As filed with the Securities and Exchange Commission on March 16, 2000
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. 72
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 73
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)
Johanne Castro, Assistant Secretary
101 California Street
San Francisco, California 94111
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to Rule 485(b)
_____ on October 31, 1999 pursuant to Rule 485(b)
_____ 60 days after filing pursuant to Rule 485(a)(1
__X__ 75 days after filing pursuant to Rule 485(a)(2)
_____ on ______________ pursuant to Rule 485(a)
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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 POST-EFFECTIVE AMENDMENT
This post-effective amendment to the registration statement of the Registrant
contains the following documents:
Facing Sheet
Contents of Post-Effective Amendment
Part A - Prospectus for Montgomery New Economy 20 Portfolio.
Part B - Combined Statement of Additional Information for Montgomery Growth
20 Portfolio, Montgomery International 20 Portfolio and Montgomery
New Economy 20 Portfolio
Part C - Other Information
Signature Page
Exhibits
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PART A
PROSPECTUS FOR
MONTGOMERY NEW ECONOMY 20 PORTFOLIO
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<PAGE>
Prospectus
May 31, 2000
THE MONTGOMERY FUNDS (SM)
New Economy 20 Portfolio
The Montgomery Funds has registered the Portfolio offered in this prospectus
with the U.S. Securities and Exchange Commission (SEC). That registration does
not imply, however, that the SEC endorses the Portfolio.
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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How to Contact Us
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[Sidebar]
Montgomery Web Site
www.montgomeryfunds.com
E-mail
[email protected]
Montgomery Shareholder
Service Representatives
800.572.FUND [3863]
Available 6 A.M. to 5 P.M.
Pacific time
Address General
Correspondence to:
The Montgomery Funds
101 California Street
San Francisco, CA
94111-9361
TABLE OF CONTENTS
New Economy 20 Portfolio .................................................... 4
Portfolio Management......................................................... 6
Additional Investment Strategies and Related Risks........................... 7
Defensive Investments................................................... 7
Portfolio Turnover...................................................... 7
Internet Risks ......................................................... 7
The Euro-Single European Currency....................................... 7
Investment Options........................................................... 8
Becoming a Montgomery Shareholder....................................... 9
How Portfolio Shares Are Priced......................................... 10
Montgomery Online....................................................... 12
Buying Additional Shares................................................ 13
Exchanging Shares....................................................... 13
Selling Shares.......................................................... 14
Other Policies.......................................................... 15
Tax Information......................................................... 16
After You Invest........................................................ 17
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This prospectus contains important information about the investment objectives,
strategies and risks of the Montgomery New Economy 20 Portfolio (the
"Portfolio") that you should know before you invest in the Portfolio. Please
read it carefully and keep it on hand for future reference. Please be aware that
the Portfolio:
* Is not bank a deposit
* Is not guaranteed, endorsed or insured by any financial institution or
government entity such as the Federal Deposit Insurance Corporation (FDIC)
You should also know that you could lose money by investing in the Portfolio.
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New Economy 20 Portfolio
Objective
* Seeks long-term capital appreciation through concentrated exposure to "new
economy" companies
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Principal Strategy [clipart]
Under normal conditions, the Portfolio invests in a limited number of "new
economy" companies worldwide, typically between 20 and 30, and generally never
fewer than 20. Companies generally associated with the new economy are those
companies in the areas of technology (including biotechnology), communications
and media, as well as companies that leverage the Internet (such as Internet
stock brokers) to revolutionize "old economy" businesses.
The portfolio manager seeks well-managed companies that he believes will be able
to increase their sales and corporate earnings on a sustained basis (even though
they may not yet generate profits). He will favor those companies that he
believes have a competitive advantage, offer innovative products or services and
may profit from trends associated with the emergence of the new economy. On a
strategic basis, the Portfolio's assets may be allocated among countries and
market sectors in an attempt to take advantage of market trends.
Principal Risks [clipart]
By investing in stocks, the Portfolio may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market as well as in response to the activities of individual
companies. The Portfolio is a non-diversified mutual fund that typically invests
in the securities of as few as 20 companies. Consequently, the value of an
investment in the Portfolio will vary more in response to developments or
changes in market value affecting particular stocks than an investment in a
diversified mutual fund investing in a greater number of securities.
To the extent the Portfolio concentrates its investments in industries generally
associated with the new economy, its share value may be more volatile than that
of more-diversified mutual funds. The Portfolio's share value will reflect
trends specific to new economy industries, which may be subject to greater
changes in governmental policies and regulation than many other industries.
Additionally, new economy companies can be particularly affected by such
specific risks as: aggressive product prices due to competitive pressure from
numerous market entrants, short product cycles, rapid rate of change, and
product obsolescence at a more frequent rate than other types of companies
caused by rapid technological advances; and risks that new products will fail to
meet expectations or even reach the marketplace, among others. In addition,
these companies tend to be capital intensive and, as a result, may not be able
to recover all capital investment costs.
The Portfolio's investment in small- or mid-cap companies worldwide may expose
shareholders to additional risks. Smaller companies have less public information
generally available, more-limited product lines, less liquidity, less frequent
trading and limited financial resources. Foreign stock markets tend to be more
volatile than the U.S. market due to economic and political instability and
regulatory conditions in some countries. Additionally, by investing in
securities denominated in foreign currencies, the Portfolio is also exposed to
currency risks since those foreign currencies may decline against the U.S.
dollar.
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Past Portfolio Performance The Portfolio was launched on May 31, 2000.
Performance results have not been provided because the Portfolio has not been in
existence for a full calendar year.
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Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of this Portfolio. Montgomery does not impose any front-end or deferred
sales loads on this Portfolio.
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 2.00%+
Annual Portfolio Operating Expenses (expenses that are
deducted from Portfolio assets)
Management Fee# 1.00%
Distribution (12b-1) Fee 0.00%
Other Expenses## 0.20%
Shareholder Service Fee 0.25%
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Total Annual Portfolio Operating Expenses 1.45%
+ The 2.00% redemption fee applies to those shares redeemed within six months
from the date of purchase and is paid to the Portfolio. $10 will be
deducted from redemption proceeds sent by wire or overnight courier.
# The management fee of 1.00% will be reduced to ____% for those assets over
$____ million and to ____% for those assets over $_____.
## Other expenses are based on estimated amounts for the current fiscal year.
Example of Portfolio expenses: This example is intended to help you compare the
cost of investing in the Portfolio with the cost of investing in other mutual
funds. The table below shows what you would pay in expenses over time, whether
or not you sold your shares at the end of each period. It assumes a $10,000
initial investment, 5% total return each year and no changes in expenses. This
example is for comparison purposes only. It does not necessarily represent the
Portfolio's actual expenses or returns.
1 Year 3 Years
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$147 $458
[clipart] [sidebar]
Portfolio Management
Oscar Castro
For more details see page 6
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PORTFOLIO MANAGEMENT
PORTFOLIO MANAGEMENT
The investment manager of the Portfolio is Montgomery Asset Management, LLC, 101
California Street, San Francisco, California 94111. Founded in 1990, Montgomery
Asset Management is a subsidiary of Commerzbank AG, one of the largest publicly
held commercial banks in Germany. As of December 31, 1999, Montgomery Asset
Management managed approximately $4.9 billion on behalf of some 200,000
investors in The Montgomery Funds. Montgomery may rely on the expertise,
research and resources of Commerzbank AG and its worldwide affiliates in
managing the Portfolio.
New Economy 20 Portfolio
[photo] OSCAR CASTRO, CFA, senior portfolio manager for the Montgomery New
Economy 20 Portfolio (since inception 2000). Mr. Castro joined Montgomery in
1993 as a senior portfolio manager and managing director. From 1991 to 1993 he
was a vice president and portfolio manager at G.T. Capital Management, Inc. From
1989 to 1990, he was co-founder and co-manager of The Common Goal World Fund, a
global equity partnership.
Management Fee and Operating Expense Limit
The annual contractual management fee rate and the annual contractual total
operating expense limit (excluding interest and tax expense) for the Portfolio
are 1.00% and 1.45%, respectively. The management fee amounts actually paid to
Montgomery Asset Management may vary from year to year, depending on actual
expenses. The actual fee rate may be greater than the contractual rate only to
the extent Montgomery recouped previously deferred fees during the fiscal year.
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Additional Investment Strategies and Related Risks
Defensive Investments
At the discretion of its portfolio manager, the Portfolio may invest up to 100%
of its assets in cash for temporary defensive purposes. The Portfolio is not
required or expected to take such a defensive posture. But if used, such an
unlikely stance may help the Portfolio minimize or avoid losses during adverse
market, economic or political conditions. During such a period, the Portfolio
may not achieve its investment objective. For example, should the market advance
during this period, the Portfolio may not participate as much as it would have
if it had been more fully invested.
Portfolio Turnover
The Portfolio's manager will sell a security when he believes it is appropriate
to do so, regardless of how long the Portfolio has owned that security. Buying
and selling securities generally involves some expense to the Portfolio, such as
commission paid to brokers and other transaction costs. By selling a security,
the Portfolio may realize taxable capital gains that it will subsequently
distribute to shareholders. Generally speaking, the higher the Portfolio's
annual portfolio turnover, the greater its brokerage costs and the greater the
likelihood that it will realize taxable capital gains. Increased brokerage costs
may adversely affect the Portfolio's performance. Also, unless you are a
tax-exempt investor or you purchase shares through a tax-deferred account, the
distribution of capital gains may affect your after-tax return. Annual portfolio
turnover of 100% or more, as is expected for the Portfolio, is considered high.
Internet Risks
An interruption in transmissions over the Internet generally, or a problem in
the transmission of our Web site in particular, could result in a delay or
interruption in your ability to access our Web site, to place purchase or sale
orders with the Portfolio, to receive certain shareholder information
electronically or otherwise to interact with the Portfolio.
The Euro: Single European Currency
Investors should note the following: On January 1, 1999, the European Union (EU)
introduced a single European currency called the euro. Eleven of the fifteen EU
members have begun to convert their currencies to the euro including Austria,
Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands,
Portugal and Spain (leaving out Britain, Sweden, Denmark and Greece). For the
first three years, the euro will be a phantom currency (only an accounting
entry). Euro notes and coins will begin circulating in 2002.
The introduction of the euro has occurred, but the following uncertainties will
continue to exist for some time:
* Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably.
* The applicable conversion rate for contracts stated in the national
currency of an EU member.
* The ability of clearing and settlement systems to process transactions
reliably.
* The effects of the euro on European financial and commercial markets.
* The effect of new legislation and regulations to address euro-related
issues.
These and other factors could cause market disruptions and affect the value of
your shares in the Portfolio to the extent it invests in companies conducting
business in Europe. Montgomery and its key service providers have taken steps to
address euro-related issues, but there can be no assurance that these efforts
will be sufficient.
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[table]
To open a new account, complete and mail the New Account application included
with this prospectus, or complete the application online by accessing our Web
site at www.montgomeryfunds.com.
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Purchase and redemption requests received after 1:00 P.M. Pacific time (4:00
P.M. eastern time) will be executed at the following business day's closing
price. Once a trade is placed it may not be altered or canceled.
Checks should be made payable to: The Montgomery Funds
The minimum initial investment is $1,000 for the Portfolio. The minimum
subsequent investment is $100.
Once an account is established, you can:
* Buy or sell shares online
Access the Portfolio at The Montgomery Funds
Web site at www.montgomeryfunds.com and
follow the instructions.
* Buy, sell or exchange shares by phone
Contact The Montgomery Funds at
800.572.FUND [3863]. Press (1) for a shareholder
service representative. Press (2) for the automated
Montgomery Star System.
* Buy or sell shares by mail
Mail buy/sell order(s) with your check:
By regular mail:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 219073
Kansas City, MO 64121-9073
* By express or overnight service:
The Montgomery Funds
c/o DST Systems, Inc.
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1614
* Buy or sell shares by wiring funds
To: 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 Portfolio: [Montgomery Portfolio Name]
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ACCOUNT INFORMATION
What You Need to Know About Your Montgomery Account
You pay no sales charge to invest in the Portfolio. The minimum initial
investment for the Portfolio is $1,000. The minimum subsequent investment is
$100. Under certain conditions we may waive these minimums. If you buy shares
through a broker or investment advisor, different requirements may apply. All
investments must be made in U.S. dollars.
We must receive payment from you within three business days of your
purchase. In addition, the Portfolio and the Distributor each reserve the right
to reject all or part of any purchase.
From time to time, Montgomery may close and reopen the Portfolio to new
investors at its discretion. Shareholders who maintain open accounts which meet
the minimum required balance in the Portfolio when it closes may make additional
investments in it. If the Portfolio is closed and you redeem your total
investment in the Portfolio, your account will be closed and you will not be
able to make any additional investments in the Portfolio. The Montgomery Funds
reserves the right to close or liquidate the Portfolio at its discretion.
Becoming a Montgomery Shareholder
To open a new account:
* Online Go to www.montgomeryfunds.com. Print and complete the online New
Account application and send a check payable to The Montgomery Funds to the
appropriate address (see previous page).
* By Mail Send your completed application (included with this prospectus or
printed from our Web site at www.montgomeryfunds.com), with a check payable to
The Montgomery Funds, to the appropriate address. Your check must be in U.S.
dollars and drawn only on a bank located in the United States. Dividends do not
accrue until your check has cleared. We do not accept third-party checks,
"starter" checks, credit-card checks, instant-loan checks or cash investments.
We may impose a charge on checks that do not clear.
* By Wire Call us at (800) 572-FUND [3863] to let us know that you intend to
make your initial investment by wire. Tell us your name, the amount you want to
invest and the name of the Portfolio. We will give you further instructions and
a fax number to which you should send your completed New Account application. To
ensure that we handle your investment accurately, include complete account
information in all wire instructions. Then request your bank to wire money from
your account to the attention of:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
and include the following:
Account #7526601
Attention: The Montgomery Funds
For credit to: [shareholder(s) name]
Shareholder Account Number:
[shareholder(s) account number]
Name of Portfolio: [Montgomery Portfolio Name]
Please note: Your bank may charge a wire transfer fee.
