial Paper Ratings
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no
more than 365 days. Issues assigned an A rating are
B-32
<PAGE>
regarded as having the greatest capacity for timely payment. Issues in
this category are delineated with the numbers 1, 2 and 3 to indicate
the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
as for issues designated A-1.
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues carrying this designation are regarded as having only
speculative capacity for timely payment.
C This designation is assigned to short-term obligations with
doubtful capacity for payment.
D Issues carrying this designation are in default, and payment
of interest and/or repayment of principal is in arrears.
Moody's Investors Service, Inc.
Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
generally are known as highgrade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as mediumgrade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and, therefore, not well safeguarded during both
good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack the characteristics of
a desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
B-33
<PAGE>
Ca Bonds which are rated Ca present obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category
and in the categories below B. The modifier 1 indicates a ranking for
the security in the higher end of a rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of a rating category.
Commercial Paper Ratings
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity
for repayment of short-term promissory obligations, and ordinarily will
be evidenced by leading market positions in well established
industries, high rates of return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial
charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate
liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained. Issuers
(or related supporting institutions) rated Prime-3 (P-3) have an
acceptable capacity for repayment of short-term promissory obligations.
The effect of industry characteristics and market composition may be
more pronounced. Variability in earnings and profitability may result
in changes in the level of debt protection measurements and the
requirements for relatively high financial leverage. Adequate alternate
liquidity is maintained. Issuers (or related supporting institutions)
rated Not Prime do not fall within any of the Prime rating categories.
Fitch Investors Service, L.P.
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current financial
condition and operative performance of the issuer and of any guarantor,
as well as the political and economic environment that might affect the
issuer's future financial strength and credit quality.
AAA Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
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A Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics,
which, if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest
or principal.
DDD, DD and D Bonds rated DDD, DD and D are in actual default of
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for
recovery.
Plus (+) and minus () signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes. Although the credit analysis is similar
to Fitch's bond rating analysis, the short-term rating places greater
emphasis than bond ratings on the existence of liquidity necessary to
meet the issuer's obligations in a timely manner.
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F1+.
F-2 Good credit quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-l+ and F-1
categories.
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<PAGE>
F-3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
Duff & Phelps Credit Rating Co.
Bond Ratings
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
BBB Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent
investment. There may be considerable variability in risk for
bonds in this category during economic cycles.
BB Bonds rated BB are below investment grade but are deemed by
Duff as likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality
may move up or down frequently within the category.
B Bonds rated B are below investment grade and possess the risk
that obligations will not be met when due. Financial
protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this
category or into a higher or lower quality rating grade.
CCC Bonds rated CCC are well below investment grade securities.
Such bonds may be in default or have considerable uncertainty
as to timely payment of interest, preferred dividends and/or
principal. Protection factors are narrow and risk can be
substantial with unfavorable economic or industry conditions
and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer has failed to meet
scheduled principal and/or interest payments.
Plus (+) and minus () signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating
category.
Commercial Paper Ratings
Duff-1 The rating Duff-1 is the highest commercial paper rating
assigned by Duff. Paper rated Duff-1 is regarded as having
very high certainty of timely payment with excellent liquidity
factors which are supported by ample asset protection. Risk
factors are minor.
Duff-2 Paper rated Duff-2 is regarded as having good certainty of
timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are
small.
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<PAGE>
Duff-3 Paper rated Duff-3 is regarded as having satisfactory
liquidity and other protection factors. Risk factors are
larger and subject to more variation. Nevertheless, timely
payment is expected.
Duff-4 Paper rated Duff-4 is regarded as having speculative
investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors
and market access may be subject to a high degree of
variation.
Duff-5 Paper rated Duff-5 is in default. The issuer has failed to
meet scheduled principal and/or interest payments.
B-37
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Portfolio Investments as of June 30, 1997; Statements
of Assets and Liabilities as of June 30, 1997;
Statements of Operations for the year ended June 30,
1997; Statement of Cash Flows for year ended June 30,
1997; Statements of Changes in Net Assets for the
year ended June 30, 1997; Financial Highlights for a
Fund share outstanding throughout each year,
including the year ended June 30, 1997 for Montgomery
Growth Fund, Montgomery Small Cap Fund, Montgomery
Micro Cap Fund (now U.S. Emerging Growth Fund),
Montgomery Small Cap Opportunities Fund, Montgomery
Equity Income Fund, Montgomery International Growth
Fund, Montgomery International Small Cap Fund,
Montgomery Emerging Markets Fund, Montgomery Global
Opportunities Fund, Montgomery Global Communications
Fund, Montgomery Select 50 Fund, Montgomery Global
Asset Allocation Fund, Montgomery Short Duration
Government Bond Fund, Montgomery Government Reserve
Fund, Montgomery California Tax-Free Intermediate
Bond Fund, Montgomery California Tax-Free Money Fund
and Montgomery Federal Tax-Free Money Fund; Notes to
Financial Statements; Independent Auditors' Report on
the foregoing, all incorporated by reference to the
Annual Report to Shareholders of the above-named
funds.