* By Phone To make an initial investment by phone, you must have been a
current Montgomery shareholder for at least 30 days. Shares for Individual
Retirement Accounts (IRAs) may not be purchased by phone. Your purchase of the
Portfolio must meet its investment minimum and is limited to the total
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value of your existing accounts or $10,000, whichever is greater. To complete
the transaction, we must receive payment within three business days. We reserve
the right to collect any losses from your account if we do not receive payment
within that time.
[sidebar]
Getting Started
To invest, complete and send the New
Account application enclosed with this
prospectus or from our Web site at
www.montgomeryfunds.com. Send a check
payable to The Montgomery Funds.
Regular Mail
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 219073
Kansas City, MO 64121-9073
Express Mail or Overnight Courier
The Montgomery Funds
c/o DST Systems, Inc.
210 West 10th Street
8th Floor
Kansas City, MO 64105-1614
Foreign Investors:
Foreign citizens and resident
aliens of the United States living
abroad may not invest in the
Portfolio.
How Portfolio Shares Are Priced
How and when we calculate the Portfolio's price or net asset value (NAV)
determines the price at which you will buy or sell shares. We calculate the
Portfolio's NAV by dividing the total net value of its assets by the number of
outstanding shares. We base the value of the Portfolio's investments on their
market value, usually the last price reported for each security before the close
of market that day. A market price may not be available for securities that
trade infrequently. Occasionally, an event that affects a security's value may
occur after the market closes. This is more likely to happen for foreign
securities traded in foreign markets that have different time zones than in the
United States. Major developments affecting the price of those securities may
happen after the foreign markets in which such securities trade have closed, but
before the Portfolio calculates its NAV. In this case, Montgomery, subject to
the supervision of the Portfolio's Board of Trustees or Pricing Committee, will
make a good-faith estimate of the security's "fair value," which may be higher
or lower than the security's closing price in its relevant market.
We calculate the NAV of the Portfolio after the close of trading on the New York
Stock Exchange (NYSE) every day the NYSE is open. We do not calculate NAVs on
the days on which the NYSE is closed for trading. An exception applies as
described below. If we receive your order by the close of trading on the NYSE,
you can purchase shares at the price calculated for that day. The NYSE usually
closes at 4:00 P.M. eastern time on weekdays, except for holidays. If your order
is received after the NYSE has closed, your shares will be priced at the next
NAV we determine after receipt of your order. More details about how we
calculate the Portfolio's NAVs are in the Statement of Additional Information.
* The Portfolio invests in securities denominated in foreign currencies and
traded on foreign exchanges. To determine their value, we convert their
foreign-currency price into U.S. dollars by using the exchange rate last quoted
by a major bank. Exchange rates fluctuate frequently and may affect the U.S.
dollar value of foreign-denominated securities, even if their market price does
not change. In addition, some foreign exchanges are open for trading when the
U.S. market is closed. As a result, the Portfolio's foreign
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securities--and its price--may fluctuate during periods when you can't buy, sell
or exchange shares in the Portfolio.
[sidebar]
trading times
Whether buying, exchanging or selling shares, transaction
requests received after 1:00 P.M. Pacific time (4:00 P.M.
eastern time) will be executed at the next business day's
closing price.
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[Table]
www.montgomeryfunds.com
Manage your account(s) online. Our Account Access area offers free, secure
access to your Montgomery Portfolio account(s) around-the-clock.
At www.montgomeryfunds.com Montgomery shareholders can:
* Check current account balances
* Buy, exchange or sell shares
* View the most recent account activity and up to 80 records of account
history within the past two years
* Receive current versions of the Portfolio's prospectus, annual and
semi-annual reports, proxy statements, confirmations and statements, and
other shareholder information electronically
* Order duplicate statements and tax forms
* View tax summaries
* Change address of record
Access your account(s) online today. Simply click on the Account Access tab and
follow the simple steps to create a secure Personal Identification Number (PIN).
It takes only a minute.
Please note that for your protection, this secure area of our Website requires
the use of browsers with 128-bit encryption. If you are not sure what level of
security your browser supports, click on our convenient browser check.
[clipart]
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Buying Additional Shares
* Online. To buy shares online, you must first set up an Electronic Link
(described in the note at above left). Then visit our Web site,
www.montgomeryfunds.com, where you can purchase up to $25,000 per day in
additional shares of the Portfolio, except those held in a retirement account.
You will be prompted to enter your PIN whenever you perform a transaction so
that we can be sure each purchase is secure. You will then be asked to (1)
affirm your consent to receive all Portfolio documentation electronically, (2)
provide your e-mail address, and (3) affirm that you have read the appropriate
Prospectus. The Portfolio's current Prospectus will be readily available for
viewing and printing on our Web site. The cost of the shares will be
automatically deducted from your bank account.
* By Mail. Complete the form at the bottom of any Montgomery statement and
mail it with your check payable to The Montgomery Funds. Or mail the check with
a signed letter noting the name of the Portfolio, your account number and
telephone number. We will mail you a confirmation of your investment. Note that
we may impose a charge on checks that do not clear.
* By Phone. Current shareholders are automatically eligible to buy shares by
phone. To buy shares in the Portfolio or to invest in a new Montgomery Fund,
call (800) 572-FUND [3863]. Shares for IRAs may not be purchased by phone.
Telephone purchases can be made for up to five times your account value as of
the previous day.
We must receive payment for your purchase within three business days of your
request. To ensure that we do, you can:
* Transfer money directly from your bank account by mailing a written request
and a voided check or deposit slip (for a savings account).
* Send us a check by overnight or second-day courier service.
* Instruct your bank to wire money to our affiliated bank using the
information in "Becoming A Montgomery Shareholder" (page 12).
* By Wire. There is no need to contact us when buying additional shares by
wire. Instruct your bank to wire funds to our affiliated bank using the
information under "Becoming a Montgomery Shareholder" (page 12).
Exchanging Shares
You may exchange shares of the Portfolio for shares in the same class of
another, in accounts with the same registration, Taxpayer Identification Number
and address. There is a $100 minimum to exchange into a Montgomery fund you
currently own, otherwise the minimum is $1,000. Note that an exchange is treated
as a sale and may result in a realized gain or loss for tax purposes. You may
exchange shares online at www.montgomeryfunds.com, or by phone at (800) 572-FUND
[3863].
Other Exchange Policies
* We will process your exchange order at the next-calculated NAV.
* You may exchange shares only if the Portfolio is qualified for sale in your
state. Call (800) 572-FUND [3863] for information on availability in your state.
You may not exchange shares in the Portfolio for shares of another Montgomery
fund that is currently closed to new shareholders unless you are already a
shareholder in the closed fund.
* Because excessive exchanges can harm the Portfolio's performance, we reserve
the right to terminate your exchange privileges if you make more than four
exchanges out of any one Montgomery fund during a 12-month period. We may also
refuse an exchange into a Montgomery fund from which you have sold shares within
the previous 90 days (accounts under common control and accounts having the same
Taxpayer Identification Number will be counted together).
[sidebar]
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Our Electronic Link program allows us to automatically debit or credit your bank
account for transactions made by phone or online. To take advantage of this
service, simply mail us a voided check or preprinted deposit slip from your bank
account along with a request to establish an Electronic Link.
We may restrict or refuse your exchanges if we receive, or anticipate receiving,
simultaneous orders affecting a large portion of the Portfolio's assets or if we
detect a pattern of exchanges that suggests a market-timing strategy.
* We reserve the right to refuse exchanges into the Portfolio by any person or
group if, in our judgment, the Portfolio would be unable to effectively invest
the money in accordance with its investment objective and policies, or might be
adversely affected in other ways.
* Any redemption fees will apply to exchanges or redemptions out of the
Portfolio.
Selling Shares
You may sell some or all of your Portfolio shares on days that the New York
Stock Exchange is open for trading. Note that a redemption is treated as a sale
and may result in a realized gain or loss for tax purposes.
Your shares will be sold at the next NAV we calculate for the Portfolio
after receiving your order. We will promptly pay the proceeds to you, normally
within three business days of receiving your order and all necessary documents
(including a written redemption order with the appropriate signature guarantee).
We will mail or wire you the proceeds, depending on your instructions. Shares
purchased by check will be priced upon receipt of you order, but proceeds may
not be paid until your check clears, which may take up to 15 days after the
purchase date. Within this 15-day period, you may choose to exchange into a
Montgomery money market fund provided you have received and read the prospectus
for that money market fund.
Aside from any applicable redemption fees, we generally will not charge you
any fees when you sell your shares, although there are some minor exceptions:
* For shares sold by wire pay a $10 wire transfer fee that will be deducted
directly from their proceeds.
* For redemption checks requested by Federal Express, a $10 fee will be
deducted directly from the redemption proceeds.
In accordance with the rules of the Securities and Exchange Commission (SEC)
we reserve the right to suspend redemptions under extraordinary circumstances.
Shares can be sold in several ways:
* Online. You can sell up to $50,000 in shares in a regular account in the
Account Access section of www.montgomeryfunds.com.
* By Mail. Send us a letter including your name, Montgomery account number,
the name of the Portfolio and the dollar amount or number of shares you want to
sell. You must sign the letter the same way your account is registered. If you
have a joint account, all accountholders must sign the letter.
If you want the proceeds to go to a party other than the account owner(s) or
your predesignated bank account, or if the dollar amount of your redemption
exceeds $50,000, you must obtain a signature guarantee (not a notarization),
available from many commercial banks, savings associations, stock brokers and
other National Association of Securities Dealers member firms.
If you want to wire your redemption proceeds but do not have a predesignated
bank account, include a preprinted, voided check or deposit slip. If you do not
have a preprinted check, please send a signature-guaranteed letter along with
your bank instructions. The minimum wire amount is $500. Wire charges, if any,
will be deducted from the redemption proceeds. We may permit lesser wire amounts
or fees at our discretion. Call (800) 572-FUND [3863] for more details.
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[sidebar]
Shareholder service is available Monday through Friday from 6:00 a.m. to 5:00
P.M. Pacific time.
Shareholders can get information or perform transactions around-the-clock
through the Montgomery Star System or www.montgomeryfunds.com.**
* By Phone. You may accept or decline telephone redemption privileges on your
New Account application. If you accept, you will be able to sell up to $50,000
in shares through one of our shareholder service representatives or through our
automated Star System at (800) 572-FUND [3863]. You may not buy or sell shares
in an IRA account by phone. If you included bank wire information on your New
Account application or made arrangements later for wire redemptions, proceeds
can be wired to your bank account. Please allow at least two business days for
the proceeds to be credited to your bank account. If you want proceeds to arrive
at your bank on the same business day (subject to bank cutoff times), there is a
$10 fee. For more information about our telephone transaction policies, see
"Other Policies."
* Redemption Fee. The redemption fee is intended to compensate the Portfolio
for the increased expenses to longer-term shareholders and the disruptive effect
on the Portfolio caused by short-term investments. The redemption fee will be
assessed on the net asset value of the shares redeemed or exchanged and will be
deducted from the redemption proceeds otherwise payable to the shareholder. The
Portfolio will retain the fee charged.
Other Policies
Minimum Account Balances
Due to the cost of maintaining small accounts, we require a minimum account
balance of $1,000. If your account balance falls below that amount for any
reason, we will ask you to add to your account. If your account balance is not
brought up to the minimum or you do not send us other instructions, we will
redeem your shares and send you the proceeds. We believe that this policy is in
the best interests of all our shareholders.
Expense Limitations
Montgomery Asset Management may reduce its management fees and absorb expenses
in order to maintain total operating expenses (excluding interest, taxes and
dividend expenses) for the Portfolio below its previously set operating expense
limit. The Investment Management Agreement allows Montgomery three years to
recoup amounts previously reduced or absorbed, provided the Portfolio remains
within the applicable expense limitation. Montgomery generally seeks to recoup
the oldest amounts before seeking payment of fees and expenses for the current
year.
Shareholder Servicing Plan
The Portfolio has adopted a Shareholder Servicing Plan, under which the
Portfolio pays Montgomery or its Distributor a shareholder service fee at an
annual rate of up to 0.25% of the Portfolio's average daily net assets. The fee
is intended to reimburse the recipient for providing or arranging for services
to shareholders. The fee may also be used to pay certain brokers, transfer
agents and other financial intermediaries for providing shareholder services.
Uncashed Redemption Checks
If you receive your Portfolio redemption proceeds or distributions by check
(instead of by wire) and it does not arrive within a reasonable period of time,
call us at (800) 572-FUND [3863]. Please note that we
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are responsible only for mailing redemption or distribution checks and are not
responsible for tracking uncashed checks or determining why checks are uncashed.
If your check is returned to us by the U.S. Postal Service or other delivery
service, we will hold it on your behalf for a reasonable period of time. We will
not invest the proceeds in any interest-bearing account. No interest will accrue
on uncashed distribution or redemption proceeds.
Transaction Confirmation
If you notice any errors on your confirmation, you must notify the Portfolio of
such errors within 30 days following mailing of that confirmation. The Portfolio
will not be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on your confirmation after this 30-day period.
Telephone Transactions
By buying or selling shares over the phone, you agree to reimburse the Portfolio
for any expenses or losses incurred in connection with transfers of money from
your account. This includes any losses or expenses caused by your bank's failure
to honor your debit or act in accordance with your instructions. If your bank
makes erroneous payments or fails to make payment after you buy shares, we may
cancel the purchase and immediately terminate your telephone transaction
privileges.
The shares you purchase by phone will be priced at the first net asset value
we determine after receiving your request. You will not actually own the shares,
however, until we receive your payment in full. If we do not receive your
payment within three business days of your request, we will cancel your
purchase. You may be responsible for any losses incurred by the Portfolio as a
result.
Please note that we cannot be held liable for following telephone
instructions that we reasonably believe to be genuine. We use the following
safeguards to ensure that the instructions we receive are accurate and
authentic:
* Recording certain calls
* Requiring an authorization number or other personal information not likely
to be known by others
* Sending a transaction confirmation to the investor
The Portfolio and our Transfer Agent may be held liable for any losses due
to unauthorized or fraudulent telephone transactions only if we have not
followed these reasonable procedures.
We reserve the right to revoke the telephone transaction privilege of any
shareholder at any time if he or she has used abusive language or misused the
phone privilege by making purchases and redemptions that appear to be part of a
systematic market-timing strategy.
If you notify us that your address has changed, we will temporarily suspend
your telephone redemption privileges until 30 days after your notification to
protect you and your account. We require all redemption requests made during
this period to be in writing with a signature guarantee.
Shareholders may experience delays in exercising telephone redemption
privileges during periods of volatile economic or market conditions. In these
cases you may want to transmit your redemption request:
* Online
* Using the automated Star System
* By overnight courier
* By telegram
You may discontinue phone privileges at any time.
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Tax Withholding Information
Be sure to complete the Taxpayer Identification Number (TIN) section of the New
Account application. If you don't have a Social Security Number or TIN, apply
for one immediately by contacting your local office of the Social Security
Administration or the Internal Revenue Service (IRS). If you do not provide us
with a TIN or a Social Security Number, federal tax law may require us to
withhold 31% of your taxable dividends, capital-gain distributions, and
redemption and exchange proceeds (unless you qualify as an exempt payee under
certain rules).
Other rules about TINs apply for certain investors. For example, if you are
establishing an account for a minor under the Uniform Gifts to Minors Act, you
should furnish the minor's TIN. If the IRS has notified you that you are subject
to backup withholding because you failed to report all interest and dividend
income on your tax return, you must check the appropriate item on the New
Account application. Foreign shareholders should note that any dividends the
Portfolio pays to them may be subject to up to 30% withholding instead of backup
withholding.
[sidebar]
INVESTMENT MINIMUMS
The minimum initial investment is $1,000 for the Portfolio. The minimum
subsequent investment is $100.
After You Invest
Taxes
IRS rules require that the Portfolio distributes all of its net investment
income and capital gains, if any, to shareholders. Capital gains may be taxable
at different rates depending upon the length of time the Portfolio holds its
assets. We will inform you about the source of any dividends and capital gains
upon payment. After the close of each calendar year, we will advise you of their
tax status. The Portfolio's distributions, whether received in cash or
reinvested, may be taxable. Any redemption of the Portfolio's shares or any
exchange of the Portfolio's shares for another Montgomery Fund will be treated
as a sale, and any gain on the transaction may be taxable.
Additional information about tax issues relating to the Portfolio can be
found in our Statement of Additional Information, available free by calling
(800) 572-FUND [3863]. Consult your tax advisor about the potential tax
consequences of investing in the Portfolio.
Dividends and Distributions
As a shareholder in the Portfolio, you may receive income dividends and
capital-gain distributions for which you will owe taxes (unless you invest
solely through a tax-advantaged account such as an IRA or a 401(k) plan). Income
dividends and capital-gain distributions are paid to all shareholders who
maintain accounts with the Portfolio as of its "record date."
If you would like to receive dividends and distributions in cash, indicate
that choice on your New Account application. Otherwise, the distribution will be
reinvested in additional Portfolio shares.
Keeping You Informed
After you invest you will receive, either by regular mail or electronically, our
Shareholder Services Guide, which includes more information about buying,
exchanging and selling shares in the Portfolio. It also describes in more detail
useful tools for investors such as the Montgomery Star System and online
transactions.
During the year, we will also send you, either by mail or electronically,
the following communications:
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* Confirmation statements
* Account statements, sent after the close of each calendar quarter
* Annual and semiannual reports, sent approximately 60 days after June 30 and
December 31
* 1099 tax form, sent by January 31
* Annual updated prospectus, sent to existing shareholders in the fall
To save you money, we send only one copy of each shareholder report or other
mailings to your household if you hold accounts under common ownership or at the
same address (regardless of the number of shareholders or accounts at that
household or address), unless you request additional copies. You also have the
option of receiving the shareholder report or other mailings electronically.
Your consent to receive these materials electronically is effective until
further notice by the Portfolio or revocation by you.
[sidebar]
OUR PARTNERS
As a Montgomery shareholder, you may see the names of our partners on a regular
basis. We all work together to ensure that your investments are handled
accurately and efficiently.
Funds Distributor, Inc., located in New York City and Boston, distributes the
Portfolio.
Investors Fiduciary Trust Company, located in Kansas City, Missouri, is the
Portfolio's master transfer agent. It performs certain recordkeeping and
accounting functions for the Portfolio.
DST Systems, Inc. also located in Kansas City, Missouri, assists Investors
Fiduciary Trust with certain record keeping and accounting functions for the
Portfolio.
INCOME DIVIDENDS CAPITAL GAINS
New Economy 20 Portfolio Declared and paid in the Declared and paid in the
last quarter of each last quarter of each
calendar year* calendar year*
*Following their fiscal year end (June 30), the Portfolio may make additional
distributions to avoid the imposition of a tax.
[sidebar]
HOW TO AVOID "BUYING A DIVIDEND"
If you plan to purchase shares in the Portfolio, check if it is planning to make
a distribution in the near future. Here's why: If you buy shares of the
Portfolio just before a distribution, you'll pay full price for the shares but
receive a portion of your purchase price back as a taxable distribution. This is
called "buying a dividend." Unless you hold the Portfolio in a tax-deferred
account, you will have to include the distribution in your gross income for tax
purposes, even though you may not have participated in the increase of the
Portfolio's appreciation.
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You can find more information about the Portfolio's investment policies in the
Statement of Additional Information (SAI), incorporated by reference in this
prospectus, which is available free of charge.
You can also find further information about the Portfolio in our annual and
semiannual shareholder reports, which discuss the market conditions and
investment strategies that significantly affected the Portfolio's performance
during its most recent fiscal period. To request a copy of the most recent
annual or semiannual report, please call us at (800) 572-FUND [3863], option 3.
To request a free copy of the SAI, call us at (800) 572-FUND [3863]. You can
review and copy further information about the Portfolio, including the SAI, at
the Securities and Exchange Commission's (SEC's) Public Reference Room in
Washington, D.C. To obtain information on the operation of the Public Reference
Room please call (202) 942-8090. Reports and other information about the
Portfolio are available at the SEC's Web site at www.sec.gov. You can also
obtain copies of this information, upon payment of a duplicating fee, by writing
the Public Reference Section of the SEC, Washington, D.C., 20549-6009, or
e-mailing the SEC at [email protected].
Corporate Headquarters:
The Montgomery Funds
101 California Street
San Francisco, CA 94111-9361
- ---------------------------
(800) 572-FUND [3863]
www.montgomeryfunds.com
- ---------------------------
SEC File Nos.: The Montgomery Funds 811-6011
Funds Distributor, Inc. 5/00
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PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION FOR
MONTGOMERY GROWTH 20 PORTFOLIO
MONTGOMERY INTERNATIONAL 20 PORTFOLIO
MONTGOMERY NEW ECONOMY 20 PORTFOLIO
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
MONTGOMERY GROWTH 20 PORTFOLIO
MONTGOMERY INTERNATIONAL 20 PORTFOLIO
MONTGOMERY NEW ECONOMY 20 PORTFOLIO
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
STATEMENT OF ADDITIONAL INFORMATION
May 31, 2000
The Montgomery Funds is an open-end management investment company organized
as a Massachusetts business trust (the "Trust"), having different series of
shares of beneficial interest. The Montgomery Growth 20 Portfolio, the
Montgomery International 20 Portfolio and the Montgomery New Economy 20
Portfolio (each a "Portfolio" and collectively, the "Portfolios") are series of
the Trust. This Statement of Additional Information contains information in
addition to that set forth in the combined prospectus for the Montgomery Growth
20 Portfolio and the Montgomery International 20 Portfolio dated December 31,
1999 and the prospectus for the Montgomery New Economy 20 Portfolio dated May
31, 2000, as those prospectuses may be revised from time to time (each a
"Prospectus" and collectively, the "Prospectuses"). The Prospectuses 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.
<PAGE>
TABLE OF CONTENTS
Page
----
STATEMENT OF ADDITIONAL INFORMATION............................................1
THE TRUST......................................................................3
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS...........................3
RISK FACTORS..................................................................15
INVESTMENT RESTRICTIONS......................................................167
DISTRIBUTIONS AND TAX INFORMATION.............................................19
TRUSTEES AND OFFICERS.........................................................23
INVESTMENT MANAGEMENT AND OTHER SERVICES......................................26
EXECUTION OF PORTFOLIO TRANSACTIONS...........................................30
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................32
DETERMINATION OF NET ASSET VALUE..............................................33
PRINCIPAL UNDERWRITER.........................................................35
PERFORMANCE INFORMATION.......................................................36
GENERAL INFORMATION...........................................................39
FINANCIAL STATEMENTS..........................................................40
APPENDIX......................................................................41
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THE TRUST
The Montgomery Funds is an open-end management investment company organized
as a Massachusetts business trust on May 10, 1990, and is 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. This Statement of Additional Information pertains to the
Montgomery Growth 20 Portfolio (the "Growth 20 Portfolio"), the Montgomery
International 20 Portfolio (the "International 20 Portfolio") and the Montgomery
New Economy 20 Portfolio (the "New Economy 20 Portfolio").
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
The Portfolios are managed by Montgomery Asset Management, LLC (the
"Manager") and their shares are distributed by Funds Distributor, Inc. (the
"Distributor"). The investment objectives and policies of the Portfolios are
described in detail in the respective Prospectuses. The following discussion
supplements the discussion in the Prospectuses.
Each Portfolio is a non-diversified series of The Montgomery Funds. The
achievement of each Portfolio's investment objective will depend upon market
conditions generally and on the Manager's analytical and portfolio management
skills.
Alternative Structures
Each Portfolio has reserved the right, if approved by the Board of Trustees,
to convert to a "master/feeder" structure. In this structure the assets of
mutual funds with common investment objectives and similar parameters are
combined in a pool, rather than being managed separately. The individual funds
are known as "feeder" funds and the pool as the "master" fund. Although
combining assets in this way allows for economies of scale and other advantages,
this change will not affect the investment objectives, philosophies or
disciplines currently employed by the Portfolios and the Manager. Each Portfolio
would notify its shareholders before it took any action to convert to this
structure. As of the date of this Statement of Additional Information, the
Portfolios have not proposed instituting this alternative structure.
Portfolio Securities
Depositary Receipts, Convertible Securities and Securities Warrants. Each
Portfolio may hold securities of foreign issuers in the form of American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depository Receipts ("GDRs"), and other similar global instruments available in
emerging markets, or other securities convertible into securities of eligible
issuers. These securities may not necessarily be denominated in the same
currency as the securities for which they may be exchanged. Generally, ADRs in
registered form are designed for use in U.S. securities markets, and EDRs and
other similar global instruments in bearer form are designed for use in European
securities markets. For purposes of a Portfolio's investment policies, a
Portfolio'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. Each Portfolio may also invest in
convertible securities and securities warrants.
Other Investment Companies. Each Portfolio may invest in securities issued
by other investment companies. Those investment companies must invest in
securities in which the Portfolio can invest in a manner
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consistent with the Portfolio's investment objective and policies. Applicable
provisions of the Investment Company Act require that a Portfolio limit its
investments so that, as determined immediately after a securities purchase is
made: (a) not more than 10% of the value of a Portfolio's total assets will be
invested in the aggregate in securities of investment companies as a group; and
(b) either (i) a Portfolio and affiliated persons of that Portfolio not own
together more than 3% of the total outstanding shares of any one investment
company at the time of purchase (and that all shares of the investment company
held by that Portfolio in excess of 1% of the company's total outstanding shares
be deemed illiquid), or (ii) a Portfolio 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.
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 each of the International 20 Portfolio and the New Economy 20 Portfolio 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. Each of the International 20 Portfolio and the New Economy 20 Portfolio
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
respective Portfolio.
Each of the Growth 20 Portfolio, the International 20 Portfolio and the New
Economy 20 Portfolio 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, each Portfolio bears its
ratable share of that investment company's expenses, including advisory and
administration fees, resulting in an additional layer of management fees and
expenses for shareholders. This duplication of expenses would occur regardless
of the type of investment company, i.e., open-end (mutual fund) or closed-end.
Debt Securities. Each Portfolio 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. Debt securities may constitute up to 35% of each
Portfolio's total assets. In selecting debt securities, the Manager seeks out
good credits and analyzes interest rate trends and specific developments that
may affect individual issuers. As an operating policy, which may be changed by
the Board of Trustees, the Portfolio may invest up to 5% of its total assets in
debt securities rated lower than investment grade. Subject to this limitation,
each Portfolio may invest in any debt security, including securities in default.
After its purchase by a Portfolio, a debt security may cease to be rated or its
rating may be reduced below that required for purchase by the Portfolio. A
security downgraded below the minimum level may be retained if determined by the
Manager and the Board of Trustees to be in the best interests of the Portfolio.
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 a Portfolio and will be
limited to 5% of that Portfolio's total assets.
In addition to traditional corporate, government and supranational debt
securities, each of the International 20 Portfolio and the New Economy 20
Portfolio 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
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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. Each Portfolio may invest a substantial portion,
if not all, of its net assets in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, including repurchase agreements
backed by such securities ("U.S. government securities"). A Portfolio generally
will have a lower yield than if it purchased higher yielding commercial paper or
other securities with correspondingly greater risk instead of U.S. Government
securities.
Certain of the obligations, including U.S. Treasury bills, notes and bonds,
and mortgage-related securities of the GNMA, are issued or guaranteed by the
U.S. government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, 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 a Portfolio'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. The securities issued by these agencies are
discussed in more detail later.