(2) Portfolio Investments as of October 31, 1997;
Statements of Assets and Liabilities as of October
31, 1997; Statements of Operations for the period
ended October 31, 1997; Statements of Changes in Net
Assets for the period ended October 31, 1997;
Statement of Cash Flows for period ended October 31,
1997; Financial Highlights for a Fund share
outstanding for the period ended October 31, 1997 for
Montgomery Latin America Fund and Montgomery Total
Return Bond Fund; Notes to Financial Statements all
incorporated by reference to the Post Effective
Amendment No. 26 to the Registration Statement as
filed with the Commission on December 30, 1997 ("Post
Effective Amendment No. 17").
(b) Exhibits:
(1)(A) Agreement and Declaration of Trust is incorporated by
reference to the Registrant's Registration Statement
as filed with the Commission on May 16, 1990
("Registration Statement").
(1)(B) Amendment to Agreement and Declaration of Trust is
incorporated by reference to Post-Effective Amendment
No. 17 to the Registration Statement as filed with
the Commission on December 30, 1993 ("Post-Effective
Amendment No. 17").
(1)(C) Amended and Restated Agreement and Declaration of
Trust is incorporated by reference to Post-Effective
Amendment No. 28 to the Registration Statement as
filed with the Commission on September 13, 1995
("Post-Effective Amendment No. 28").
(2) By-Laws are incorporated by reference to the
Registration Statement.
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<PAGE>
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5) Form of Investment Management Agreement is
incorporated by reference to Post-Effective Amendment
No. 52 to the Registration Statement as filed with
the Commission on July 31, 1997 ("Post-Effective
Amendment No. 52")
(6)(A) Form of Underwriting Agreement is incorporated by
reference to Post-Effective Amendment No. 52.
(6)(B) Form of Selling Group Agreement is incorporated by
reference to Pre-Effective Amendment No. 1.
(7) Benefit Plan(s) - Not applicable.
(8) Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 24.
(9)(A) Form of Administrative Services Agreement is
incorporated by reference to Post-Effective Amendment
No. 52.
(9)(B) Form of Multiple Class Plan is incorporated by
reference to Post-Effective Amendment No. 28.
(9)(C) Form of Shareholder Services Plan is incorporated by
reference to Post-Effective Amendment No. 28.
(10) Consent and Opinion of Counsel as to legality of
shares is incorporated by reference to Pre-Effective
Amendment No. 1.
(11) Independent Auditors' Consent - Not applicable
(12) Financial Statements omitted from Item 23 - Not
applicable.
(13) Letter of Understanding re: Initial Shares is
incorporated by reference to Pre-Effective Amendment
No. 1.
(14) Model Retirement Plan Documents are incorporated by
reference to Post-Effective Amendment No. 2 to the
Registration Statement as filed with the Commission
on March 4, 1991 ("Post-Effective Amendment No. 2").
(15) Form of Share Marketing Plan (Rule 12b-1 Plan) is
incorporated by reference to Post-Effective Amendment
No. 52.
(16)(A) Performance Computation for Montgomery Short
Government Bond Fund is incorporated by reference to
Post-Effective Amendment No. 13.
(16)(B) Performance Computation for Montgomery Government
Reserve Fund is incorporated by reference to
Post-Effective Amendment No. 12.
(16)(C) Performance Computation for Montgomery California
Tax-Free Intermediate Bond Fund is incorporated by
reference to Post-Effective Amendment No. 17.
(16)(D) Performance Computation for the other series of
Registrant is incorporated by reference to
Post-Effective Amendment No. 2.
(17) Financial Data Schedules incorporated by reference to
Form NSAR-A filed on February 27, 1998.
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<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Montgomery Asset Management, LLC, a Delaware limited liability
company, is the manager of each series of the Registrant, of The
Montgomery Funds II, a Delaware business trust, and of The Montgomery
Funds III, a Delaware business trust. Montgomery Asset Management, LLC
is a subsidiary of Commerzbank AG based in Frankfurt, Germany. The
Registrant, The Montgomery Funds II and The Montgomery Funds III are
deemed to be under the common control of each of those two entities.