Asset-Backed Securities. Each Portfolio may invest up to 5% of its total
assets in asset-backed securities. These are secured by and payable from pools
of assets, such as motor vehicle installment loan contracts, leases of various
types of real and personal property, and receivables from revolving credit
(e.g., credit card) agreements. Like mortgage-related securities, these
securities are subject to the risk of prepayment.
Structured Notes and Indexed Securities. Each Portfolio may invest in
structured notes and indexed securities. Structured notes are debt securities,
the interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Portfolio invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of that Portfolio's portfolio in an effort
to monitor the Portfolio's interest rate risk.
Privatizations. Each of the International 20 Portfolio and the New Economy
20 Portfolio may invest in privatizations. Foreign governmental programs of
selling interests in government-owned or -controlled enterprises
("privatizations") may represent opportunities for significant capital
appreciation. The ability of U.S. entities, such as either Portfolio, to
participate in privatizations may be limited by local law, or the terms for
participation may be less advantageous than for local investors. There can be no
assurance that privatization programs will be successful.
Special Situations. Each of the International 20 Portfolio and the New
Economy 20 Portfolio may invest in special situations. Each Portfolio believes
that carefully selected investments in joint ventures, cooperatives,
partnerships, private placements, unlisted securities and similar vehicles
(collectively, "special situations")
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could enhance their capital appreciation potential. Each Portfolio also may
invest in certain types of vehicles or derivative securities that represent
indirect investments in foreign markets or securities in which it is
impracticable for the Portfolio to invest directly. Investments in special
situations may be illiquid, as determined by the Manager based on criteria
reviewed by the Board of Trustees. Each Portfolio does not invest more than 15%
of its net assets in illiquid investments, including special situations.
Risk Factors/Special Considerations Relating to Debt Securities
Each of the International 20 Portfolio and the New Economy 20 Portfolio may
invest in debt securities that are rated below BBB by S&P, Baa by Moody's or BBB
by Fitch, or, if unrated, are deemed to be of equivalent investment quality by
the Manager. As an operating policy, which may be changed by the Board of
Trustees without shareholder approval, each Portfolio will invest no more than
5% of its assets in debt securities rated below Baa by Moody's or BBB by S&P,
or, if unrated, of equivalent investment quality as determined by the Manager.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. The net asset value of either Portfolio 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 either Portfolio 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 respective Portfolio.
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 either Portfolio
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 Portfolio 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
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Portfolio may incur additional expenses to seek financial recovery. The
low-rated bond market is relatively new, and many of the outstanding low-rated
bonds have not endured a major business downturn.
Hedging and Risk Management Practices
Each of the International 20 Portfolio and the New Economy 20 Portfolio
typically will not hedge against the foreign currency exchange risks associated
with its investments in foreign securities. Consequently, each Portfolio will be
very sensitive to any changes in exchange rates for the currencies in which its
foreign investments are denominated or linked. Each Portfolio may enter into
forward foreign currency exchange contracts ("forward contracts") and foreign
currency futures contracts, as well as purchase put or call options on foreign
currencies, as described below, in connection with making an investment or, on
rare occasions, to hedge against expected adverse currency exchange rate
changes. Despite their very limited use, each Portfolio may enter into hedging
transactions when, in fact, it is inopportune to do so and, conversely, when it
is more opportune to enter into hedging transactions the Portfolio might not
enter into such transactions. Such inopportune timing of utilization of hedging
practices could result in substantial losses to the Portfolio.
Each of the International 20 Portfolio and the New Economy 20 Portfolio 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.
Forward Contracts. A forward contract, which is individually negotiated and
privately traded by currency traders and their customers, involves an obligation
to purchase or sell a specific currency for an agreed-upon price at a future
date.
Each of the International 20 Portfolio and the New Economy 20 Portfolio may
enter into a forward contract, for example, when it enters into a contract for
the purchase or sale of a security denominated in a foreign currency or is
expecting a dividend or interest payment in order to "lock in" the U.S. dollar
price of a security, dividend or interest payment. When either Portfolio
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, that Portfolio may enter into a forward contract to sell an amount
of that foreign currency approximating the value of some or all of that
Portfolio's portfolio securities denominated in such currency, or when either
Portfolio believes that the U.S. dollar may suffer a substantial decline against
a foreign currency, that Portfolio may enter into a forward contract to buy that
currency for a fixed dollar amount.
In connection with each Portfolio's forward contract transactions, an amount
of that Portfolio'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
Portfolio always will have cash, cash equivalents or liquid equity or debt
securities denominated in the appropriate currency available in an amount
sufficient to cover any commitments under these contracts. Segregated assets
used to cover forward contracts will be marked to market on a daily basis. While
these contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of either Portfolio to utilize forward contracts may be restricted. Forward
contracts may limit potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance by the Portfolio than
if it had not entered into such contracts. Each Portfolio generally will not
enter into a forward foreign currency exchange contract with a term greater than
one year.
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Futures Contracts and Options on Futures Contracts. Each Portfolio typically
will not hedge against movements in interest rates, securities prices or
currency exchange rates. Each Portfolio may still occasionally purchase and sell
various kinds of futures contracts and options on futures contracts. Each
Portfolio 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 Trust 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. Pursuant to
Section 4.5 of the regulations under the Commodity Exchange Act, the notice of
eligibility included the representation that each Portfolio will use futures
contracts and related options for bona fide hedging purposes within the meaning
of CFTC regulations, provided that each Portfolio 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 Portfolio'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%.
Each Portfolio 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 that Portfolio
for which it expects to purchase. When used, the Portfolio'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
Portfolio 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 a Portfolio 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 a Portfolio's
futures contracts on securities or currencies will usually be liquidated in this
manner, that Portfolio may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, a Portfolio 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 that Portfolio proposes to acquire. For example,
when interest rates are rising or securities prices are falling, a Portfolio can
seek, through the sale of futures contracts, to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising, a
Portfolio, through the purchase of futures contracts, can attempt to secure
better rates or prices than might later be available in the market with respect
to anticipated purchases. Similarly, a Portfolio can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Portfolio
can purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that Portfolio has acquired
or expects to acquire.
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As part of its hedging strategy, a Portfolio 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 that Portfolio's
portfolio securities and such futures contracts. Although under some
circumstances prices of securities in a Portfolio'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 Portfolio enter into a greater
or lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting that Portfolio's securities portfolio.
When hedging of this character is successful, any depreciation in the value of
portfolio securities can be substantially offset by appreciation in the value of
the futures position. However, any unanticipated appreciation in the value of a
Portfolio's portfolio securities could be offset substantially by a decline in
the value of the futures position.
The acquisition of put and call options on futures contracts gives a
Portfolio the right (but not the obligation), for a specified price, to sell or
purchase the underlying futures contract at any time during the option period.
Purchasing an option on a futures contract gives a Portfolio the benefit of the
futures position if prices move in a favorable direction, and limits its risk of
loss, in the event of an unfavorable price movement, to the loss of the premium
and transaction costs.
A Portfolio may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. A Portfolio's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by a Portfolio is potentially
unlimited.
A Portfolio 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
its qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies. Each Portfolio may
purchase put and call options on securities in which it has invested, on foreign
currencies represented in its portfolios and on any securities index based in
whole or in part on securities in which that Portfolio may invest. A Portfolio
also may enter into closing sales transactions in order to realize gains or
minimize losses on options it has purchased.
A Portfolio normally will purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest or
a positive change in the currency in which such securities are denominated. The
purchase of a call option would entitle a Portfolio, in return for the premium
paid, to purchase specified securities or a specified amount of a foreign
currency at a specified price during the option period.
A Portfolio may purchase and sell options traded on U.S. and foreign
exchanges. Although a Portfolio will generally purchase only those options for
which there appears to be an active secondary market, there can be no assurance
that a liquid secondary market on an exchange will exist for any particular
option or at any particular time. For some options, no secondary market on an
exchange may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that a Portfolio would have
to exercise its options in order to realize any profit and would incur
transaction costs upon the purchase or sale of the underlying securities.
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Secondary markets on an exchange may not exist or may not be liquid for a
variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although the Portfolios do not currently intend to do so, they may, in the
future, write (i.e., sell) covered put and call options on securities,
securities indices and currencies in which they may invest. A covered call
option involves a Portfolio's giving another party, in return for a premium, the
right to buy specified securities owned by that Portfolio at a specified future
date and price set at the time of the contract. A covered call option serves as
a partial hedge against a price decline of the underlying security. However, by
writing a covered call option, a Portfolio gives up the opportunity, while the
option is in effect, to realize gain from any price increase (above the option
exercise price) in the underlying security. In addition, a Portfolio's ability
to sell the underlying security is limited while the option is in effect unless
that Portfolio effects a closing purchase transaction.
Each Portfolio also may write covered put options that give the holder of
the option the right to sell the underlying security to that Portfolio at the
stated exercise price. A Portfolio will receive a premium for writing a put
option but will be obligated for as long as the option is outstanding to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise. In order to "cover" put options
it has written, a Portfolio will cause its custodian to segregate cash, cash
equivalents, U.S. government securities or other liquid equity or debt
securities with at least the value of the exercise price of the put options. A
Portfolio will not write put options if the aggregate value of the obligations
underlying the put options exceeds 25% of that Portfolio'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 Portfolios' orders.
Equity-Linked Derivatives--SPDRs, WEBS, DIAMONDS and OPALS. Each Portfolio
may invest in Standard & Poor's ("S&P") Depository Receipts ("SPDRs") and S&P's
MidCap 400 Depository Receipts ("MidCap SPDRs"), World Equity Benchmark Series
("WEBS"), Dow Jones Industrial Average instruments ("DIAMONDS") and baskets of
Country Securities ("OPALS"). Each of these instruments is a derivative security
whose value follows a well-known securities index or baskets of securities.
SPDRs and MidCap SPDRs are designed to follow the performance of S&P 500
Index and the S&P MidCap 400 Index, respectively. WEBS are currently available
in 17 varieties, each designed to follow the performance of a different Morgan
Stanley Capital International country index. DIAMONDS are designed to follow the
performance of the Dow Jones Industrial Average which tracks the composite stock
performance of 30 major U.S. companies in a diverse range of industries.
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OPALS track the performance of adjustable baskets of stocks owned by Morgan
Stanley Capital (Luxembourg) S.A. (the "Counterparty") until a specified
maturity date. Holders of OPALS will receive semi-annual distributions
corresponding to dividends received on shares contained in the underlying basket
of stocks and certain amounts, net of expenses. On the maturity date of the
OPALS, the holders will receive the physical securities comprising the
underlying baskets. OPALS, like many of these types of instruments, represent an
unsecured obligation and therefore carry with them the risk that the
Counterparty will default.
Because the prices of SPDRs, MidCap SPDRs, WEBS, DIAMONDS and OPALS are
correlated to diversified portfolios, they are subject to the risk that the
general level of stock prices may decline or that the underlying indices
decline. In addition, because SPDRs, MidCap SPDRs, WEBS, DIAMONDS and OPALS will
continue to be traded even when trading is halted in component stocks of the
underlying indices, price quotations for these securities may, at times, be
based upon non-current price information with respect to some or even all of the
stocks in the underlying indices. In addition to the risks disclosed in "Foreign
Securities" below, because WEBS mirror the performance of a single country
index, an economic downturn in a single country could significantly adversely
affect the price of the WEBS for that country.
Other Investment Practices
Repurchase Agreements. Each Portfolio may enter into repurchase agreements.
A Portfolio's repurchase agreements will generally involve a short-term
investment in a U.S. government security or other high-grade liquid debt
security, with the seller of the underlying security agreeing to repurchase it
at a mutually agreed-upon time and price. The repurchase price is generally
higher than the purchase price, the difference being interest income to that
Portfolio. Alternatively, the purchase and repurchase prices may be the same,
with interest at a stated rate due to a Portfolio together with the repurchase
price on the date of repurchase. In either case, the income to a Portfolio 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, reviews on a periodic basis the suitability and creditworthiness,
and the value of the collateral, of those sellers with whom the Portfolios enter
into repurchase agreements to evaluate potential risk. All repurchase agreements
will be made pursuant to procedures adopted and regularly reviewed by the Board
of Trustees.
The Portfolios generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Portfolios regard repurchase agreements
with maturities in excess of seven days as illiquid. A Portfolio may not invest
more than 15% of the value of its net assets in illiquid securities, including
repurchase agreements with maturities greater than seven days.
For purposes of the Investment Company Act, a repurchase agreement is deemed
to be a collateralized loan from a Portfolio to the seller of the security
subject to the repurchase agreement. It is not clear whether a court would
consider the security acquired by a Portfolio subject to a repurchase agreement
as being owned by that Portfolio or as being collateral for a loan by that
Portfolio to the seller. If bankruptcy or insolvency proceedings are commenced
with respect to the seller of the security before its repurchase, a Portfolio
may encounter delays and incur costs before being able to sell the security.
Delays may involve loss of interest or a decline in price of the security. If a
court characterizes such a transaction as a loan and a Portfolio has not
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perfected a security interest in the security, that Portfolio may be required to
return the security to the seller's estate and be treated as an unsecured
creditor. As such, a Portfolio would be at risk of losing some or all of the
principal and income involved in the transaction. As with any unsecured debt
instrument purchased for a Portfolio, the Manager seeks to minimize the risk of
loss through repurchase agreements by analyzing the creditworthiness of the
seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, a Portfolio
also runs the risk that the seller may fail to repurchase the security. However,
each Portfolio 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 Portfolio plus
accrued interest, and each Portfolio 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), a
Portfolio, pursuant to its repurchase agreement, may require the seller of the
security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement equals or exceeds the repurchase
price (including interest) at all times.
The Portfolios may participate in one or more joint accounts with each other
and other series of the Trust that invest in repurchase agreements
collateralized, subject to their investment policies, either by (i) obligations
issued or guaranteed as to principal and interest by the U.S. government or by
one of its agencies or instrumentalities, or (ii) privately issued
mortgage-related securities that are in turn collateralized by securities issued
by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using objective criteria. Any
such repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event have a duration
of more than seven days.
Reverse Repurchase Agreements. Each Portfolio may enter into reverse
repurchase agreements. A Portfolio typically will invest the proceeds of a
reverse repurchase agreement in money market instruments or repurchase
agreements maturing not later than the expiration of the reverse repurchase
agreement. This use of proceeds involves leverage, and a Portfolio will enter
into a reverse repurchase agreement for leverage purposes only when the Manager
believes that the interest income to be earned from the investment of the
proceeds would be greater than the interest expense of the transaction. A
Portfolio also may use the proceeds of reverse repurchase agreements to provide
liquidity to meet redemption requests when sale of that Portfolio's securities
is disadvantageous.
Each Portfolio will cause 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. Such assets are marked to market daily to ensure that
full collateralization is maintained.
Lending of Portfolio Securities. Although the Portfolios currently do not
intend to do so, each Portfolio 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. A Portfolio may pay
reasonable administrative and custodial fees in connection with a loan and
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may pay a negotiated portion of the income earned on the cash to the borrower or
placing broker. Loans are subject to termination at the option of a Portfolio or
the borrower at any time. Upon such termination, that Portfolio is entitled to
obtain the return of the securities loaned within five business days.
For the duration of the loan, a Portfolio will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned, will receive proceeds from the investment of the collateral and will
continue to retain any voting rights with respect to those securities. As with
other extensions of credit, there are risks of delay in recovery or even losses
of rights in the securities loaned should the borrower of the securities fail
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
When-Issued and Forward Commitment Securities. Each Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" or "delayed delivery" basis. The price of such securities
is fixed at the time the commitment to purchase or sell is made, but delivery
and payment for the securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Portfolio to the
issuer. While each Portfolio reserves the right to sell when-issued or delayed
delivery securities prior to the settlement date, each Portfolio intends to
purchase such securities with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons. At the time a Portfolio 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. Each Portfolio does not believe that its net
asset values will be adversely affected by its purchase of securities on a
when-issued or delayed delivery basis. Each Portfolio will cause 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 a Portfolio are held in cash pending the settlement of a purchase of
securities, that Portfolio will earn no income on these assets.
Each Portfolio may seek to hedge investments or to realize additional gains
through forward commitments to sell high-grade liquid debt securities it does
not own at the time it enters into the commitments. Such forward commitments
effectively constitute a form of short sale. To complete such a transaction, a
Portfolio must obtain the security which it has made a commitment to deliver. If
a Portfolio does not have cash available to purchase the security it is
obligated to deliver, it may be required to liquidate securities in its
portfolio at either a gain or a loss, or borrow cash under a reverse repurchase
or other short-term arrangement, thus incurring an additional expense. In
addition, a Portfolio may incur a loss as a result of this type of forward
commitment if the price of the security increases between the date that
Portfolio enters into the forward commitment and the date on which it must
purchase the security it is committed to deliver. That Portfolio will realize a
gain from this type of forward commitment if the security declines in price
between those dates. The amount of any gain will be reduced, and the amount of
any loss increased, by the amount of the interest or other transaction expenses
that Portfolio may be required to pay in connection with this type of forward
commitment. Whenever a Portfolio engages in this type of transaction, it will
segregate assets as discussed above.
Illiquid Securities. Each Portfolio may invest up to 15% of its net assets
in illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which a Portfolio has valued the
securities and
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includes, among others, repurchase agreements maturing in more than seven days,
certain restricted securities and securities that are otherwise not freely
transferable. Illiquid securities also include shares of an investment company
held by a Portfolio 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 a Portfolio may include those that
are subject to restrictions on transferability contained in the securities laws
of other countries. Securities that are freely marketable in the country where
they are principally traded, but that would not be freely marketable in the
United States, will not be considered illiquid. Where registration is required,
a Portfolio 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 that Portfolio may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, that Portfolio might obtain a less favorable price than prevailed
when it decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities sold
pursuant to Rule 144A in many cases provide both readily ascertainable values
for restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. Such markets might include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified buyers
interested in purchasing Rule 144A-eligible restricted securities, however,
could adversely affect the marketability of such portfolio securities and result
in a Portfolio's inability to dispose of such securities promptly or at
favorable prices.
The Board of Trustees has delegated the function of making day-to-day
determinations of liquidity to the Manager pursuant to guidelines approved by
the Board of Trustees. 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 each Portfolio's portfolio
and reports periodically on such decisions to the Board of Trustees.
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RISK FACTORS
The following describes certain risks involved with investing in the
Portfolios in addition to those described in the prospectus or elsewhere in this
Statement of Additional Information.
Foreign Securities
The Portfolios may purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation; taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations; foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments); default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the United States. Foreign
companies are often not subject to uniform accounting, auditing and financial
reporting standards. Further, the Portfolios may encounter difficulties in
pursuing legal remedies or in obtaining judgments in foreign courts.
Brokerage commissions, fees for custodial services and other costs relating
to investments by the Portfolios in other countries are generally greater than
in the United States. Foreign markets have different clearance and settlement
procedures from those in the United States, and certain markets have experienced
times when settlements did not keep pace with the volume of securities
transactions which resulted in settlement difficulty. The inability of a
Portfolio to make intended security purchases due to settlement difficulties
could cause it to miss attractive investment opportunities. Inability to sell a
portfolio security due to settlement problems could result in loss to a
Portfolio if the value of the portfolio security declined, or result in claims
against that Portfolio if it had entered into a contract to sell the security.
In certain countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. The securities markets of many of the countries in
which the Portfolios may invest may also be smaller, less liquid and subject to
greater price volatility than those in the United States.
Because certain securities may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions between currencies. A change in the value of a foreign currency
against the U.S. dollar results in a corresponding change in the U.S. dollar
value of a Portfolio's securities denominated in the currency. Such changes also
affect that Portfolio's income and distributions to shareholders. A Portfolio
may be affected either favorably or unfavorably by changes in the relative rates
of exchange among the currencies of different nations, and a Portfolio may
therefore engage in foreign currency hedging strategies. Such strategies,
however, involve certain transaction costs and investment risks, including
dependence upon the Manager's ability to predict movements in exchange rates.
Some countries in which the Portfolios may invest may also have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies has experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on a
Portfolio. Many countries in which a
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Portfolio may invest have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuation in
inflation rates may have negative effects on certain economies and securities
markets. Moreover, the economies of some countries may differ favorably or
unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments. Certain countries also limit the
amount of foreign capital that can be invested in their markets and local
companies, creating a "foreign premium" on capital investments available to
foreign investors such as the Portfolios. The Portfolios may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Exchange Rates and Policies
Each of the International 20 Portfolio and the New Economy 20 Portfolio
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 Portfolio 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 Portfolio from repatriating invested capital
and dividends, withhold portions of interest and dividends at the source, or
impose other taxes, with respect to the Portfolio'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.
Each of these Portfolios 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 Manager considers at least annually the likelihood of the imposition by
any foreign government of exchange control restrictions that would affect the
liquidity of each Portfolio'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 Manager also considers the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services").
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.
Equity Swaps
Each Portfolio may invest in equity swaps. Equity swaps allow the parties to
exchange the dividend income or other components of return on an equity
investment (e.g., a group of equity securities or an index) for a component of
return on another non-equity or equity investment. Equity swaps are derivatives,
and their
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values can be very volatile. To the extent that the Manager does not accurately
analyze and predict the potential relative fluctuation of the components swapped
with another party, a Portfolio 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, a Portfolio may suffer a loss if the counterparty defaults.
Non-Diversified Portfolio
The Portfolios are "non-diversified" investment companies under the
Investment Company Act. This means that, with respect to 50% of each Portfolio's
total assets, it may not invest more than 5% of its total assets in the
securities of any one issuer (other than the U.S. government). The balance of
its assets may be invested in as few as two issuers. Thus, up to 25% of each
Portfolio's total assets may be invested in the securities of any one issuer.
The investment return on a non-diversified portfolio, however, typically is
dependent upon the performance of a smaller number of issuers relative to the
number of issuers held in a diversified portfolio. If the financial condition or
market assessment of certain issuers changes, a Portfolio's policy of acquiring
large positions in the obligations of a relatively small number of issuers may
affect the value of its portfolio to a greater extent than if its portfolio were
fully diversified.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by the
Portfolios and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of the Portfolios' outstanding voting
securities as defined in the Investment Company Act. The Portfolios may not:
1. 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, or (c) to the extent the entry into a repurchase
agreement or a reverse dollar roll transaction is deemed to be a loan.
2. (a) Borrow money, except for temporary or emergency purposes from a
bank, or pursuant to reverse repurchase agreements or dollar roll
transactions 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 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
contracts, futures contracts, option contracts or other hedging
transactions.
3. Except as required in connection with permissible hedging activities,
purchase securities on margin or underwrite securities. (This does not
preclude a Portfolio from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio
securities
B-17
<PAGE>
or from engaging in 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.)
4. Buy or sell real estate or commodities or commodity contracts;
however, a Portfolio, 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 this Statement of Additional
Information.
5. Invest in securities of other investment companies, except to the
extent permitted by the Investment Company Act and discussed in this
Statement of Additional Information, or as such securities may be
acquired as part of a merger, consolidation or acquisition of assets.
6. 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 a Portfolio. (This is an operating policy that may be
changed without shareholder approval, consistent with the Investment
Company Act and changes in relevant SEC interpretations).
7. Invest in any issuer for purposes of exercising control or management
of the issuer. (This is an operating policy that may be changed
without shareholder approval, consistent with the Investment Company
Act.)
8. 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
Portfolios generally rely on the U.S. Office of Management and
Budget's Standard Industrial Classifications.
9. Issue senior securities, as defined in the Investment Company Act,
except that this restriction shall not be deemed to prohibit a
Portfolio from (a) making any permitted borrowings, mortgages or
pledges, or (b) entering into permissible repurchase and dollar roll
transactions.
10. Except as described in this Statement of Additional Information,
acquire or dispose of put, call, straddle or spread options unless:
(a) such options are written by other persons or are put options
written with respect to securities representing 25% or less of a
Portfolio's total assets, and
(b) the aggregate premiums paid on all such options which are held at
any time do not exceed 5% of a Portfolio's total assets.
B-18
<PAGE>
(This is an operating policy that may be changed without shareholder
approval.)
11. Except as described in the Prospectuses and this Statement of
Additional Information, engage in short sales of securities. (This is
an operating policy that may be changed without shareholder approval,
consistent with applicable regulations.)
12. Purchase more than 10% of the outstanding voting securities of any one
issuer. (This is an operating policy that may be changed without
shareholder approval.)
13. Invest in commodities, except for futures contracts or options on
futures contracts if the investments are either (a) for bona fide
hedging purposes within the meaning of CFTC regulations or (b) for
other than bona fide hedging purposes if, as a result thereof, no more
than 5% of a Portfolio'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 that
may be changed without shareholder vote, these restrictions may be amended upon
approval by the Board of Trustees 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 Portfolios receive income in the form of dividends and
interest earned on their investments in securities. This income, less the
expenses incurred in their operations, is the Portfolios' net investment income,
substantially all of which will be declared as dividends to the Portfolios'
shareholders.
The amount of ordinary income dividend payments by a Portfolio is dependent
upon the amount of net investment income received by that Portfolio from its
portfolio holdings, is not guaranteed and is subject to the discretion of the
Portfolio's Board of Trustees. The Portfolios do not pay "interest" or guarantee
any fixed rate of return on an investment in its shares.
The Portfolios also may derive capital gains or losses in connection with
sales or other dispositions of their portfolio securities. Any net gain a
Portfolio may realize from transactions involving investments held less than the
period required for long-term capital gain or loss recognition or otherwise
producing short-term capital gains and losses (taking into account any carryover
of capital losses from the eight previous taxable years), although a
distribution from capital gains, will be distributed to shareholders with and as
a part of dividends giving rise to ordinary income. If during any year a
Portfolio realizes a net gain on transactions involving investments held for the
period required for long-term capital gain or loss recognition or otherwise
producing long-term capital gains and losses, that Portfolio will have a net
long-term capital gain. After deduction of the amount of any net short-term
capital loss, the balance (to the extent not offset by any capital losses
carried over from the eight previous taxable years) will be distributed and
treated as long-term capital gains in the hands of the shareholders regardless
of the length of time a Portfolio's shares may have been held by the
shareholders.
B-19
<PAGE>
The maximum long-term federal capital gains rate for individuals is 20% with
respect to capital assets held for more than 12 months. The maximum capital
gains rate for corporate shareholders is the same as the maximum tax rate for
ordinary income.
Any dividend or distribution per share paid by a Portfolio reduces its 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 reinvested in additional shares of
a Portfolio unless the shareholder has otherwise indicated. Investors have the
right to change their elections 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. Each Portfolio has elected and intends to continue to
qualify to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), 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.
A Portfolio that has filed a tax return has so qualified and elected in prior
tax years. The Portfolios' policy is to distribute to their shareholders all of
their 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 the Portfolios will not be subject to any federal income tax or
excise taxes based on net income. However, the Board of Trustees may elect to
pay such excise taxes if it determines that payment is, under the circumstances,
in the best interests of the Portfolios.
In order to qualify as a regulated investment company, each Portfolio must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stocks or other securities, or other
income (generally including gains from options, futures or forward contracts)
derived with respect to the business of investing in stock, securities or
currency, 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 that Portfolio'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 Portfolios will not be subject
to federal income tax on taxable income (including realized capital gains) that
is distributed to shareholders in accordance with the timing requirements of the
Code. If a Portfolio is unable to meet certain requirements of the Code, it may
be subject to taxation as a corporation.