<TABLE>
Item 26. Number of Holders of Securities
<CAPTION>
Number of Record Holders
Title of Class as June 30, 1998
-------------- ----------------
Shares of Beneficial
Interest, $0.01 par value
-------------------------
<S> <C>
Montgomery Growth Fund 48,570
Montgomery Small Cap Opportunities Fund 11,496
Montgomery Small Cap Fund 4,619
Montgomery Micro Cap Fund (now 8,761
U.S. Emerging Growth)
Montgomery Equity Income Fund 1,490
Montgomery International Growth Fund 1,124
Montgomery International Small Cap Fund 1,370
Montgomery Emerging Markets Fund 32,920
Montgomery Emerging Asia Fund 1,719
Montgomery Latin America Fund 664
Montgomery Global Opportunities Fund 1,880
Montgomery Global Communications Fund 9,668
Montgomery Select 50 Fund 11,198
Montgomery Total Return Bond Fund 152
Montgomery Short Duration Government Bond Fund 1,000
Montgomery Government Reserve Fund 7,241
Montgomery California Tax-Free Intermediate Bond Fund 179
Montgomery California Tax-Free Money Fund 1,368
Montgomery Federal Tax-Free Money Fund 1,052
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<PAGE>
Montgomery Growth & Income Fund 0
Montgomery Technology Fund 0
</TABLE>
Item 27. Indemnification
Article VII of the Agreement and Declaration of Trust empowers
the Trustees of the Trust, to the full extent permitted by law, to
purchase with Trust assets insurance for indemnification from liability
and to pay for all expenses reasonably incurred or paid or expected to
be paid by a Trustee or officer in connection with any claim, action,
suit or proceeding in which he or she becomes involved by virtue of his
or her capacity or former capacity with the Trust.
Article VI of the By-Laws of the Trust provides that the Trust
shall indemnify any person who was or is a party or is threatened to be
made a party to any proceeding by reason of the fact that such person
is and other amounts or was an agent of the Trust, against expenses,
judgments, fines, settlement and other amounts actually and reasonable
incurred in connection with such proceeding if that person acted in
good faith and reasonably believed his or her conduct to be in the best
interests of the Trust. Indemnification will not be provided in certain
circumstances, however, including instances of willful misfeasance, bad
faith, gross negligence, and reckless disregard of the duties involved
in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted
to the Trustees, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable in the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such Trustee,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
C-4
<PAGE>
Item 28. Business and Other Connections of Investment Adviser.
Effective July 31, 1997, Montgomery Asset Management, L.P.
completed the sale of substantially all of its assets to the current
investment manager, Montgomery Asset Management, LLC ("MAM, LLC"), a
subsidiary of Commerzbank A.G. Information about the officers and
directors of MAM, LLC is provided below. The address for the following
persons is 101 California Street, San Francisco, California 94111.
R. Stephen Doyle Chairman of the Board of Directors
and Chief Executive Officer of MAM,
LLC
Mark B. Geist President and Director of MAM, LLC
John T. Story Executive Vice President of MAM, LLC
David E. Demarest Chief Administrative Officer and
Managing Director of MAM, LLC
The following directors of MAM, LLC also are officers of
Commerzbank AG. The address for the following persons is Neue Mainzer
Strasse 32-36, Frankfurt am Main, Germany.
Heinz Josef Hockmann Director of MAM, LLC
Dietrich-Kurt Frowein Director of MAM, LLC
Andreas Kleffel Director of MAM, LLC
Before July 31, 1997, Montgomery Securities, which is a
broker-dealer and the prior principal underwriter of The Montgomery
Funds II, was the sole limited partner of the prior investment manager,
Montgomery Asset Management, L.P. ("MAM, L.P."). The general partner of
MAM, L.P. was a corporation, Montgomery Asset Management, Inc. ("MAM,
Inc."), certain of the officers and directors of which now serve in
similar capacities for MAM, LLC.
Item 29. Principal Underwriter
(a) Funds Distributor, Inc. (the ?Distributor?) acts as principal
underwriter for the following investment companies:
American Century California Tax-Free and Municipal Funds
American Century Capital portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
BJB Investment Funds
The Brinson Funds
The Harris Insight Funds Trust
HT Insight Funds, Inc.
J.P. Morgan Institutional Funds
J.P. Morgan Funds
J.P. Morgan Series Trust
J.P. Morgan Series Trust II
Kobrick-Cendant Investment Trust
LaSalle Partners Funds, Inc.
Monetta Fund, Inc.