Distributions of net investment income and net realized capital gains by a
Portfolio will be taxable to shareholders whether made in cash or reinvested in
shares. In determining amounts of net realized capital gains to be distributed,
any capital loss carryovers from the eight prior taxable years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of a Portfolio on the
B-20
<PAGE>
reinvestment date. Portfolio distributions also will be included in individual
and corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Portfolios or any securities dealer effecting a redemption of the
Portfolios' shares by a shareholder will be required to file information reports
with the IRS with respect to distributions and payments made to the shareholder.
In addition, the Portfolios will be required to withhold federal income tax at
the rate of 31% on taxable dividends, redemptions and other payments made to
accounts of individual or other non-exempt shareholders who have not furnished
their correct taxpayer identification numbers and made certain required
certifications on the Account Application Form or with respect to which the
Portfolios 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 Portfolios intend to declare and pay dividends and other distributions,
as stated in the Prospectus. In order to avoid the payment of any federal excise
tax based on net income, the Portfolios 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 Portfolios may receive dividend distributions from U.S. corporations. To
the extent that a Portfolio receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of that Portfolio may be entitled to the "dividends received"
deduction. Availability of the deduction is subject to certain holding period
and debt-financing limitations.
If more than 50% in value of the total assets of a Portfolio at the end of
its fiscal year is invested in stock or other securities of foreign
corporations, that Portfolio may elect to pass through to its shareholders the
pro rata share of all foreign income taxes paid by that Portfolio. If this
election is made, shareholders will be (i) required to include in their gross
income their pro rata share of any foreign income taxes paid by a Portfolio, and
(ii) entitled either to deduct their share of such foreign taxes in computing
their taxable income or to claim a credit for such taxes against their U.S.
income tax, subject to certain limitations under the Code, including certain
holding period requirements. In this case, shareholders will be informed in
writing by that Portfolio at the end of each calendar year regarding the
availability of any credits on and the amount of foreign source income
(including or excluding foreign income taxes paid by that Portfolio) to be
included in their income tax returns. If 50% or less in value of a Portfolio's
total assets at the end of its fiscal year are invested in stock or other
securities of foreign corporations, that Portfolio will not be entitled under
the Code to pass through to its shareholders their pro rata share of the foreign
income taxes paid by that Portfolio. In this case, these taxes will be taken as
a deduction by that Portfolio.
A Portfolio may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. Each
Portfolio may invest up to 10% of its total assets in the stock of foreign
investment companies. Such companies are likely to be treated as "passive
foreign investment companies" ("PFICs") under the Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy the
PFIC definition. A portion of the income and gains that a Portfolio derives from
PFIC stock may be subject to a non-deductible federal income tax at the
Portfolio level. In some cases, that Portfolio may be able to avoid this tax by
electing to be taxed currently on its share of the PFIC's income, whether or not
B-21
<PAGE>
such income is actually distributed by the PFIC. Each Portfolio will endeavor to
limit its exposure to the PFIC tax by investing in PFICs only where the election
to be taxed currently will be made. Because it is not always possible to
identify a foreign issuer as a PFIC in advance of making the investment, a
Portfolio may incur the PFIC tax in some instances.
Hedging. The use of hedging strategies, such as entering into futures
contracts and forward contracts and purchasing options, involves complex rules
that will determine the character and timing of recognition of the income
received in connection therewith by a Portfolio. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by a Portfolio with respect to its business of investing in securities
or foreign currencies will qualify as permissible income under Subchapter M of
the Code.
For accounting purposes, when a Portfolio purchases an option, the premium
paid by that Portfolio is recorded as an asset and is subsequently adjusted to
the current market value of the option. Any gain or loss realized by a Portfolio
upon the expiration or sale of such options held by that Portfolio generally
will be capital gain or loss.
Any security, option, or other position entered into or held by a Portfolio
that substantially diminishes that Portfolio's risk of loss from any other
position held by that Portfolio may constitute a "straddle" for federal income
tax purposes. In general, straddles are subject to certain rules that may affect
the amount, character and timing of a Portfolio's gains and losses with respect
to straddle positions by requiring, among other things, that the loss realized
on disposition of one position of a straddle be deferred until gain is realized
on disposition of the offsetting position; that a Portfolio's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to a
Portfolio that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are subject to
Section 1256 of the Code ("Section 1256 Contracts") and that are held by a
Portfolio at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions that may affect the amount, timing and character
of income, gain or loss recognized by a Portfolio. Under these rules, foreign
exchange gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency-denominated
payables and receivables and foreign currency options and futures contracts
(other than options and futures contracts that are governed by the
mark-to-market and 60/40 rules of Section 1256 of the Code and for which no
election is made) is treated as ordinary income or loss. Some part of a
Portfolio'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.
B-22
<PAGE>
Redemptions and exchanges of shares of a Portfolio will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends with respect to such shares during such
six-month period. All or a portion of a loss realized upon the redemption of
shares of a Portfolio may be disallowed to the extent shares of that Portfolio
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 Portfolios. The law firm of Paul, Hastings, Janofsky &
Walker LLP has expressed no opinion in respect thereof. Nonresident aliens and
foreign persons are subject to different tax rules, and may be subject to
withholding of up to 30% on certain payments received from the Portfolios.
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
Portfolios.
TRUSTEES AND OFFICERS
The Trustees of the Trust are responsible for the overall management of the
Portfolios, including establishing the Portfolios' policies, general supervision
and review of their investment activities. The officers (the Trust, as well as
two affiliated Trusts, The Montgomery Funds II and The Montgomery Funds III,
have the same officers), who administer the Portfolios' daily operations, are
appointed by the Board of Trustees. The current Trustees and officers of the
Trust 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 (born 1955)
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 (born 1966)
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 (born 1959)
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
B-23
<PAGE>
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 (born 1964)
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 (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
John P. Covino, Vice President (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Covino is a Vice
President and Treasury Group Manager of Treasury Servicing and Administration of
FDI. From February 1995 to November 1998, Mr. Covino was employed by Fidelity
Investments where he held multiple positions in its Institutional Brokerage
Group. Prior to joining Fidelity Mr. Covino was employed by SunGard Brokerage
systems where he was responsible for the technology and development of the
accounting product group.
Marie E. Connolly, Vice President and Assistant Treasurer (born 1957)
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 (born 1969)
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.
B-24
<PAGE>
Joseph F. Tower, III, Vice President and Assistant Treasurer (born 1962)
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 (born 1941)
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.,
an executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
Andrew Cox, Trustee (born 1944)
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 (born 1949)
636 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 (born 1939)+
101 California Street, San Francisco, California 94111. R. Stephen Doyle, the
founder of Montgomery Asset Management, began his career in the financial
services industry in 1974. Before starting Montgomery Asset Management in 1990,
Mr. Doyle was a General Partner and member of the Management Committee at
Montgomery Securities with specific responsibility for private placements and
venture capital. Prior to joining Montgomery Securities, Mr. Doyle was at E. F.
Hutton & Co. as a Vice President with responsibility for both retail and
institutional accounts. Mr. Doyle was also with Connecticut General Insurance,
where he served as a Consultant to New York Stock Exchange Member Firms in the
area of financial planning.
- ----------
+Trustee deemed an "interested person" of the Funds as defined in the Investment
Company Act.
B-25
<PAGE>
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 Manager or the Distributor may receive
remuneration indirectly because the Manager will receive a management fee from
the Portfolios and Funds Distributor, Inc., will receive commissions for
executing portfolio transactions for the Portfolios. The Trustees who are not
affiliated with the Manager or the Distributor receive an annual retainer and
fees and expenses for each regular Board of Trustees meeting attended. The
aggregate compensation to be paid by the Trust to each of the Trustees during
the fiscal year ending June 30, 2000, and the aggregate compensation to be paid
to each of the Trustees during the fiscal year ending June 30, 2000, by all of
the registered investment companies to which the Manager provides investment
advisory services, are set forth below.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1999
--------------------------------------------------------------------------
Pension or
Aggregate Retirement Benefits Total Compensation From the
Compensation from The Accrued as Part of Trust and Fund Complex
Name of Trustee Montgomery Funds Fund Expenses* (2 additional Trusts)
- ---------------------- --------------------------------------------------------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
- ---------------------- --------------------------------------------------------------------------
John A. Farnsworth $35,000 -- $55,000
- ---------------------- --------------------------------------------------------------------------
Andrew Cox $35,000 -- $55,000
- ---------------------- --------------------------------------------------------------------------
Cecilia H. Herbert $35,000 -- $55,000
- ---------------------- --------------------------------------------------------------------------
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
Shares of the Portfolios are all sold without a sales load. Therefore, there
is no existing arrangement to reduce or eliminate any sales loads for Trustees
and other affiliated persons of the Trust.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus, investment
management services are provided to the Portfolios by Montgomery Asset
Management LLC (the "Manager"), pursuant to an Investment Management Agreement
between the Manager and The Montgomery Funds dated July 31, 1997 (the
"Agreement").
The Agreement is in effect with respect to the Portfolios for two years
after each Portfolio's inclusion in its Trust's Agreement (on or around its
beginning of public operations) and then continue for periods not exceeding one
year so long as such continuation is approved at least annually by (1) the Board
of Trustees or the vote of a majority of the outstanding shares of the
Portfolios, and (2) 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 Portfolios or the Manager upon
60 days' written notice, and are automatically terminated in the event of its
assignment as defined in the Investment Company Act.
For services performed under the Agreement, each Portfolio pays the Manager
a management fee (accrued daily but paid when requested by the Manager) based
upon the average daily net assets of the Portfolio at the following annual
rates:
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<PAGE>
PORTFOLIO AVERAGE DAILY NET ASSETS ANNUAL RATE
- --------------------------------------------------------------------------------
First $500 million 1.00%
Montgomery Growth 20 Portfolio Next $500 million 0.90%
Over $1 billion 0.80%
First $500 million 1.10%
Montgomery International 20 Portfolio Next $500 million 1.00%
Over $1 billion 0.90%
First $____ million 1.00%
Montgomery New Economy 20 Portfolio Next $____ million [___%]
Over $__________ [___%]
As noted in the Prospectus, the Manager has agreed in an Operating Expense
Agreement with the Trust to reduce some or all of its management fee (and to
reimburse other Portfolio expenses) if necessary to keep total operating
expenses (excluding interest, taxes, dividend expenses and Rule 12b-1 Plan
fees), expressed on an annualized basis, at or below 1.40% of the Growth 20
Portfolio's average net assets, at or below 1.65% of the International 20
Portfolio's average net assets and at or below 1.45% of the New Economy 20
Portfolio's average net assets.
The Operating Expense Agreement has a 10-year rolling term. The Manager also
may voluntarily reduce additional amounts to increase the return to the
Portfolios' investors. Any reductions made by the Manager in its fees are
subject to reimbursement by the Portfolios within the following three years
provided the Portfolios are able to effect such reimbursement and remain in
compliance with the foregoing expense limitations. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the
Portfolios 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,
Rule 12b-1 fees, expenses incurred in connection with any merger or
reorganization or extraordinary expenses such as litigation.
The Agreement was approved with respect to the Portfolios by the Board of
Trustees at duly called meetings. In considering the Agreement, the Trustees
specifically considered and approved the provision that permits the Manager to
seek reimbursement of any reduction made to its management fee within the
three-year period. The Manager's ability to request reimbursement is subject to
various conditions. First, any reimbursement is subject to the Portfolios'
ability to effect such reimbursement and remain in compliance with applicable
expense limitations in place at that time. Second, the Manager must specifically
request the reimbursement from the Board of Trustees. Third, the Board of
Trustees must approve such reimbursement as appropriate and not inconsistent
with the best interests of the Portfolios and the shareholders at the time such
reimbursement is requested. Because of these substantial contingencies, the
potential reimbursements will be accounted for as contingent liabilities that
are not recordable on the balance sheet of the Portfolios until
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collection is probable; but the full amount of the potential liability will
appear in a footnote to the Portfolios' financial statements. At such time as it
appears probable that the Portfolios are able to effect such reimbursement, that
the Manager intends to seek such reimbursement and that the Board of Trustees
has or is likely to approve the payment of such reimbursement, the amount of the
reimbursement will be accrued as an expense of the Portfolios for that current
period.
Information regarding advisory fees actually paid to the Manager has not
been provided since the Growth 20 Portfolio and the International 20 Portfolio
were launched on December 31, 1999, and the New Economy 20 Portfolio was
launched on May 31, 2000.
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 Portfolio is
pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Portfolios.
Shareholder Services Plan. The Trust has adopted a Shareholder Services Plan
(the "Services Plan") with respect to the Portfolios. The Manager (or its
affiliate) serves as the service provider under the Services Plan and, as such,
receives any fees paid by the Portfolios pursuant to the Services Plan.
On August 24, 1995, the Board of Trustees of the Trust, 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 each Fund. [The Plan was later amended to cover Class R shares
of the Portfolios.]
Under the Services Plan, the covered shares of each Portfolio 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 the covered shares of each
Portfolio. Such amounts are compensation for providing certain services to
clients owning those shares of the Portfolios, including personal services such
as processing purchase and redemption transactions, assisting in change of
address requests and similar administrative details, and providing other
information and assistance with respect to a Portfolio, including responding to
shareholder inquiries.
The Distributor. Funds Distributor, Inc., the Distributor, may provide
certain administrative services to the Portfolios on behalf of the Manager. The
Distributor will also perform investment banking, investment advisory and
brokerage services for persons other than the Portfolios, including issuers of
securities in which the Portfolios may invest. These activities from time to
time may result in a conflict of interests of the Distributor with those of the
Portfolios, and may restrict the ability of the Distributor to provide services
to the Portfolios.
Referral Arrangements. The Distributor from time to time compensates other
parties for the solicitation of additional investments by existing shareholders
or new shareholder accounts. The Portfolios will not pay this compensation out
of their assets unless they have adopted a Rule 12b-1 plan. The Distributor pays
compensation only to those who have a written agreement with the Distributor or
the Manager. The only agreement currently in place is with Round Hill
Securities, Inc. ("Round Hill") and relates to a very limited
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number of its registered representatives. The Distributor currently pays Round
Hill at the annual rate of 0.25% of average daily assets introduced and
maintained in customer accounts of these representatives. The Distributor also
may reimburse certain solicitation expenses.
The Custodian. The Chase Manhattan Bank serves as principal Custodian of the
Portfolios' assets, which are maintained at the Custodian's office at 4 Chase
MetroTech Center, Brooklyn, New York, 11245, and at the offices of its branches
and agencies throughout the world. The Board of Trustees has delegated various
foreign custody responsibilities to the Custodian, as the "Foreign Custody
Manager" for the Portfolios to the extent permitted by Rule 17f-5. The Custodian
has entered into agreements with foreign sub-custodians in accordance with
delegation instructions approved by the Board of 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.
Administrative and Other Services. Montgomery Asset Management, LLC ("MAM")
serves as the Administrator to the Portfolio a pursuant to an Administrative
Services Agreement between the Trust and MAM (the "Agreement"). In approving the
Agreement, the Board of Trustees, including a majority of the independent
Trustees, recognizes that the Agreement involves an affiliate of the Trust;
however, it has made separate determinations that, among other things, the
nature and quality of the services rendered under the Agreement are at least
equal to the nature and quality of the service that would be provided by an
unaffiliated entity. Subject to the control of the Trust and the supervision of
the Board of Trustees, the Administrator performs the following types of
services for the Portfolios: (i) furnish performance, statistical and research
data; (ii) prepare and file various reports required by federal, state and other
applicable laws and regulations; (iii) prepare and print of all documents,
prospectuses and reports to shareholders; (iv) prepare financial statements; (v)
prepare agendas, notices and minutes for each meeting of the Board of Trustees;
(vi) develop and monitor compliance procedures; (vii) monitor Blue Sky filings
and (viii) manage legal services. For its services performed under the
Agreement, each Portfolio pays the Administrator an administrative fee based
upon a percentage of the average daily net assets of each Portfolio. The fee may
vary from an annual rate of 0.07% to 0.04% depending on the Portfolio and the
level of assets.
Chase Global Funds Services Company ("Chase"), 73 Fremont Street, Boston,
Massachusetts 02108, serves as the Sub-Administrator to the Portfolios pursuant
to a Mutual Funds Service Agreement (the "Sub-Agreement") between Chase and MAM.
Subject to the control, direction and supervision of MAM and the Trust, Chase
assists MAM in providing administrative services to the Portfolios. As
compensation for the services rendered pursuant to the Sub-Agreement, MAM pays
Chase an annual sub-administrative fee based upon a percentage of the average
net assets in the aggregate of the Trust, The Montgomery Funds II and The
Montgomery Funds III. The sub-administrative fee is paid monthly for the month
or portion of the month Chase assists MAM in providing administrative services
to the Portfolios. This fee is based on all assets of the Trust and related
trusts or funds and is equal to an annual rate of 0.01625% of the first $3
billion, plus 0.0125% of the next $2 billion and 0.0075% of amounts over $5
billion. The sub-administrative fee paid to Chase is paid from the
administrative fees paid to MAM by the Portfolio. Chase succeeded First Data
Corporation as sub-administrator.
Chase also serves as Fund Accountant to the Trust pursuant to a Mutual Funds
Service Agreement ("Fund Accounting Agreement") entered into between the Trust
and Chase on May 3, 1999. By entering into
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the Fund Accounting Agreement, Chase also succeeds First Data Corporation as
Fund Accountant to the Trust. As Fund Accountant, Chase provides the Trust with
various services, including, but are not limited to: (i) maintaining the books
and records for the Portfolios' assets, (ii) calculating net asset values of the
Portfolios, (iii) accounting for dividends and distributions made by the
Portfolios, and (iv) assisting the Portfolios' independent auditors with respect
to the annual audit. This fee is based on all assets of the Trust and related
trusts or funds and is equal to an annual rate of 0.04875% of the first $3
billion, plus 0.0375% of the next $2 billion and 0.0225% of amounts over $5
billion.
Information regarding administrative and accounting fees has not been
provided since the Growth 20 Portfolio and the International 20 Portfolio were
launched on December 31, 1999, and the New Economy 20 Portfolio was launched on
May 31, 2000.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for a Portfolio, the primary
consideration is to obtain the most favorable price and execution available. The
Manager determines which securities are to be purchased and sold by a Portfolio
and which broker-dealers are eligible to execute that Portfolio's portfolio
transactions, subject to the instructions of, and review by, that Portfolio and
the Board of Trustees. Purchases and sales of securities within the U.S. other
than on a securities exchange will generally be executed directly with a
"market-maker" unless, in the opinion of the Manager or a Portfolio, a better
price and execution can otherwise be obtained by using a broker for the
transaction.
Purchases of portfolio securities for a Portfolio 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 a Portfolio will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its best efforts to
choose a broker-dealer capable of providing the services necessary generally to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the firm's ability to execute trades in a specific market required by a
Portfolio, 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 a Portfolio is receiving
the most favorable price and execution available, the Manager may also consider
the sale of that Portfolio's shares as a factor in the selection of
broker-dealers to execute their portfolio transactions. The placement of
portfolio transactions with broker-dealers who sell shares of a Portfolio is
subject to rules adopted by NASD Regulation, Inc.
While a Portfolio'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 that
Portfolio or to the Manager, even if
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the specific services were not imputed just to that Portfolio and may be
lawfully and appropriately used by the Manager in advising other clients. The
Manager considers such information, which is in addition to, and not in lieu of,
the services required to be performed by it under the Agreement, to be useful in
varying degrees, but of indeterminable value. In negotiating any commissions
with a broker or evaluating the spread to be paid to a dealer, a Portfolio may
therefore pay a higher commission or spread than would be the case if no weight
were given to the furnishing of these supplemental services, provided that the
amount of such commission or spread has been determined in good faith by that
Portfolio and the Manager to be reasonable in relation to the value of the
brokerage and/or research services provided by such broker-dealer, which
services either produce a direct benefit to that Portfolio or assist the Manager
in carrying out its responsibilities to that Portfolio. The standard of
reasonableness is to be measured in light of the Manager's overall
responsibilities to that Portfolio. The Board of Trustees reviews all brokerage
allocations where services other than best price and execution capabilities are
a factor to ensure that the other services provided meet the criteria outlined
above and produce a benefit to a Portfolio.
Investment decisions for a Portfolio are made independently from those of
other client accounts of the Manager or its affiliates, and suitability is
always a paramount consideration. Nevertheless, it is possible that at times the
same securities will be acceptable for one or more Portfolios 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 a Portfolio and the Manager's various other accounts. These
procedures emphasize the desirability of bunching trades and price averaging
(see below) to achieve objective fairness among clients advised by the same
portfolio manager or portfolio team. Where trades cannot be bunched, the
procedures specify alternatives designed to ensure that buy and sell
opportunities are allocated fairly and that, over time, all clients are treated
equitably. The Manager's trade allocation procedures also seek to ensure
reasonable efficiency in client transactions, and they provide portfolio
managers with reasonable flexibility to use allocation methodologies that are
appropriate to their investment discipline on client accounts.
To the extent any of the Manager's client accounts and a Portfolio seek to
acquire the same security at the same general time (especially if that security
is thinly traded or is a small-cap stock), that Portfolio may not be able to
acquire as large a portion of such security as it desires, or it may have to pay
a higher price or obtain a lower yield for such security. Similarly, a Portfolio
may not be able to obtain as high a price for, or as large an execution of, an
order to sell any particular security at the same time. If one or more of such
client accounts simultaneously purchases or sells the same security that a
Portfolio is purchasing or selling, each day's transactions in such security
generally will be allocated between that Portfolio and all such client accounts
in a manner deemed equitable by the Manager, taking into account the respective
sizes of the accounts, the amount being purchased or sold and other factors
deemed relevant by the Manager. In many cases, that Portfolio'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 a Portfolio is concerned. In other cases, however, it
is believed that the ability of a Portfolio to participate in volume
transactions may produce better executions for that Portfolio.
The Manager's sell discipline for investments in issuers is based on the
premise of a long-term investment horizon; however, sudden changes in valuation
levels arising from, for example, new macroeconomic policies, political
developments, and industry conditions could change the assumed time
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horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by the Manager in determining the appropriate investment horizon.
For a Portfolio, 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.
Information regarding brokerage commissions has not been provided since the
Growth 20 Portfolio and the International 20 Portfolio were launched on December
31, 1999, and the New Economy 20 Portfolio was launched on May 31, 2000.
The Portfolios do not direct brokerage or effect securities transactions
through brokers in accordance with any formula, nor do they effect securities
transactions through such brokers solely for selling shares of the Portfolios.
However, brokers who execute brokerage transactions as described above may from
time to time effect purchases of shares of the Portfolios for their customers.
Depending on the Manager's view of market conditions, the Portfolios 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 Portfolios
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 Portfolios' 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 Portfolios.
When in the judgment of the Manager it is in the best interests of a
Portfolio, an investor may purchase shares of a Portfolio by tendering payment
in-kind in the form of securities, provided that any such tendered securities
are readily marketable (e.g., the Portfolio will not acquire restricted
securities), their acquisition is consistent with that Portfolio's investment
objective and policies, and the tendered securities are otherwise acceptable to
the Manager. Such securities are acquired by that Portfolio only for the purpose
of investment and not for resale. For the purposes of sales of shares of that
Portfolio for such securities, the tendered securities shall be valued at the
identical time and in the identical manner that the portfolio securities of that
Portfolio are valued for the purpose of calculating the net asset value of that
Portfolio's shares. A shareholder who purchases shares of a Portfolio 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 that Portfolio and the
purchase price of that Portfolio's shares acquired by the shareholder.
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Payments to shareholders for shares of a Portfolio redeemed directly from
that Portfolio will be made as promptly as possible but no later than three days
after receipt by the Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that that
Portfolio may suspend the right of redemption or postpone the date of payment
during any period when (i) trading on the New York Stock Exchange ("NYSE") is
restricted as determined by the SEC or the NYSE is closed for other than
weekends and holidays; (ii) an emergency exists as determined by the SEC (upon
application by that Portfolio pursuant to Section 22(e) of the Investment
Company Act) making disposal of portfolio securities or valuation of net assets
of the Portfolio not reasonably practicable; or (iii) for such other period as
the SEC may permit for the protection of that Portfolio's shareholders.
The Portfolios intend to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions that make payment in cash unwise, the Portfolios
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 Portfolios do not anticipate that they will make any part of a redemption
payment in securities, if such payment were made, an investor may incur
brokerage costs in converting such securities to cash. The Trust has elected to
be governed by the provisions of Rule 18f-1 under the Investment Company Act,
which require that the Portfolios pay in cash all requests for redemption by any
shareholder of record limited in amount, however, during any 90-day period to
the lesser of $250,000 or 1% of the value of the Trust's net assets at the
beginning of such period.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of a Portfolio's portfolio
securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Portfolios 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 Portfolios through an
IRA, there is available through the Portfolios 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 Portfolios 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 Portfolios. An
IRA that invests in shares of the Portfolios 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 Portfolios under a custodianship with another
bank or trust company must make individual arrangements with such institution.
Information about Roth IRAs is also available from those materials.
It is advisable for an investor considering the funding of any retirement
plan to consult with an attorney or to obtain advice from a competent retirement
plan consultant with respect to the requirements of such plans and the tax
aspects thereof.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio 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
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net assets are divided by the number of shares of the Portfolio outstanding at
the time of the valuation and the result (adjusted to the nearest cent) is the
net asset value per share.
As noted in the Prospectus, the net asset value of shares of each Portfolio
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 for New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. The
Portfolios may, but do not expect to, determine the net asset values of their
shares on any day when the NYSE is not open for trading if there is sufficient
trading in 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 Portfolios' net asset values are not calculated. Occasionally, events
affecting the values of such securities in U.S. dollars on a day on which a
Portfolio 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 Portfolio's net asset value unless the Board of Trustees
or its delegates deem that such events would materially affect the net asset
value, in which case an adjustment would be made.
Generally, a Portfolio'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 of Trustees.
A Portfolio's equity 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. Equity securities that are traded on
more than one exchange are valued on the exchange determined by the Manager to
be the primary market. Securities traded in the over-the-counter market are
valued at the mean between the last available bid and asked price prior to the
time of valuation. Securities and assets for which market quotations are not
readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Board of Trustees.
Short-term debt obligations with remaining maturities in excess of 60 days
are valued at current market prices, as discussed above. Short-term securities
with 60 days or less remaining to maturity are, unless conditions indicate
otherwise, amortized to maturity based on their cost to a Portfolio if acquired
within 60 days of maturity or, if already held by that Portfolio on the 60th
day, based on the value determined on the 61st day.
Corporate debt securities and U.S. government securities held by a Portfolio
are valued on the basis of valuations provided by dealers in those instruments,
by an independent pricing service, or at fair value as determined in good faith
by procedures approved by the Board of Trustees. 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.
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An option that is written by a Portfolio is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by a Portfolio 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 of Trustees.
If any securities held by a Portfolio are restricted as to resale or do not
have readily available market quotations, the Manager and the Trust's Pricing
Committees determine their fair value, following procedures approved by the
Board of Trustees. The Board of Trustees periodically reviews such valuations
and valuation procedures. The fair value of such securities is generally
determined as the amount which a Portfolio could reasonably expect to realize
from an orderly disposition of such securities over a reasonable period of time.
The valuation procedures applied in any specific instance are likely to vary
from case to case. However, consideration is generally given to the financial
position of the issuer and other fundamental analytical data relating to the
investment and to the nature of the restrictions on disposition of the
securities (including any registration expenses that might be borne by a
Portfolio 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 of Trustees in good faith will establish a conversion rate for such
currency.
All other assets of the Portfolios are valued in such manner as the Board of
Trustees in good faith deem appropriate to reflect their fair value.