Monetta Trust
C-5
<PAGE>
The Montgomery Funds
The Montgomery Funds II
The Munder Framlington Funds Trust
the Munder Funds Trust
The Orbitex Group of Funds
PanAgora Institutional Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
St. Clair Money Market Fund, Inc.
The Skyline Funds
Waterhouse Investors Cash Management Fund, Inc.
WEBS Index Fund, Inc.
Funds Distributor is registered with the Securities and Exchange Commission as a
broker-dealer and is a member of the National Association of Securities Dealers.
Funds Distributor is an indirect wholly-owned subsidiary of Boston Institutional
Group, Inc., a holding company of all whose outstanding shares are owned by key
employees.
(b) The following is a list of the executive officers of Funds Distributor, Inc.
President and Chief Executive Officer - Mario E. Connolly
President and Treasurer George A. Rio
Executive Vice President - Donald R. Roberson
Senior Vice President - Allen B. Closser
Senior Vice President - Paula K. David
Senior Vice President - Michael S. Petrucelli
Senior Vice President, Treasurer
and Chief Financial Officer - Joseph F. Tower, III
Senior Vice President - Bernard A. Whalen
Secretary Margaret W. Chambers
(c) Not Applicable.
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940, as
amended (the "Investment Company Act") will be kept by the Registrant's
Transfer Agent, DST Systems, Inc., P.O. Box 1004 Baltimore, Kansas
City, Missouri 64105, except those records relating to portfolio
transactions and the basic organizational and Trust documents of the
Registrant (see Subsections (2)(iii), (4), (5), (6), (7), (9), (10) and
(11) of Rule 31a-1(b)), which will be kept by the Registrant at 101
California Street, San Francisco, California 94111.
Item 31. Management Services.
There are no management-related service contracts not
discussed in Parts A and B.
Item 32. Undertakings.
(a) Not applicable.
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<PAGE>
(b) Registrant hereby undertakes to furnish each person
to whom a prospectus is delivered with a copy of the
Registrant's last annual report to Shareholders, upon request
and without charge.
(c) Registrant has undertaken to comply with Section
16(a) of the Investment Company Act which requires the prompt
convening of a meeting of shareholders to elect trustees to
fill existing vacancies in the Registrant's Board of Trustees
in the event that less than a majority of the trustees have
been elected to such position by shareholders. Registrant has
also undertaken promptly to call a meeting of shareholders for
the purpose of voting upon the question of removal of any
Trustee or Trustees when requested in writing to do so by the
record holders of not less than 10 percent of the Registrant's
outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the
requirements of Section 16(c) of the Investment Company Act.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Francisco, the State of California, on the
7th day of August, 1998.
THE MONTGOMERY FUNDS
By: Margaret W. Chambers*
---------------------
Margaret W. Chambers
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
R. Stephen Doyle * Trustee August 7, 1998
- ------------------
R. Stephen Doyle
Andrew Cox * Trustee August 7, 1998
- -----------
Andrew Cox
Cecilia H. Herbert * Trustee August 7, 1998
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee August 7, 1998
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-------------------
Julie Allecta, Attorney-in-Fact pursuant to Powers of Attorney
previously filed.
C-8
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
24 Power of Attorney
C-9
Exhibit 24
POWER OF ATTORNEY
<PAGE>
POWER OF ATTORNEY
FOR
SECURITIES AND EXCHANGE COMMISSION
AND RELATED FILINGS
----------------------------------------
The undersigned officer of THE MONTGOMERY FUNDS, THE MONTGOMERY FUNDS
II and THE MONTGOMERY FUNDS III (the "Trusts") hereby appoints MARK B. GEIST,
JULIE ALLECTA, MITCHELL E. NICHTER and DAVID A. HEARTH (with full power to each
of them to act alone), her attorney-in-fact and agent, in all capacities, to
execute and to file any documents relating to the Registration Statements on
Forms N-1A and N-14 under the Investment Company Act of 1940, as amended, and
under the Securities Act of 1933, as amended, and under the laws of all states
and other domestic and foreign jurisdictions, including any and all amendments
thereto, covering the registration and the sale of shares by the Trusts,
including all exhibits and any and all documents required to be filed with
respect thereto with any regulatory authority, including applications for
exemptive orders, rulings or filings of proxy materials. The undersigned grants
to each of said attorneys full authority to do every act necessary to be done in
order to effectuate the same as fully, to all intents and purposes, as she could
do if personally present, thereby ratifying all that said attorneys-in-fact and
agents may lawfully do or cause to be done by virtue hereof.
The undersigned officer hereby executes this Power of Attorney as of
this 26th day of June 1998.
/s/ Margaret W. Chambers
-------------------------------
Margaret W. Chambers
Secretary