PRINCIPAL UNDERWRITER
The Distributor, Funds Distributor, Inc., 60 State Street, Suite 1300,
Boston, Massachusetts 02109, also acts as the Portfolios' principal underwriter
in a continuous public offering of the Portfolios' shares. The Distributor is
currently registered as a broker-dealer with the SEC and in all 50 states, is a
member of most of the principal securities exchanges in the U.S., and is a
member of the National Association of Securities Dealers, Inc. The Underwriting
Agreement between the Portfolios and the Distributor is in effect for the
Portfolios for the same periods as the Agreement, and shall continue in effect
thereafter for periods not exceeding one year if approved at least annually by
(i) the Board of Trustees or the vote of a majority of the outstanding
securities of the Portfolios (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
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called for the purpose of voting on such approval. The Underwriting Agreement
with respect to the Portfolios 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 Portfolios' shares.
The Principal Underwriter has not been paid any underwriting commissions for
underwriting securities of the Portfolios during the Portfolios' last three
fiscal years.
PERFORMANCE INFORMATION
As noted in the Prospectuses, the Portfolios may, from time to time, quote
various performance figures in advertisements and other communications to
illustrate its past performance. Performance figures will be calculated
separately for different classes of 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 a Portfolio will be accompanied by information on that
Portfolio's average annual compounded rate of return over the most recent four
calendar quarters and the period from that Portfolio's inception of operations.
A Portfolio may also advertise aggregate and average total return information
over different periods of time. A Portfolio's "average annual total return"
figures are computed according to a formula prescribed by the SEC expressed as
follows:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5- or 10-year period at the
end of each respective period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions and complete redemption of the hypothetical
investment at the end of the measuring period.
Aggregate Total Return. The Portfolio's "aggregate total return" figures
represent the cumulative change in the value of an investment in the Portfolio
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 redemption of the hypothetical
investment at the end of the measuring period.
A Portfolio's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of that Portfolio's performance for any specified period in the
future. In
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<PAGE>
addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in a Portfolio with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Portfolio's performance with that of other investment companies
should give consideration to the quality and maturity of the respective
investment companies' portfolio securities.
The information regarding average annual total returns for the Portfolios
has not been provided since the Growth 20 Portfolio and the International 20
Portfolio were launched on December 31, 1999, and the New Economy 20 Portfolio
was launched on May 31, 2000.
Comparisons. To help investors better evaluate how an investment in the
Portfolios might satisfy their investment objectives, advertisements and other
materials regarding the Portfolios may discuss various financial publications.
Materials may also compare performance (as calculated above) to performance as
reported by other investments, indices, and averages. Publications, indices and
averages, including but not limited to, the following may be used in discussion
of the Portfolios' performance or the investment opportunities it may offer:
a) Standard & Poor's 500 Composite Stock Index, one or more of the Morgan
Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) Bank Rate Monitor--A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings
account rates and average loan rates.
c) Lipper Mutual Fund Performance Analysis and Lipper Fixed Income Fund
Performance Analysis--A ranking service that measures total return and
average current yield for the mutual fund industry and ranks
individual mutual fund performance over specified time periods
assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
d) Donoghue's Money Fund Report--Industry averages for 7-day annualized
and compounded yields of taxable, tax-free, and government money
funds.
e) Salomon Brothers Bond Market Roundup--A weekly publication which
reviews yield spread changes in the major sectors of the money,
government agency, futures, options, mortgage, corporate, Yankee,
Eurodollar, municipal, and preferred stock markets. This publication
also summarizes changes in banking statistics and reserve aggregates.
f) Lehman Brothers indices--Lehman Brothers fixed-income indices may be
used for appropriate comparisons.
g) other indices--including Consumer Price Index, Ibbotson, Micropal,
CNBC/Financial News Composite Index, MSCI EAFE Index (Morgan Stanley
Capital International, Europe, Australasia, Far East Index--a
capitalization-weighted index that includes all developed world
markets except for those in North America), Datastream, Worldscope,
NASDAQ, Russell 2000 and IFC Emerging Markets Database.
In addition, one or more portfolio managers or other employees of the
Manager may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Portfolios.
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<PAGE>
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 a Portfolio'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 that Portfolio to
calculate its figures.
The Portfolios may also publish its relative rankings as determined by
independent mutual fund ranking services like Lipper Analytical Services, Inc.
and Morningstar, Inc.
Investors should note that the investment results of the Portfolios will
fluctuate over time, and any presentation of the Portfolios' 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 Portfolios. From time to time, the Portfolios may
publish or distribute information and reasons supporting the Manager's belief
that the Portfolios may be appropriate for investors at a particular time. The
information will generally be based on internally generated estimates resulting
from the Manager's research activities and projections from independent sources.
These sources may include, but are not limited to, Bloomberg, Morningstar,
Barings, WEFA, consensus estimates, Datastream, Micropal, I/B/E/S Consensus
Forecast, Worldscope and Reuters as well as both local and international
brokerage firms. For example, the Portfolios may suggest that certain countries
or areas may be particularly appealing to investors because of interest rate
movements, increasing exports and/or economic growth. The Portfolios may, by way
of further example, present a region as possessing the fastest growing economies
and may also present projected gross domestic product (GDP) for selected
economies.
Research. The Manager has developed its own tradition of intensive research
and has made intensive research one of the important characteristics of the
Montgomery Funds style.
Extensive research into companies that are not well known--discovering new
opportunities for investment--is a theme that crosses a number of the Montgomery
Funds and is reflected in the number of Montgomery Funds oriented towards
smaller capitalization businesses.
In-depth research, however, goes beyond gaining an understanding of unknown
opportunities. The portfolio analysts have also developed new ways of gaining
information about well-known parts of the domestic market. The growth equity
team, for example, has developed its own strategy and proprietary database for
analyzing the growth potential of U.S. companies, often large, well-known
companies.
From time to time, advertising and sales materials for the Montgomery Funds
may include biographical information about portfolio managers as well as
commentary by portfolio managers regarding investment strategy, asset growth,
current or past economic, political or financial conditions that may be of
interest to investors.
Also, from time to time, the Manager may refer to its quality and size,
including references to its total assets under management (as of December 31,
1999 approximately $4.9 billion for retail and institutional investors in The
Montgomery Funds) and total shareholders invested in the Portfolios (as of
December 31, 1999, around 200,000).
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<PAGE>
GENERAL INFORMATION
Investors in the Portfolios will be informed of the Portfolios' progress
through periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the organization of The
Montgomery Funds and the registration of shares of the Small Cap Fund as the
initial series of the Trust have been assumed by the Small Cap Fund. Expenses
incurred in connection with the establishment and registration of shares of the
Portfolios constituting separate series of the Trust have been assumed by the
Portfolios. The Manager has agreed, to the extent necessary, to advance the
organizational expenses incurred by the Portfolios and will be reimbursed for
such expenses during the first fiscal year after commencement of the Portfolios'
operations, subject to the Portfolios' expense limitation.
As noted above, The Chase Manhattan Bank (the "Custodian") acts as custodian
of the securities and other assets of the Portfolios. The Custodian does not
participate in decisions relating to the purchase and sale of securities by the
Portfolios.
DST Systems, Inc., 333 West 11th Street, Kansas City, Missouri 64105, the
Portfolios' Master Transfer Agent and Paying Agent.
_________________, 333 Market Street, San Francisco, California 94105, is
the independent auditor for the Portfolios.
The validity of shares offered hereby has been passed on by Paul, Hastings,
Janofsky & Walker LLP, 345 California Street, San Francisco, California 94104.
The shareholders of The Montgomery Funds as shareholders of a Massachusetts
business trust could, under certain circumstances, be held personally liable as
partners for its obligations. However, the Trust's Agreement and Declaration of
Trust ("Declaration of Trust") contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. The Declaration of Trust also
provides for indemnification and reimbursement of expenses out of the
Portfolios' assets for any shareholder held personally liable for obligations of
the Portfolios or Trust. The Declaration of Trust provides that the Trust shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Portfolios or Trust and satisfy any judgment
thereon. All such rights are limited to the assets of the Portfolios. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the activities
of the Trust as an investment company as distinguished from an operating company
would not likely give rise to liabilities in excess of the Portfolio's total
assets. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is extremely remote because it is limited to the unlikely
circumstances in which both inadequate insurance exists and the Portfolio itself
is unable to meet its obligations.
Among the Board of Trustees' powers enumerated in the Agreement and
Declaration of Trust is the authority to terminate the Trust or any of its
series, 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.
As of December 31, 1999, the Distributor was the sole initial shareholder of
the Growth 20 Portfolio and the International 20 Portfolio and held
substantially all the shares of those Portfolios for organizational
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<PAGE>
purposes. As of May 31, 2000, the Distributor was the sole initial shareholder
of the New Economy 20 Portfolio and held substantially shares of that Portfolio
for organizational purposes.
The Trust is registered with the Securities and Exchange Commission as
non-diversified management investment companies. Such a registration does not
involve supervision of the management or policies of the Portfolio. The
Prospectus and this Statement of Additional Information omit certain of the
information contained in the Registration Statements filed with the SEC. Copies
of the Registration Statements may be obtained from the SEC upon payment of the
prescribed fee.
FINANCIAL STATEMENTS
There are no financial statements for the Portfolios since the Growth 20
Portfolio and the International 20 Portfolio were launched on December 31, 1999,
and the New Economy 20 Portfolio was launched on May 31, 2000.
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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- debt rating.
D Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
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<PAGE>
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 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 high-grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
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A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have 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.
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
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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+.
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
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<PAGE>
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 F-1+.
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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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.
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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.
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.
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----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 23. Exhibits
(a) Amended and Restated Agreement and Declaration of Trust as
incorporated by reference to Post-Effective Amendment No. 61 to
the Registration Statement as filed with the Commission on
October 29, 1998 ("Post-Effective Amendment No. 61").
(b) Amended and Restated By-Laws is incorporated by reference to
Post-Effective Amendment No. 61.
(c) Instruments Defining Rights of Security Holder - Not applicable.
(d) Investment Advisory Contracts--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").
(e) Form of Underwriting Agreement is incorporated by reference to
Post-Effective Amendment No. 52.
(f) Bonus or Profit Sharing Contracts - Not applicable.
(g) Form of Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 61.
(h) Other Material Contracts:
(1) Form of Administrative Services Agreement is incorporated by
reference to Post-Effective Amendment No. 52.
(2) Form of Shareholder Services Plan is incorporated by
reference to Post-Effective Amendment No. 61.
(i) Opinion of Counsel - Not applicable.
(i) Other Opinions: Independent Auditors' Consent - Not applicable.
(k) Omitted Financial Statements - Not applicable.
(l) Initial Capital Agreements: Letter of Understanding re: Initial
Shares is incorporated by reference to Post-Effective Amendment
No. 61.
(m) Rule 12b-1 Plan: Form of Share Marketing Plan (Rule 12b-1 Plan)
is incorporated by reference to Post-Effective Amendment No. 52.
(n) Financial Data Schedule - Not applicable.
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(o) 18f-3 Plan - Form of Amended and Restated Multiple Class Plan is
incorporated by reference to Post-Effective Amendment No. 61.
Item 24. Persons Controlled by or Under Common Control with the Fund
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.
Item 25. 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.
Item 26. Business and Other Connections of the 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
Mark B. Geist Chief Executive Officer of MAM, LLC
F. Scott Tuck President of MAM, LLC
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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
Item 27. 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
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
Founders Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
J.P. Morgan Institutional Funds
J.P. Morgan Funds
JPM Series Trust
JPM Series Trust II
LaSalle Partners Funds, Inc.
Kobrick-Cendant Investment Trust
Merrimac Series
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
National Investors Cash Management Fund, Inc.
Orbitex Group of Funds
SG Cowen Funds, Inc.
SG Cowen Income + Growth Fund, Inc.
SG Cowen Standby Reserve Fund, Inc.
SG Cowen Standby Tax-Exempt Reserve Fund, Inc.
SG Cowen Series Funds, Inc.
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St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Family of Funds, Inc.
WEBS Index Fund, Inc.
The 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 located at 60
State Street, Suite 1300, Boston, Massachusetts 02109. Funds
Distributor is an indirect wholly owned subsidiary of Boston
Institutional Group, Inc., a holding company all of whose outstanding
shares are owned by key employees.
(b) The following is a list of the executive officers, directors and
partners of Funds Distributor, Inc.
Director, President and Chief Executive Officer Marie E. Connolly
Executive Vice President George A. Rio
Executive Vice President Donald R. Roberson
Executive Vice President William S. Nichols
Senior Vice President, General Counsel, Chief Margaret W. Chambers
Compliance Officer, Secretary and Clerk
Senior Vice President Michael S. Petrucelli
Director, Senior Vice President, Treasurer and Joseph F. Tower, III
Chief Financial Officer
Senior Vice President Paula R. David
Senior Vice President Allen B. Closser
Senior Vice President Bernard A. Whalen
Chairman and Director William J. Nutt
(c) Not Applicable.
Item 28. 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 29. Management Services.
There are no management-related service contracts not discussed in Parts A
and B.
Item 30. Undertakings.
(a) Not applicable.
(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.
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(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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, 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 this 15th day of March, 2000.
THE MONTGOMERY FUNDS
By: George A. Rio*
--------------
George A. Rio
President and Principal Executive
Officer; Treasurer and Principal
Financial and Accounting Officer
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.
George A. Rio* President and March 16, 2000
- -------------------------- Principal Executive Officer,
George A. Rio Treasurer and Principal
Financial and Accounting
Officer
R. Stephen Doyle * Chairman of the March 16, 2000
- -------------------------- Board of Trustees
R. Stephen Doyle
Andrew Cox * Trustee March 16, 2000
- --------------------------
Andrew Cox
Cecilia H. Herbert * Trustee March 16, 2000
- --------------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee March 16, 2000
- --------------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-------------------------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
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